Question

Problem 11-54 (Algo) Step Method with Three Service Departments (LO 11-3)

Model, Inc., produces model automobiles made from metal. It operates two production departments, Molding and Painting, and has three service departments, Administration, Accounting, and Maintenance. The accumulated costs in the three service departments were $262,000, $392,000, and $189,000, respectively. Management is concerned that the costs of its service departments are getting too high. In particular, managers would like to keep the costs of service departments under $3.50 per unit on average. You have been asked to allocate service department costs to the two production departments and compute the unit costs.

The company decided that Administration costs should be allocated on the basis of square footage used by each production and service department. Accounting costs are allocated on the basis of number of employees. Maintenance costs are allocated on the basis of the dollar value of the equipment in each department. The use of each base by all departments during the current period follows.
  

	Used by
Allocation Base	Administration			Accounting			Maintenance			Molding			Painting
Building area		15,000			29,500			41,300			442,500			76,700
Employees		66			15			22			44			88
Equipment value (in thousands)	$	56.00		$	168.00		$	15.50		$	224.00		$	112.00

      
Direct costs of the Molding Department included $245,000 in direct materials, $337,500 in direct labor, and $110,000 in overhead. The Painting Department’s direct costs consisted of $213,000 in direct materials, $167,000 in direct labor, and $62,500 in overhead.

A. Using the step method, determine the allocated costs and the total costs in each of the two producing departments. Ignore self-usage (for example, ignore work done by Administration for itself). Rank order the allocation as follows: (1) Maintenance, (2) Accounting, and (3) Administration. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.)

MODEL, INC. - Step Method - TO:

	Maintenance	Accounting	Administration	Molding	Painting
Direct Costs	$	$	$	$	$
FROM:
Maintenance	$	$	$	$	$
Accounting	$	$	$	$	$
Administration	$	$	$	$	$
Totals	$	$	$	$	$

B. Assume that 100,000 units were processed through these two departments. What is the unit cost for the sum of direct materials, direct labor, and overhead (1) for Molding, (2) for Painting, and (3) in total? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

	Unit Cost
Molding	$
Painting	$
Total	$

C. Compute the cost per unit for the service department costs allocated to the production departments. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

	Unit Cost
Molding	$
Painting	$

Answer 1

Dear Friend,

A. Firstly lets allocate Administration costs on the basis of square footage used by each production and service department. Accounting costs are allocated on the basis of number of employees. Maintenance costs are allocated on the basis of the dollar value of the equipment in each department.

So, lets put everything on a table like below: For molding I guess it was a mistake in your question, so I took it as 42500

Now, lets allocate total cost based on the above numbers and we will derive at the below table:

For instance, let me explain you how to calculate and allocate Admin cost for Molding

= (Admin cost/Total Sq footage)/Sq footage used by Molding)

=(262,000/205,000)/42,500

= 54,317.07

B. Unit cost when produced 100,000 units by considering Material, Labor and Over heads for Molding and Painting:

C. Cost per unit for the service department costs allocated to the production departments

: