Question

University Printers has two service departments (Maintenance and Personnel) and two operating departments (Printing and Developing). Management has decided to allocate maintenance costs on the basis of machine-hours in each department and personnel costs on the basis of labor-hours worked by the employees in each.

The following data appear in the company records for the current period:

	Maintenance			Personnel			Printing			Developing
Machine-hours		—			1,000			1,000			3,000
Labor-hours		500			—			500			2,000
Department direct costs	$	5,000		$	12,000		$	15,000		$	10,000

Required:

Use the direct method to allocate these service department costs to the operating departments.

	Maintenance Personnel Printing Developing Service department costs $5,000 $12,000 Maintenance allocation (5,000) Personnel allocation Total costs allocated $0 $0 $0 $0

Answer 1

	Maintenance Personnel Printing Developing Service department costs $5,000 $12,000 Maintenance allocation (5,000) 0 1,250 3,750 Personnel allocation 0 - 12,000 2,400 9,600 Total costs allocated $0 $0 $3,650 $13,350

(i)

Maintenance costs are to be allocated on the basis of machine-hours in each department.

Maintenance department cost = $5,000

Machine hours in Printing department = 1,000

Machine hours in Developing department = 3,000

Total machine hours in Printing and Developing department = 1,000 + 3,000

= 4,000

Maintenance cost to be allocated to Printing department = Maintenance cost x Machine hours in Printing department/Total machine hours in Printing and Developing department

= 5,000 x 1,000/4,000

= $1,250

Maintenance cost to be allocated to Developing department = Maintenance cost x Machine hours in Developing department/Total machine hours in Printing and Developing department

= 5,000 x 3,000/4,000

= $3,750

(ii)

Personnel costs are to be allocated on the basis of labor-hours worked by the employees in each department.

Personnel department cost = $12,000

Direct labor hours in Printing department = 500

Direct labor hours in Developing department = 2,000

Total direct labor hours in Printing and Developing department = 500 + 2,000

= 2,500

Personnel cost to be allocated to Printing department = Personnel cost x Direct labor hours in Printing department/Total direct labor hours in Printing and Developing department

= 12,000 x 500/2,500

= $2,400

Personnel cost to be allocated to Developing department = Personnel cost x Direct labor hours in Developing department/Total direct labor hours in Printing and Developing department

= 12,000 x 2,000/2,500

= $9,600