Dakota Company has two service departments, Maintenance and Cafeteria, as well a
ID: 2586884 • Letter: D
Question
Dakota Company has two service departments, Maintenance and Cafeteria, as well as two production departments, Mixing and Finishing. Maintenance Department costs are allocated based on direct labor hours and Cafeteria Department costs are allocated based on number of employees.
The following data are available:
Maintenance Cafeteria Mixing Finishing
Direct costs
$7,000
$2,800
$1,200
$400
Direct labor hours
180
50
20
10
Number of employees
36
120
540
60
Assume the step-down method of allocating service departments' costs is used. Required:
A. Determine the total costs of the Mixing Department after allocating the service departments' costs.
B. Determine the total costs of the Finishing Department after allocating the service departments' costs.
C. What sequence was chosen to allocate service department costs in this problem and why?
Direct costs
$7,000
$2,800
$1,200
$400
Direct labor hours
180
50
20
10
Number of employees
36
120
540
60
Explanation / Answer
Service Dept Production Dept Maintenance Cafeteria Mixing Finishing Direct costs $7,000 $2,800 $1,200 $400 Direct Labour Hrs 180 50 20 10 No.of Employees 36 120 540 60 Step by Step Method of allocation: Allocation of maintenance department costs ($7,000) $4,375 $1,750 $875 (Allocation based on direct labour hours) ($7000/(50+20+10) =$87.50 Allocation of cafeteria department costs $0 ($7,175) $4,783 $2,392 (Allocation based on umber of employees) ($7175/(20+10) =$239.17 Total Cost $0 $0 $7,733 $3,667 A. Total cost of Mixing Department after allocation is $7,733 B. Total cost of Finishing Department after allocation is $3,667 C.Sequence we have chosen for service department allocation is the highest cost incurred by the service departments; as Maintenance department has incurred higher cost than Cafeteria department, we have allocated first Maintenance department costs.
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