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. Assembl Janitorial Welding HR Data Svcs y Total Own costs Square feet # employees # transactions (thou) Power usage S 12,000 90,000 $37,200 S 32,400 54,000 $ 225,600 4,500 11,500 125 140 1,050 220 1,000 500 3,000 1,500 2,000 10 600 17 75 25 100 730 30 180 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. A. If the step-down method is applied, allocating the services in this order - HR, Janitorial, Data Sves - what are the total costs given to each service AND production department?

Explanation / Answer

A) Allocation of cost using Step down Method (Amounts in $)

Particulars HR Janitorial Data Services Welding Assembly Own Costs 37,200 12,000 32,400 90,000 54,000 Allocation of: HR (on the basis of no. of employees) (7:10:25:75) divided by total 117 (37,200) 2,226 3,179 7,949 23,846 Janitorial (in the ratio of square feet) (2,000:3,000:4,500) divided by total 9,500 - (14,226) 2,995 4,492 6,739 Data Services (in the ratio of no. of transactions) (100:140) divided by total 240 - - (38,574) 16,073 22,501 Total Allocated Cost 0 0 0 118,514 107,086

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