Williams manufactures a variety of iron products, made to customer specification

Question

Williams manufactures a variety of iron products, made to customer specifications, in small batches. Willie Williams, owner, is concerned that he does not have an accurate understanding of the costs of production. You, a newly-minted MBA, have researched his business and identified various costs and cost drivers.

Own costs

If the step-down method is used in this case, which sequence of allocations is not valid?

The service departments (Janitorial, HR, and Data Services) are allocated to the two production departments (Welding and Assembly). Janitorial costs are allocated using square feet, HR using number of employees, and Data Services using number of transactions. You recall that there are several approaches to the allocation of service department costs, direct, step-down and reciprocal methods.

Data, Janitorial, HR

HR, Data, Janitorial

Data, HR, Janitorial

Janitorial, Welding, HR, Data Svcs, Assembly

All sequences above are acceptable

Janitorial Welding HR Data Svcs Assembly Total

Own costs

$12,000 $90,000 $37,200 $32,400 $54,000 $225,600 Square feet 500 3,000 1,500 2,000 4,500 11,500 # employees 7 25 8 10 75 125 # transactions (thou) 30 100 180 600 140 1,050 Power usage 22 730 11 17 220 1,000

Explanation / Answer

Using Step-down method, we allocate the service department overhead to the production departments.

Here the service departments are HR, Janitorial, Data Services.

Production departments are Welding and Assembly.

Using step down method, we can follow any of the following sequences:

1. HR, Janitorial, Data Services (or)

2. Janitorial, Data Services , HR (or)

3. Data Services, HR, Janitorial.

All the above sequences are acceptable.

But,

Janitorial, Welding, HR, Data Services, Assembly, this sequence includes the production departments too. Hence it is not acceptable or not valid.

Therefore, Option D is correct answer.

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