Question

Madison Park Co-op, a whole foods grocery and gift shop, has provided the following data to be used in its service department cost allocations: Service Departments Operating Departments Administration Janitorial Groceries Gifts Departmental costs before allocations $210,000 $60,000 $3,900,000 $350,000 Employee-hours 490 300 2,750 150 Space occupied—square feet 800 1,300 9,400 600 Required: Using the step-down method, allocate the costs of the service departments to the two operating departments. Allocate Administration first on the basis of employee-hours and then Janitorial on the basis of space occupied. (Please enter allocations from a department as negative and allocations to a department as positive. The line should add across to zero. Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.)

Answer 1

In the step down method the costs are also allocated to other service departments. The total cost of the other service department increases by the allocation and then this increased is allocated.

We start with administration cost. This will be allocated to Janitorial, Groceries and Gifts.It is allocated based on employee-hours.

Total employee-hours are 160+3,100+740 = 4,000

Cost allocated to Janitorial = 150,000 X 160/4,000 = 6,000

Cost allocated to Groceries = 150,000 X 3,100/4,000 = 115,250

Cost allocated to Gifts = 150,000 X 740/4,000 = 27,750

Next we allocate Janitorial costs. Once the cost of any service department are allocated, then no cost is again allocated to that department. The cost is allocated to other remainingservice departments. In this case there are no remaining service departments and so the Janitorial cost would be allocated to only Groceries and Gifts.

Total cost is now 40,000+6,000 (allocated) = 46,000 and is allocated based on space occupied.

Total space for Groceries and gifts is 4,000+1,000=5,000

Cost allocated to Groceries = 46,000 X 4,000/5,000 = 36,800