Question

In: Accounting

Support Department 1 has $200,000 in costs distributed to it. Costs from Support Department 1 will...

Support Department 1 has $200,000 in costs distributed to it. Costs from Support Department 1 will be allocated to other departments based on labor hours. Support Department 2 uses 50 labor hours from Support Department 1, Production Department 1 uses 75 labor hours from Support Department 1, and Production Department 2 uses 25 labor hours from Support Department 1.

a. Using the direct method for support department cost allocation, how much of Support Department 1’s costs will be allocated to Support Department 2?

b. Using the direct method for support department cost allocation, how much of Support Department 1’s costs will be allocated to Production Department 1?

c. Using the direct method for support department cost allocation, how much of Support Department 1’s costs will be allocated to Production Department 2?

Expert Solution

Answer a)

Direct Method of Allocation of Support Department Costs: Under direct method support department costs are allocated to production departments in the proportion of services of support department used by them. However, no part of costs of one support department is allocated to other support department, even though the second support department uses service of first support department.

Accordingly, using direct method for support department cost allocation, Support Department 1’s costs allocated to support department 2 will be ZERO. (i.e. , no part of costs of support department 1 will be allocated to support department 2).

Answer b)

Support Department 1’s costs allocated to Production Department 1 = [Total costs of support department 1/ (Labor hours of support department 1 used by production department 1 + Labor hours of support department 1 used by production department 2)] X Labor hours of support department 1 used by production department 1

= [$ 200,000/ (75 labor hours + 25 labor hours)] X 75 labor hours

= $ 150,000

Therefore cost of Support Department 1 allocated to Production Department 1 is $ 150,000.

Answer c)

Support Department 1’s costs allocated to Production Department 2 = [Total costs of support department 1/ (Labor hours of support department 1 used by production department 1 + Labor hours of support department 1 used by production department 2)] X Labor hours of support department 1 used by production department 2

= [$ 200,000/ (75 labor hours + 25 labor hours)] X 25 labor hours

= $ 50,000

Therefore cost of Support Department 1 allocated to Production Department 2 is $ 50,000.

ekkarill92 answered 2 years ago

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