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In: Accounting

The Hearts and Hands Clinic has two service departments (Human Resources and Information Systems) and two...

The Hearts and Hands Clinic has two service departments (Human Resources and Information Systems) and two "production" departments (In-patient Treatment and Out-patient Treatment). The service departments service the "production" departments as well as each other, and studies have shown that Information Systems provides the greater amount of service. Which of the following allocations would not occur if Hearts uses the step-down method of cost allocation? Select one: a. Human Resources cost would be allocated to In-patient Treatment. b. In-patient Treatment cost would be allocated to Out-patient Treatment. c. Information Systems cost would be allocated to Human Resources. d. Human Resources cost would be allocated to Information Systems. e. Both Human Resources cost would be allocated to Information Systems and In-patient Treatment cost would be allocated to Out-patient Treatment.

Solutions

Expert Solution

According to the step down method of cost allocation, The largest amount of service provider is the first one who will allocate its costs to the other service department and then to the production departments as well.

After that the second largest service provider will do the same and thats how the process continues till the end.

So from the question we can see that Information Systems provides the greatest number of service. Hence it is their costs that will be allocated to other departments first.

From the above statement we can come to the conclusion that the answer to the question is option D. The reason being that Human Resources is the second largest service provider after Information system and so it will be the other way round that "Information systems costs would be allocated to Human resources".

So, D is the answer.

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ekkarill92 answered 1 year ago
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