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 $160,000    $390,000    $114,100    $93,000   
Normal activity:
   Number of employees —    50    80    160   
   Square footage 1,600    —    5,000    13,700   

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($390,000), 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 +5000+13700) square foot =								20300
Thus the allocation ratios are as under :
General Factory costs
To the Human Resources Department : 1600/20300=								7.8818%
To the Fabricating Department: 5000/20300=								24.6305%
To the Assembly Department : 13700/20300=								67.4877%
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 : 80/(80+160)=80/240=						33.3333%
To the Assembly Department : 160/(80+160)=160/240=						66.6667%
We can tabulate the allocation ratios calculated above, as shown hereunder:
	Human Resources	General Factory	Fabricating	Assembly
Human Resources			33.33%	66.67%
Ganeral factory	7.88%		24.63%	67.49%
Now, based on the calculated ratios, we will allocate the costs to the various departments.
General Factory Costs
To the Human Resources Department: $(390,000 * 7.88%=							$    30,732.00
To the Fabricating Department: $(390000 * 24.63%							$    96,057.00
To the Assembly Department = $(390000 * 67.49%							$ 208,544.10
Human Resources Costs
Total Human Resources costs to be allocated = Direct costs of the Human resources department + Costs allocated from the General Factory Department = $(160000+30732) =																		$ 190,732.00
To the Fabricating Department : $(190732*33.33%						$    63,577.33
To the Assembly Department: $(190732*66.67%						$ 127,154.67
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	$ 190,732.00	$390,000	$114,100	$93,000
Allocate:
General Factory	$   30,732.00		$ 96,057.00	$ 208,544.10
Human Resources			$ 63,577.33	$ 127,154.67
Total after allocation	$0	$0	$273,734.33	$428,698.77