Essex Consultancy uses the direct method to allocate its service department cost

Question

Essex Consultancy uses the direct method to allocate its service department costs to its operating departments. The company has two service departments, Information Technology and Administration, and two operating departments, Corporate Practice and Government Practice. Data concerning those departments follow: Information Technology Department costs are allocated on the basis of computers and Administration Department costs are allocated on the basis of employees. Required: Allocate the service department costs to the operating departments using the direct method.

Explanation / Answer

Information technology cost ----- (a) to corporate practice = 49/98 * 38024 = 19012 and (b) to government practice = 49/98 * 38024 = 19012 , , Now, Administrative cost ------ (a) to corporate practice = 78/119 * 26418 = 17316 and (b) to government practice = 41/119 * 26418 = 9102

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