Question

Sequential (Step) Method of Support Department Cost Allocation

Valron Company has two support departments, Human Resources and General Factory, and two producing departments, Fabricating and Assembly.

	Support Departments			Producing Departments
	Human Resources	General Factory		Fabricating	Assembly
Direct costs	$180,000	$300,000		$114,300	$91,000
Normal activity:
Number of employees	—	40		70	170
Square footage	1,600	—		5,300	13,500

Resources Department are allocated on the basis of number of employees, and the costs of General Factory are allocated on the basis of square footage. Now assume that Valron Company uses the sequential method to allocate support department costs. The support departments are ranked in order of highest cost to lowest cost.

Required:

1. Calculate the allocation ratios (rounded to four significant digits) for the four departments using the sequential method. If an amount is zero, enter "0". Use the rounded values for subsequent calculations.

	Proportion of Driver Used by
	Human Resources	General Factory	Fabricating	Assembly
Human Resources
General Factory

2. Using the sequential method, allocate the costs of the Human Resources and General Factory departments to the Fabricating and Assembly departments. If an amount is zero, enter"0". Round your answers to the nearest dollar.

	Support Departments			Producing Departments
	Human Resources	General Factory		Fabricating	Assembly
Direct costs	$	$		$	$
Allocate:
General Factory
Human Resources
Total after allocation	$	$		$	$

Answer 1

We have 2 support departments : Human Resources and General Factory.

Here, it has been given that the supporting departments are arranged in the order of highest to lowest cost.

The method to be used for allocating the costs of the service department is the step down or sequential method. i.e, once the costs of a service department, say Department A is allocated to another service department, say Department B, the former department DOES NOT accept any costs from the latter department.

Since the General Factory department has higher costs($300,000), we need to allocate the costs of this department first to the Human resources department and also the producing departments.

It has been given in the question that the costs of General Factory department are to be allocated on the basis of square footage.

Total square footage space used = (1600 +5300+13500) square foot = 20400 square foot

Thus the allocation ratios are as under :

General Factory costs

To the Human Resources Department : 1600/20400

7.8431%

To the Fabricating Department: 5300/20400

25.9804%

To the Assembly Department : 13500/20400

66.1765%

Human Resources Department

Under the step down method, once a service department has allocated its costs, other departmental costs are not allocated to it. So, the General Factory Department will not accept any more costs. From the HR Department, we can allocate costs only to the producing departments. As given in the question, Human Resource costs are to be allocated on the basis of the number of employees

To the Fabricating Department : 70 / (70+170) = 70/240 =

29.1667%

To the Assembly Department : 170/ (170 + 70) = 170/240 =

70.8333%

We can tabulate the allocation ratios calculated above, as shown hereunder:

Human Resources

General Factory

Fabricating

Assembly

Human Resources

29.1667%

70.8333%

Ganeral factory

7.8431%

25.9804%

66.1765%

Now, based on the calculated ratios, we will allocate the costs to the various departments.

General Factory Costs

To the Human Resources Department: $(300000 * 7.8431/100) =

$ 23,529.30

To the Fabricating Department: $(300000 * 25.9804/100) =

$ 77,941.20

To the Assembly Department = $(300000 * 66.1765/100) =

$ 198,529.50

Human Resources Costs

Total Human Resources costs to be allocated = Direct costs of the Human resources department + Costs allocated from the General Factory Department = $(180000+23529.30)

$ 203,529.30

To the Fabricating Department : $(203529.30*29.1667%)=

59362.780

To the Assembly Department: $(203529.30*70.83333%)=

144166.581

The allocation of costs can be tabulated as under :

Supporting Dept.1

Supporting Dept.2

Producing Dept.1

Producing Dept.2

Human Resources

General Factory

Fabricating

Assembly

Direct Costs

$ 203,529.30

$300,000

$114,300

$91,000

Allocate:

General Factory

$ 23,529.30

$ 77,941.20

$ 198,529.50

Human Resources

$59,362.78

$144,166.58

Total after allocation

$0

$0

$251,603.98

$433,696.08