Question

1).

The Merchant Manufacturing Company has two service departments — purchasing and maintenance, and two production departments — fabrication and assembly. The distribution of each service department's efforts to the other departments is shown below:

FROM	TO
	Purchasing			Maintenance			Fabrication			Assembly
Purchasing		0	%		60	%		30	%		10	%
Maintenance		40	%		0	%		45	%		15	%

The direct operating costs of the departments (including both variable and fixed costs) were as follows:

Purchasing	$	129,000
Maintenance		51,000
Fabrication		105,000
Assembly		81,000

The total cost accumulated in the fabrication department using the step method is (assume the purchasing department goes first; calculate all ratios and percentages to 4 decimal places, for example 33.3333%, and round all dollar amounts to the nearest whole dollar):

Multiple Choice

• $234,550.

• $240,000.

• $126,000.

• $132,700.

• $138,450.

2).

The Merchant Manufacturing Company has two service departments — purchasing and maintenance, and two production departments — fabrication and assembly. The distribution of each service department's efforts to the other departments is shown below:

FROM	TO
	Purchasing			Maintenance			Fabrication			Assembly
Purchasing		0	%		35	%		50	%		15	%
Maintenance		45	%		0	%		45	%		10	%

The direct operating costs of the departments (including both variable and fixed costs) were as follows:

Purchasing	$	102,000
Maintenance		24,000
Fabrication		78,000
Assembly		54,000

The total cost accumulated in the assembly department using the step method is (calculate all ratios and percentages to 4 decimal places, for example 33.3333%, and round all dollar amounts to the nearest whole dollar):

Multiple Choice

• $172,395.

• $177,845.

• $80,155.

• $86,855.

• $92,605.

Answer 1

Calculation:

1)

	Service Department	Production Department
Purchasing	Maintenance	Fabrication	Assembly
Operating Cost	$129,000	$51,000	$105,000	$81,000
Allocation of Purchasing Department Cost over other department in the ratio 60:30:10	($129,000)	$77,400	$38,700	$12,900
		$128,400
Allocation of Maintenance Department Cost over the production department in the ratio 45:15		($128,400)	$96,300	$32,100
			$240,000	$126,000

2)

	Service Department	Production Department
Purchasing	Maintenance	Fabrication	Assembly
Operating Cost	$102,000	$24,000	$78,000	$54,000
Allocation of Purchasing Department Cost over other department in the ratio 35:50:15	($02,000)	$35,700	$51,000	$15,300
		$59,700
Allocation of Maintenance Department Cost over the production department in the ratio 45:10		($59,700)	$48,845	$10,855
			$177,845	$80,155

Explanation:

Step Method or Non-Reciprocal Method

• It is used where one service department render services to other service department.
• Consider the services rendered by Service dept to another Service dept
• Complicated method since it describes the sequence of distribution of cost.
• Service Dept that serves largest number of services to other Depts. (Service & Production) is distributed FIRST
• On the basis of given %
• After this next largest number of departments is apportioned.