Question

The Cutright Company has a small factory with two service departments, Power and Maintenance, and two producing departments, Cutting and Assembly.

The Power Department cost is allocated on the basis of kilowatt hours, and the Maintenance Department cost is allocated on the basis of maintenance hours. The following information is available:

	Power	Maintenance	Cutting	Assembly
Departmental cost before allocations	$100,000	$40,000	$200,000	$160,000
Kilowatt hours	50	200	600	200
Maintenance hours	20	30	150	100

Required: Using the Direct Method and Step Method, allocate the costs of the service departments to the 2 operating departments.

Answer 1

Answer)

Allocation of Service Department costs using Direct Method

	Service Departments	Operating Departments	Total
Power	Maintenance	Cutting	Assembly
Departmental cost before allocation	$100,000	$40,000	$200,000	$160,000	$500,000
Allocation:
Power department cost (600/800: 200/800)	($100,000)		$75,000	$25,000	-
Maintenance department cost (150/250: 100/250)		($40,000)	$24,000	$16,000	-
Total Costs	-	-	$299,000	$201,000	$500,000

Working Note:

Calculation of ratio of allocation of Service Department costs:

Power Department costs (Allocated on the basis of Kilowatt hours):

Cutting Department = 600 hours/600 hours + 200 hours

                                     = 600/800

Assembly Department = 200 hours/600 hours + 200 hours

                                           = 200/800

Maintenance Department costs (Allocated on the basis of Maintenance hours):

Cutting Department = 150 hours/150 hours + 100 hours

                                     = 150/250

Assembly Department = 100 hours/150 hours + 100 hours

                                           = 100/250

Answer)

Allocation of Service Department costs using Step Method

	Service Departments	Opearting Departments	Total
Power	Maintenance	Cutting	Assembly
Departmental cost before allocation	$100,000	$40,000	$200,000	$160,000	$500,000
Allocation:
Power department cost (200/1,000: 600/1,000: 200/1,000)	($100,000)	$20,000	$60,000	$20,000	-
Maintenance department cost (150/250: 100/250)		($60,000)	$36,000	$24,000	-
Total Costs	-	-	$296,000	$204,000	$500,000

Working Note:

Calculation of ratio of allocation of Service Department costs:

Power Department costs (Allocated on the basis of Kilowatt hours):

Maintenance Department = 200 hours/200 hours + 600 hours + 200 hours

                                                 = 200/1,000

Cutting Department = 600 hours/200 hours + 600 hours + 200 hours

                                      = 600/1,000

Assembly Department = 200 hours/200 hours + 600 hours + 200 hours

                                           = 200/1,000

Maintenance Department costs (Allocated on the basis of Maintenance hours):

Cutting Department = 150 hours/150 hours + 100 hours

                                     = 150/250

Assembly Department = 100 hours/150 hours + 100 hours

                                           = 100/250