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Macy Manufacturing Corporation has two service departments, Custodial Services and Maintenance, and three production (operating) departments,...

Macy Manufacturing Corporation has two service departments, Custodial Services and Maintenance, and three production (operating) departments, Cutting, Milling, and Assembly. The company allocates the cost of Custodial Services on the basis of square footage and Maintenance on the basis of labor-hours. No distinction is made between variable and fixed costs. Budgeted operating data for the year just completed follow: Service Departments Operating Departments Custodial Maintenance Cutting Milling Assembly Budgeted costs before allocation $24,000 $12,000 $120,000 $75,000 $135,000 Square feet 2,000 20,000 10,000 44,000 26,000 Labor-hours 4,000 8,000 8,000 Required: a. How much service department costs are allocated to each of the production departments if the direct method is used? b. How much service department costs are allocated to each of the production departments if the step-down method is used, allocating Custodial Services first? c. What is the effect of selection of the direct or step method on total overhead cost?

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a Direct Allocation Service Department Production Department Custodial Maintenance Cutting Milling Assembly Service $24,000 $12,000 $120,000 $75,000 $135,000 Departmental costs before allocations Allocation Custodial Service Dept (10:44:26) Maintenance Dept ( 4:8:8) Total Overheads $24,000 $12,000 $0 $3,000 $2,400 $125,400 $13,200 $7,800 $4,800 $4,800 $93,000 $147,600 $0 b Step method of allocation Service Department Production Department Custodial Maintenance Cutting Milling Assembly Service $24,000 $12,000 $120,000 $75,000 $135,000 Departmental costs before allocations Allocation Custodial Service Dept (20:10:44:26) Maintenance Dept (4:8:8) Total Overheads $24,000 $4,800 $16,800 $0 $2,400 $3,360 $125,760 $10,560 $6,240 $6,720 $6,7201 $92,280 $147,960 $0 c The total overhead cost allocated is same under both the method. Only the service department wise cost allocated varies Direct method allocates the cost without allocating cost to other service department. Hence service rendered to service departments is ignored in cost allocation Step method allocates the cost to service department in a step way that is in the order of highest service to lowest service

ekkarill92 answered 2 years ago
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