Joe\'s Tire Company has two support departments, Personnel and Maintenance. The

Question

Joe's Tire Company has two support departments, Personnel and Maintenance. The Maintenance Department costs of $80,000 are allocated on the basis of standard service hours used. The are allocated based on the number of employees. Costs of Departments A and B are $40,000 and $60,000, respectively. Data on standard service hours and number of employees are as follows: aintenance Personnel Production Production tandard service hours sed umber of employees10 200 40 160 120 How much of the cost of the Maintenance Department is allocated to Department B using the direct method? $60,000 $12,800 $32,000 $21,333

Explanation / Answer

(a) Direct Allocation Method :-

Cost of Maintainance Dept allocated to Dept B =

(Total cost of Maintainance Dept/Total Hrs of Dept A & Dept B) * Total Hrs of Dept B

= (80000/[240+160]) * 160 = $32000

(b) Step Down Allocation :-

In the step method, we typically begin with the highest service cost first. We will start with Maintenance and allocate the cost to all the remaining dept.

Cost of Maintainance Dept allocated to Dept B =

(Total cost of Maintainance Dept/Total Hrs of Dept A & Dept B & Personal Dept) * Total Hrs of Dept B

= (80000/[240+160 + 200]) * 160 = $21333

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