Question

State Financial Corp. has three service departments (Administration, Communications, and Facilities), and two production departments (Deposits and Loans). A summary of costs and other data for each department prior to allocation of service department costs for the year ended December 31 follows.

	Administration			Communications			Facilities			Deposits			Loans
Direct costs	$	210,000		$	320,000		$	253,000		$	8,220,000		$	4,600,000
Employee hours		20,500			34,000			21,000			480,000			365,000
Number of employees		9			15			7			230			160
Square footage occupied		5,100			13,300			5,800			245,300			201,200

  

The costs of the service departments are allocated on the following bases: Administration, employee-hours; Communications, number of employees; and Facilities, square footage occupied.

Required:

a. Assume that the bank elects to distribute service department costs to production departments using the direct method. What amount of Communications Department costs is allocated to the Deposits Department?

b. Assume the same method of allocation as in requirement (a). What amount of Administration Department costs is allocated to the Loans Department?

c. Assuming that the bank elects to distribute service department costs to other departments using the step method (starting with Facilities and then Communications), what amount of Facilities Department costs is allocated to the Communications Department?

d. Assume the same method of allocation as in requirement (c). What amount of Communication Department costs is allocated to Facilities?

Answer 1

Under the Direct method, the costs of service department are allocated only in production departments, whereas in the Step method, Service department costs are allocated in Production department and other Service Departments in a sequential process.
a.		Amount of Communications Department costs is allocated to the Deposits Department under Direct Method
		Communication Department Costs are to be allocated on the basis of Number of Employees
		Direct Cost of Communication Department		$320,000
		Total number of Employees of Production Departments (Deposits & Loans Departments)	(230+160)	390
		Cost per Employee	320000/390	$          820.51
		No. of Employees in Deposits Department		230
		Amount of Communications Department costs is allocated to the Deposits Department	230*$820.51	$ 188,717.95
b.		Amount of Administration Department costs is allocated to the Loans Department Under Direct Method
		Administration Department Costs are to be allocated on the basis of Number of Employees Hours
		Direct Cost of Administration Department		$210,000
		Total number of Employee Hours of Production Departments (Deposits & Loans Departments)	(480000+365000)	845000
		Cost per Employee Hour	210000/845000	$          0.2485
		No. of Employee Hours in Loans Department		365000
		Amount of Administration Department costs is allocated to the Loans Department	365000*$0.2485	$    90,710.06
c.		Amount of Facilities Department costs allocated to the Communications Department under Step method
		in the Step method, Service department costs are allocated in Production department and other Service Departments in a sequential process. The sequence adopted by the Bank is First Facilities department, then Communications Department and then Administration Department.
		The Cost of Facilities Department will be allocated between the Production Departments i.e. Deposits and Loans Department and remaining Service Departments (i.e. Communications Department and Administration Department)
		The Facilities Department Costs will be allocated on the basis of square footage occupied
		Direct Cost of Facilities Department		$253,000
		Total number of Square Footage of Deposits, Loans, Communications and Administration Department	(245300+201200+13300+5100)	464900
		Cost per Square Footage	210000/845000	$          0.5442
		No. of Square Footage in Communications Department		13300
		Amount of Facilities Department costs allocated to the Communications Department	13300*$0.5442	$      7,237.90
d.		Amount of Communication Department costs allocated to the Facilities Department under Step method
		Since in the Step method, Service department costs are allocated in Production department and other Service Departments in a sequential process and sequence adopted by the Bank is First Facilities department, then Communications Department and then Administration Department. Therefore the Communication Department Cost will be allocated between Production Departments i.e. Deposits and Loans Department and Administration Department. It will not be allocated to Facilities Department.