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 $251,000, $418,000, and $207,000, 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 $232,500 in direct materials, $342,500 in direct labor, and $115,000 in overhead. The Painting Department’s direct costs consisted of $237,000 in direct materials, $163,000 in direct labor, and $70,000 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.)

Answer 1

Answer part (a):

Statement of allocation of costs:

Particulars	Amount ($)	Cost Driver	No of Cost driver	Cost per cost driver
Administration Costs	251000	Building area	605000	0.41
Accounting	418000	Employees	235	1778.72
Maintenance	207000	Equipment value (in thousands)	575.5	359.69

Statement of Total Costs and Allocated Costs:

Particulars	Molding Department	Painting Department
Direct Costs:
Direct Material	232500	237000
Direct Labor	342500	163000
Overhead	115000	70000
Allocated Costs:
Administration Costs	183582.64	31820.99
Accounting Costs	78263.83	156527.66
Maintenance Costs	80569.94	40284.97
Total Costs	1032416.41	698633.62

Answer part (b):

Total direct cost per unit for both departments:

Particulars	Molding Department	Painting Department
Direct Costs:
Direct Material	232500	237000
Direct Labor	342500	163000
Overhead	115000	70000
Total Direct Costs	690000	470000
Total Units	100000	100000
Direct Cost per unit	6.9	4.7

Answer part (c):

Statement of service department cost allocated to production department (per unit basis)

Particulars	Molding Department	Painting Department
Allocated Costs:
Administration Costs	183582.64	31820.99
Accounting Costs	78263.83	156527.66
Maintenance Costs	80569.94	40284.97
Total Allocated Costs	342416.41	228633.62
Total Units	100000	100000
Allocated cost per unit	3.42	2.29