Question

Exercise 17-18 Step-Down Method of Service Department Cost Allocation; Bank (LO 17-1)

Tuscaloosa National Bank has two service departments, the Human Resources (HR) Department and the Computing Department. The bank has two other departments that directly service customers, the Deposit Department and the Loan Department. The usage of the two service departments’ output for the year is as follows:

User of Service	Provider of Service
		HR		Computing
HR		—		20	%
Computing		10	%	—
Deposit		70	%	50	%
Loan		20	%	30	%

The budgeted costs in the two service departments for the year are as follows:

HR	$	465,000
Computing		697,500

Required:
Use the step-down method to allocate the budgeted costs of the HR and Computing departments to the Deposit and Loan departments. Tuscaloosa National Bank allocates the costs of the HR Department first. (Do not round intermediate calculations.)

Answer 1

• All working forms part of the answer

	Departments
Support Departments	HR	Computing	Deposits	Loan
HR		10.00%	70%	20%	100
Computing			50%	30%	80

• Step Down Allocation

Department	Supplying (Service Department)		Using Department
	HR	Computing	Deposits	Loan
Direct Costs	$        465,000.00	$            697,500.00	$                            -	$                                 -
Allocation of:
HR	$      (465,000.00)	$              46,500.00 [465000 x 10/100]	$          325,500.00 [465000 x 70/100]	$                  93,000.00 [465000 x 20/100]
Computing	$                          -	$          (744,000.00)	$          465,000.00 [744000 x 50/80]	$                279,000.00 [744000 x 30/80]
Total cost after allocation have been made	$                          -	$                              -	$          790,500.00	$                372,000.00

• Cost Allocated to:

Deposits = $ 790,500
Loans = $ 372,000