Amber Company uses two producing departments (A and B) and two service departmen
ID: 2562565 • Letter: A
Question
Amber Company uses two producing departments (A and B) and two service departments (S1 and S2). The costs incurred in S1 and S2 are allocated to Departments A and B and included in their factory overhead rates for costing products. S1 costs are allocated based on the number of employees, S2 costs are allocated based on direct labor-hours, and the production departmental overhead rates are also based on direct labor-hours. The following data are available for a recent period:
S1
S2
A
B
Direct department costs
$24,000
$36,000
$70,000
$117,500
Number of employees
1
2
16
9
Direct labor hours
225
150
1,125
900
What is the order of allocation under the step cost allocation method?
A.
Service department S1 is allocated first.
Service department S2 is allocated second.
B.
Service department S2 is allocated first.
Service department S1 is allocated second.
C.
Service department S1 and S2 are allocated equally, so order does not matter.
D.
None of the above.
Realty Company allocates common Building Department costs to producing departments (A and B) based on space occupied, and it allocates common Personnel Department costs based on the number of employees. Space occupancy and employee data are as follows:
Building
Personnel
Dept. A
Dept. B
Space occupied
100 ft.
5,000 ft.
12,000 ft.
3,500 ft.
Employees
3
5
45
30
If Realty Company uses the direct allocation method, the ratio representing the portion of Personnel costs allocated to Department A is:
A.
40/83
B.
75/83
C.
45/75
D.
None of the above
S1
S2
A
B
Direct department costs
$24,000
$36,000
$70,000
$117,500
Number of employees
1
2
16
9
Direct labor hours
225
150
1,125
900
Explanation / Answer
1. answer: option B Service department S2 is allocated first.
Service department S1 is allocated second.
The service department that provides service to the largest number of other service departments or which has the largest percentage of its costs consumed by other service departments allocates its costs to them first. It also allocates its other costs to the operating departments. percentage of service cost S2 is (36000/60000) 60% and S1 is (24000/60000) = 40% and thus S2 will be allocated first.
2. answer: Personnel costs allocated to Department A : option C (45/(45+30)) = 45/75
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