Question

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 $266,000, $381,000, and $209,000, 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		11,000			55,800			62,000			434,000			68,200
Employees		21			13			42			84			63
Equipment value (in thousands)	$	174.00		$	232.00		$	16.50		$	116.00		$	58.00

      
Direct costs of the Molding Department included $245,000 in direct materials, $345,000 in direct labor, and $120,000 in overhead. The Painting Department’s direct costs consisted of $212,000 in direct materials, $198,000 in direct labor, and $75,000 in overhead.

  
Required:

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.)

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.)

c.

(1) 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.)

(2) Did the company meet management's standards of keeping service department costs below $3.50 per unit in the Molding Department?

	Yes
	No

(3) Did the company meet management's standards of keeping service department costs below $3.50 per unit in the Painting Department?

	Yes
	No

Answer 1

	Administration	Accounting	Maintenance	Molding	Painting
Direct cost of department	266,000	381,000	209,000
Cost of maintenance Department 209000 allocated on Proportionate of 174:232:116:58 (174+232+116+58=580) (For Molding =209000*116/580)	62,700	83,600	(209,000)	41,800	20,900
Total	328,700	464,600	-	41,800	20,900
Cost of Accounting Department 464600 allocated on Proportionate of 21:84:63 (21+84+63 = 168) (For Molding =464600*84/168)	58,075	(464,600)		232,300	174,225
Total	386,775	-	-	274,100	195,125
Cost of Administrative Department 386775 allocated on Proportionate of 434000:68200 (434000+68200 = 502200) (For Molding = 386775*434000/502200)	(386,775)			334,250	52,525
Allocated costs to Production department	-	-	-	608,350	247,650
Add: direct cost of production department				710,000	485,000
Total cost of production department				1,318,350	732,650

	Molding Department		Painting Department
	Total cost	Per unit cost	Total cost	Per unit
Direct materials	245,000	$       2.45	212,000	$       2.12
Direct labor	345,000	$       3.45	198,000	$       1.98
Overhead	120,000	$      1.20	75,000	$       0.75
Total direct cost of production department	710,000	$       7.10	485,000	$       4.85
Answer B		$       7.10		$       4.85
Per unit cost = Total cost divided by 100000 units
	Molding Department		Painting Department
	Total cost	Per unit cost	Total cost	Per unit
Allocated costs to Production department	608,350	$       6.08	247,650	$       2.48
Answer C1		$       6.08		$       2.48
Did the company meet management's standards of keeping service department costs below $3.50 per unit in the Molding Department			$       6.08	No
Did the company meet management's standards of keeping service department costs below $3.50 per unit in the Painting Department?			$       2.48	Yes