Question

6.      Hernandez Tool and Die has three service? departments:

	Budgeted Department Costs
Cafeteria, revenue of $70,000 less expenses of $210,000	$140,000
Engineering	1,900,000
General factory administration	850,000

Cost-allocation bases are budgeted as? follows:

			Engineering Hours
Production			Worked for Production		Total Labor
Departments	Employees		Departments		Hours
Machining	126		47,600		299,000
Assembly	455		25,500		713,000
Finishing and painting	119		11,900		138,000

1.      Supposed Hernandez allocates all service department costs directly to the production departments without allocation to other service departments. How much of the budgeted costs of each service department are allocated to each production department? Choose the most logical cost-allocation base for each service department. To plan your work, examine number 2 before undertaking this question.

2.      The company has decided to use the step-down method of cost allocation. General factory administration would be allocated first, then cafeteria, then engineering. Cafeteria employees work 43,400 labor hours per year. There were 60 engineering employees with 356,600 total labor hours. Recompute the results in number 1, using the step-down method. Show your computations. Compare the results in numbers 1 and 2. Which method of allocation is best? Why?

3.      For each type of cost assignment made in number 2 using the step-down method, indicate the assignment type.

Answer 1

Direct method of cost allocation
	Service departments			Production Departments
	Cafeteria	Engineering	General factory administration	Machining	Assembly	Finishing and painting
Department costs	1,40,000	19,00,000	8,50,000
Allocation	-1,40,000			25,200	91,000	23,800
		-1,90,000		10,64,000	5,70,000	2,66,000
			-8,50,000	2,21,000	5,27,000	1,02,000
	-	-	0
Production department costs after allocation of service department costs				13,10,200	11,88,000	3,91,800
Note:
1 Service department costs are allocated to production departments using direct cost allocation method
2 Cafeteria costs are allocated based on emplyees number
3 Engineering costs are allocated using engineering hours worked for production as basis
4 General factory administration costs are allocated using total labour hours as basis
Step down method
	Service departments			Production Departments
	General factory administration	Cafeteria	Engineering	Machining	Assembly	Finishing and painting
Department costs	8,50,000	1,40,000	19,00,000
Allocation	-850000	23800	195554.84	1,63,967.74	3,91,000	75,677.42
		Allocation of
		1,63,800	12,931.58	27,156.32	98,064.47	25,647.63
			Allocation of
			21,08,486	11,80,752.16	6,32,545.80	2,95,188.04
Production department costs after allocation of service department costs				13,71,876.22	11,21,610.27	3,96,513.09
Note:
1 Service department costs are allocated to production and other service departments using step down allocation method
2 Cafeteria costs are allocated based on emplyees number
3 Engineering costs are allocated using engineering hours worked for production as basis
4 General factory administration costs are allocated using total labour hours as basis
Working Direct method Number of employees engineering hours worked for production Total Labour hours                                        126                                                                           47,600        2,99,000                                        455                                                                           25,500        7,13,000                                        119                                                                           11,900        1,38,000 Total                                        700                                                                           85,000      11,50,000 Step dowm method Total Labour hours Number of employees engineering hours worked for production 43400 60                                                                           47,600 356600 126                                                                           25,500 2,99,000 455                                                                           11,900 7,13,000 119                                                                           85,000 1,38,000 760 1550000