Question

1 The accountant for Kadhim Inc. is preparing the budgets for operating department support service costs. Maintenance costs are allocated based on square feet, and cafeteria costs are allocated based on number of employees. The following data have been collected: Support Departments Operating Departments Maintenance Cafeteria Cutting Packaging Direct costs SAR50,000 SAR45,000 SAR275,000 SAR300,000 Number of employees 15 10 150 250 Square feet 1,500 2,000 3,500 4,000

a- If the direct method is used, calculate maintenance costs allocated to the cutting department?

b- If the direct method is used, calculate the total cost (including allocations) for the packaging department?

c- Assume you are working for the organization and are requested to allocate support department costs. Describe how you would choose the best method?

Answer 1

Statement showing the allocation of support department cost to operating departments

Particular	Basis of allocation	maintenance	cafteria	cuttingL	packaging
Cost incurred		50000	45000	275000	300000
Reallocation of cost of maintenance	3500:4000	(50000)		23333	26667
Reallocation of cost of cafteria	150:250		(45000)	16875	28125
Total		0	0	315208	354792

A) Maintenance cost allocated to cutting departnent = SAR23333

B) Total cost for packaging department =SAR354792

C) Criteria for selecting the method For allocating support dept overhead to production department

Service departments provides services only to production deparments - Direct method

Support departments provide sevice to other service departments to for eg Service departments are x and y x provide service to y and operating departments department y only to operating departments - Step method

Two or more service deparments they may render service to each other and, there these inter department services arevto be given due weight while redistributing expenses of sevice department -- Resiprocal service method