Question

Williams manufactures a variety of iron products, made to customer specifications, in small batches. Willie Williams, owner, is concerned that he does not have an accurate understanding of the costs of production. You, a newly-minted MBA, have researched his business and identified various costs and cost drivers.

	Janitorial			Welding				HR			Data Svcs		Assembly				Total
Own costs	$	12,000		$	90,000		$	37,200		$	32,400		$	54,000		$	225,600
Square feet		500			3,000			1,500			2,000			4,500			11,500
# employees		7			25			8			10			75			125
# transactions (thou)		30			100			180			600			140			1,050
Power usage		22			730			11			17			220			1,000

The service departments (Janitorial, HR, and Data Services) are allocated to the two production departments (Welding and Assembly). Janitorial costs are allocated using square feet, HR using number of employees, and Data Services using number of transactions. You recall that there are several approaches to the allocation of service department costs, direct, step-down and reciprocal methods.

If the direct method is used, which of the following is true?

A. The amount of Welding costs allocated to Assembly is $37,500

B. The amount of HR allocated to Janitorial is $2,604

C. The amount of Data Services costs allocated to Welding is $13,500

D. The amount of Janitorial costs allocated to Assembly is $4,909

E. None of the choices are correct

Answer 1

Answer

OPTION C

Explanation:

	Janitorial	Welding	HR	Data Svcs	Assembly
Own costs	$ 12,000	$   90,000	$ 37,200	$ 32,400	$   54,000
Janitorial	$(12,000)	$     4,800			$     7,200
HR		$     9,300	$(37,200)		$   27,900
Data Svcs		$   13,500		$(32,400)	$   18,900
Toal	$           -	$ 117,600	$           -	$           -	$ 108,000

Note:

	Janitorial	Welding	HR	Data Svcs	Assembly
Own costs	12000	90000	37200	32400	54000
Janitorial	-12000	=12000/(3000+4500)*3000			=12000/(3000+4500)*4500
HR		=37200/(25+75)*25	-37200		=37200/(25+75)*75
Data Svcs		=32400/(100+140)*100		-32400	=32400/(100+140)*140

Explanation:

• The Welding costs are not allocated to the Assembly because Welding is a production department.
• The costs of HR are not allocated to Janitorial because both are service departments.
• The amount of Data Services costs allocated to Welding is $ 13500.
• The amount of Janitorial costs allocated to the Assembly is $ 7,200
• Clearly, option c is correct and other options are incorrect.

In case of any doubt, please comment.