Question

Support department cost allocation

Hooligan Adventure Supply produces and sells various outdoor equipment. The Molding and Assembly production departments are supported by the Personnel and Maintenance departments. Personnel costs are allocated to the production departments based on the number of employees, and Maintenance costs are allocated based on number of service calls. Information about these departments is detailed in the following table:

	Personnel Department	Maintenance Department	Molding Department	Assembly Department
Number of employees	28	10	41	49
Number of service calls	57	41	168	112
Department cost	$15,000	$11,400	$72,000	$69,000

1. Which of the following statements matches the sequential method of cost allocations?

a. Support departments are often allocated in order from lowest to the highest cost with preference given to the departments that serve few support departments and have no accurate cost drivers.

b. Support departments are often allocated in order from highest to lowest cost with preference given to the departments that serve many support departments and have accurate cost drivers.

c. The sequential method only allocates costs to departments that have a high profit margin.

d. None of the above.

Which department should be allocated first and identify the reason.

Reason:

a. It has the lowest departmental cost with no accurate cost driver

b. It has the highest departmental cost with no accurate cost driver.

c. It has the lowest departmental cost with an accurate cost driver.

d. It has the highest departmental cost with an accurate cost driver.

2. Based on your response in part (1), determine the total costs allocated from each support department to each production department using the sequential method.

	Maintenance Department	Molding Department	Assembly Department
Personnel Department cost allocation	$	$	$
Maintenance Department cost allocation	$	$	$

3. Which allocation method is usually the most accurate?

a. Direct method.

b. Reciprocal method.

c. Sequential method.

d. None of the above.

What is a potential disadvantage of the reciprocal method?

a. It is the most complex method of cost allocation.

b. Both fixed and variable costs are allocated based on the computed cost base.

c. It considers the support department cost as its own department cost.

d. All the above.

Answer 1