Question

The following information is departmental cost allocation with two service departments and two production departments.

				Percentage Service Provided to
Department	Cost			S1			S2			P1			P2
Service 1 (S1)	$	42,000			0	%		25	%		45	%		30	%
Service 2 (S2)		32,000			20			0			20			60
Production 1 (P1)		220,000
Production 2 (P2)		270,000

What is the amount of service department cost allocated to P1 and P2 using the direct method?

Answer 1

Answer)

Under Direct Method, Service department costs are allocated to production departments in the ratio of services used by them. However, no part of service department costs of one department is allocated to other service department.

Direct Method of Costs Allocation

	Service Departments	Production Departments	Total
S1	S2	P1	P2
Departmental costs before allocation	$               42,000	$                  32,000	$              2,20,000	$         2,70,000	$      5,64,000
Allocation:
Department S1 Cost (45/75, 30/75)	$             -42,000	-	$                  25,200	$            16,800	-
Department S2 Cost (20/80, 60/80)	-	$                -32,000	$                    8,000	$            24,000	-
Total Costs	-	-	$              2,53,200	$         3,10,800	$      5,64,000

Calculation of total Service department costs allocated to Production Department P1

Total allocated Service costs = Costs of Service department S1 allocated to P1 + Costs of Service department S2 allocated to P1

                                                            = $ 25,200 + $ 8,000

                                                             = $ 33,200

Calculation of total Service department costs allocated to Production Department P2

Total allocated Service costs = Costs of Service department S1 allocated to P2 + Costs of Service department S2 allocated to P2

                                                            = $ 16,800 + $ 24,000

                                                             = $ 40,800