The Dylap Corporation has two service centers: IS (information systems) and accounting. The service centers provide...

The Dylap Corporation has two service centers: IS (information systems) and accounting. The service centers provide services to one another as well as to the three operating divisions: Dysap, Dynap and Dycap. The distribution of each service center’s output as well as its costs (in millions) is given as follows:

Fraction of Service Center Output Used
			Dysap	Dynap	Dycap	Total
	IS	Accounting	Division	Division	Division	Cost
IS	0.15	0.22	0.23	0.15	0.25	$17.3

Accounting	0.04	0.16	0.38	0.27	0.15	$8.7
						$26.0

1. Utilizing the Direct Allocation Method with revised shares, how much of the IS and Accounting Department costs would be allocated to the operating divisions?

2. Utilizing the Step Down Allocation method with IS first, how much of the IS and Accounting Department costs would be allocated to the operating divisions?

3. Assuming you are negotiating on behalf of the Dynap Division, which allocation method would you suggest Dylap Corporation utilize to allocate service center costs to operating divisions and why? What specific points would you offer to persuade the CEO of Dylap Corporation to select the allocation method you advocate?

Expert Solution

1)

**Direct Allocation Method**
Department	Dysap	Dynap	Dycap	Total
Revised share of IS Allocation	0.36	0.24	0.40
IS	6.228	4.152	6.92	17.3
Revised Share of Accounting Allocation	0.475	0.3375	0.1875
Accounting	4.1325	2.93625	1.63125	8.7
Total	10.3605	7.08825	8.55125	26.0

2)

**Step Down Allocation Method with IS first**
Department	Accounting	Dysap	Dynap	Dycap	Total
Revised share of Allocation of IS Dept.	0.26	0.27	0.18	0.29
IS (A)	4.498	4.671	3.114	5.017
Accounting	8.7
Revised share of Allocation of Accounting Dept.		47.5	33.75	18.75
Accounting (B)	(13.198)	6.26905	4.454325	2.474625
Total Allocation (A+B)		10.94005	7.568325	7.491625	26

3) According to Dynap Production, Direct Allocation Method is better, as it reduces the cost by $ 0.48.

To convince some points are :

Direct allocation method simplifies allocation procedure.
The proportion of services provided internal or other service departments can be ignored in this method.

ekkarill92 answered 2 years ago

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