Question

Problem 11-48 Step Method with Three Service Depagrtments (LO 11-3)

Model, Inc., produces model automobiles made from metal. It operates two production departments, Molding and Painting, and has three service departments, Administration, Accounting, and Maintenance. The accumulated costs in the three service departments were $255,000, $416,000, and $191,000, respectively. Management is concerned that the costs of its service departments are getting too high. In particular, managers would like to keep the costs of service departments under $3.50 per unit on average. You have been asked to allocate service department costs to the two production departments and compute the unit costs.

The company decided that Administration costs should be allocated on the basis of square footage used by each production and service department. Accounting costs are allocated on the basis of number of employees. Maintenance costs are allocated on the basis of the dollar value of the equipment in each department. The use of each base by all departments during the current period follows:  
  

	Used by
Allocation Base	Administration			Accounting			Maintenance			Molding			Painting
Building area		11,000			61,100			47,000			329,000			32,900
Employees		28			16			56			126			70
Equipment value (in thousands)	$	50.00		$	200.00		$	15.50		$	150.00		$	50.00
Direct costs of the Molding Department included $242,500 in direct materials, $340,000 in direct labor, and $105,000 in overhead. The Painting Department’s direct costs consisted of $208,000 in direct materials, $222,000 in direct labor, and $67,500 in overhead.    Required: a. Using the step method, determine the allocated costs and the total costs in each of the two producing departments. Ignore self-usage (for example, ignore work done by Administration for itself). Rank order the allocation as follows: (1) Maintenance, (2) Accounting, and (3) Administration. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.) 191000 MODEL, INC. Step Method To Maintenance Accounting Administration Molding Painting Direct Costs $191,000 $416,000 $255,000 FROM Maintenance Accounting Administration Totals 191,000 416,000 255,000 $0 $0 b. Assume that 100,000 units were processed through these two departments. What is the unit cost for the sum of direct materials, direct labor, and overhead (1) for Molding, (2) for Painting, and (3) in total? (Do not round intermediate calculations. Round your answers to 2 decimal places.) c. (1) Compute the cost per unit for the service department costs allocated to the production departments. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Answer 1

Solution a:

Model Inc.
From	Service Department Cost Allocation - Step Method
	Service Department			Production Departments
	Maintenance	Accounting	Administration	Molding	Painting
Direct charges of department	$191,000	$416,000	$255,000
Maintenance (200:50:150:50)	-$191,000	$84,889	$21,222	$63,667	$21,222
Accounting (28:126:70)		-$500,889	$62,611	$281,750	$156,528
Administration (10:1)			-$338,833	$308,030	$30,803
Total	$0	$0	$0	$653,447	$208,553

Solution b:

Computation of unit cost
Particulars	Molding	Painting	Total
Direct cost	$687,500	$497,500	$1,185,000
Nos of units	100000	100000	100000
Cost per unit	$6.88	$4.98	$11.85

Solution c:

Computation of unit cost - Sevice department
Particulars	Molding	Painting
Sum of allocated service department cost	$653,447	$208,553
Nos of units	100000	100000
Cost per unit	$6.53	$2.09