Yong Seng (YS) is a manufacturing firm. It has three support departments: A, B and C,...

Yong Seng (YS) is a manufacturing firm. It has three support departments: A, B and C, and three operating departments: P, Q and R. Its support departments provide services to both other support and operating departments. Their usage is captured below:

Usage By

Support Depts Operating Depts

A B C P Q R

Departmental OH Costs $114,000 $179,000 $130,000

Support Department

A - 20% 20% 20% 20% 20%

B 20% - - 20% 30% 30%

C 20% 20% - 20% 20% 20%

YS uses the step down method to allocate support department costs to operating departments, and a plant wide method based on machine hours to allocate manufacturing overheads to products. Each operating department manufactures a line of products. YS prices its products on a cost plus mark-up basis.

Required:

(a)(i) Ryan, a new cost accountant, believes department B should be allocated first as it has the highest support department costs. Without performing any calculations, explain if Ryan is correct. (5m)

(ii) Ignoring your answer in part (i), calculate the support department costs allocated to each of the operating departments P, Q and R; by using the Step Down method beginning with department C, followed by department A, and finally B. Provide your final answer to the nearest dollar. (14m)

(b) Without performing any calculations, briefly explain if the overall profit of YS will change if YS uses the direct method to allocate support department costs instead. (4m)

Solutions

Expert Solution

1. According to the step down method of cost allocation firstly the support department with the highest cost will be allocated followed by the next support department with highest cost and goes on. Accordingly since dept. B is having the highest cost, it will be allocated first followed by dept C and lastly by dept A. Hence Ryan is correct.

Allocation based on Step down method
	A	B	C	P	Q	R	Total
Support costs before allocation	114000	179000	130000				423000
Allocation of B (Ratio 20:0:20:30:30)	35800	-179000	0	35800	53700	53700	0
Total	149800	0	130000	35800	53700	53700	423000
Allocation of C (20:0:20:20:20)	32500	0	-130000	32500	32500	26000	0
Total	182300	0	0	68300	86200	86200	423000
Allocation of A (20:20:20)	-182300	0	0	60766	60767	60767	0
TOTAL	0	0	0	129066	146367	146967	423000

2. It is very much noteworthy that the above table is just a cost allocation. It does not have anything to do with increasing or decreasing of overall cost of the company. Thus the overall profit of the company will remain the same regardless of the allocation made.

ekkarill92 answered 11 months ago

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