Question

Caro Manufacturing has two production departments, Machining and Assembly, and two service departments, Maintenance and Cafeteria. Direct costs for each department and the proportion of service costs used by the various departments for the month of August follow.

				Proportion of Services Used by
Department	Direct Costs			Maintenance		Cafeteria		Machining		Assembly
Machining	$	99,000
Assembly		64,400
Maintenance		40,000		—		0.2		0.5		0.3
Cafeteria		32,000		0.8		—		0.1		0.1

Required:

Use the step method to allocate the service costs, using the following:

a. The order of allocation starts with Maintenance.

b. The allocations are made in the reverse order (starting with Cafeteria).

Answer 1

a Cost allocation under step down method (beginning with maintenance department)

	Service department	production department
Departments	Maintenance	Cafeteria	Machining	Assembly
Department cost before allocation	40,000	32,000	99,000	64,400
Maintenance department cost allocation (.20 , .50 , .30)	(40,000)	8,000	20,000	12,000
Cafeteria department cost allocation (.1 /.2 , .1 / .2)		(40,000)	20,000	20,000
Total cost after allocation			139,000	96,400

Maintenance department cost allocation

To cafeteria = 40,000 × .20 = $8,000

To machining = 40,000 × .50 = $20,000

To assembly = 40,000 × .30 = $12,000

Cafeteria department cost allocation

To machining = 40,000 × (.1 / .2) = $20,000

To assembly = 40,000 × (.1 / .2) = $20,000

b Cost allocation under step down method (beginning with cafeteria department)

	Service department	Production department
Departments	Cafeteria	Maintenance	Machining	Assembly
Department cost before allocation	32,000	40,000	99,000	64,400
Cafeteria department cost allocation (.8 , .1 , .1)	(32,000)	25,600	3,200	3,200
Maintenance department cost allocation (.5 / .8 , .3 / .8)		(65,600)	41,000	24,600
Total cost after allocation			143,200	92,200

Cafeteria department cost allocation

To maintenance = 32,000 × .8 = $25,600

To machining = 32,000 × .1 = $3,200

To assembly = 32,000 × .1 = $3,200

Maintenance department cost allocation

To machining = 65,600 × (.5 / .8) = $41,000

To assembly = 65,600 × (.3 / .8) = $24,600

The above are the detailed calculations of service departments cost allocation to production department under step down method.

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