Question

1. Leader Company has two support departments (S1 and S2) and two producing departments (P1 and P2). Estimated direct costs and percentages of services used by these departments are as follows:

Allocation of support departments	S1	S2	P1	P2
S1	-	10%	40%	50%
S2	20%	-	50%	30%
Direct costs	£4,500	£8,000	£10,000	£15,000

        Required:

a.	Prepare a schedule allocating the support department costs to the producing departments using the direct allocation method.
b.	Prepare a schedule allocating the support department costs to the producing departments using the sequential allocation method.

2. Describe the differences between support and producing departments. Give two examples of each.

Answer 1

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Leader Company
Answer 1- Direct Method	S 1	S 2	P 1	P 2	Total
S 1			40.00%	50.00%	90.00%
S 1 %			44.44%	55.56%
S 2			50.00%	30.00%	80.00%
S 2 %			62.50%	37.50%
Department cost	4,500.00	8,000.00	10,000.00	15,000.00	37,500.00
Allocation
Actuarial	(4,500.00)		2,000.00	2,500.00	-
Premium		(8,000.00)	5,000.00	3,000.00	-
Total cost after allocation	-	-	17,000.00	20,500.00	37,500.00
Answer 2- Sequential Method	S 1	S 2	P 1	P 2	Total
S 1			40.00%	50.00%	90.00%
S 1 %			44.44%	55.56%
S 2	20.00%		50.00%	30.00%	100.00%
Department cost	4,500.00	8,000.00	10,000.00	15,000.00	37,500.00
Allocation
S 2	1,600.00	(8,000.00)	4,000.00	2,400.00	-
Department cost after allocation	6,100.00	-	14,000.00	17,400.00	37,500.00
S 1	(6,100.00)	-	2,711.00	3,389.00	-
Total cost after allocation	-	-	16,711.00	20,789.00	37,500.00

Producing departments are primarily responsible for making products. These department incur direct costs. Example are Assembling and Finishing department.

Supporting departments provides only service to producing departments. They are not involved in making products. These department incur indirect costs. Example are maintenance and janitorial costs.