Question

Problem 1

The All Souls Hospital has three service departments (Nursing Support, Maintenance and Administration) and two operating departments (Inpatient and Outpatient.) Selected data from a recent period on the five departments follows.

	Service Departments			Operating Departments
	Nursing Support	Maintenance	Administration	Inpatient	Outpatient	Total
Direct Costs	$140,000	$105,000	$48,000	$275,000	$430,000	$998,000
Number of Employees	60	35	140	315	210	760
Square Feet of Space Occupied	15,000	10,000	20,000	40,000	100,000	185,000
Patient Hours				30,000	60,000	90,000

Hospital Administrators use the following for cost allocation:

Allocates Nursing Support based upon Number of Employees

Allocates Maintenance based upon Square Feet of Space Occupied

Allocates Administration based upon Patient Hours

Complete the following:

Use the step method to allocate the service department costs to the operating departments based upon the information above and determine the new costs for Inpatient and Outpatient. Use the following order: Nursing Support, Maintenance, Administration.

Use the direct method to allocate the service department costs to the operating departments.

Problem 2

Betty's Beauty Supply Company purchases a Cremex which is then processed to yield three moisturizing lotions: Angelic Crème, Ageless Crème and Antique Crème. In February, Betty purchased 10,000 gallons of Cremex at a cost of $250,000, and the company incurred $100,000 of additional joint conversion costs. June sales and production information are as follows:

	Gallons Produced	Sales Price at Split-off	Further Processing Cost per Gallon	Final Sales Price
Angelic Crème	2,000	$55	$0	$55
Ageless Crème	3,000	$40	$0	$40
Antique Crème	5,000	$30	$5	$60

Angelic and Ageless can be sold to other beauty supply stores at the split-off point. Antique can be sold at the split-off point or processed further and packaged for sale as an asthma medication. Allocate the $350,000 of joint cost to the three lotions using:

Physical units method

Sales value at split off method

NRV method

Constant gross margin method

	Physical Units Method	Sales Value at Split Off Method	NRV Method	Constant Gross Margin Method
Angelic Crème
Ageless Crème
Antique Crème

Answer 1

Solution to Problem 1

Allocation of cost of service departments using the step method

Under Step Method - The cost of each service department is allocated to other service departments and operating departments. However, the cost is not allocated to the same department as the cost incurred by each department pertains to providing the service to other departments and once the cost of a service department is allocated, the cost of other service department will not be allocated to that department.

As mentioned in the question, the cost of service department would be allocated in the following order

1) Nursing Support

2) Maintenance

3) Administration Department

Table showing the allocation of service departments using step method

Direct method of cost allocation

Under direct method the cost of each service department is allocated to operating department. Under this method the services used by other service departments are ignored for cost allocation.

Table showing the allocation of service departments using direct method

Workings