Lizabeth Co. allocates costs from the payroll department (S1) and the maintenanc

Question

Lizabeth Co. allocates costs from the payroll department (S1) and the maintenance department (S2) to the molding (P1), finishing (P2), and packaging (P3) departments. Payroll department costs are allocated based on the number of employees in the department and maintenance department costs are allocated based on the number of square feet which the production department occupies within the factory. Information about the departments is presented below:

Medusa uses the direct method to allocate costs. Round all answers to the nearest dollar.  
What amount of the payroll department costs will be allocated to the molding department?

Number of Number of Square Department Costs Employees Feet Occupied Payroll (S1) $145,000 2 2,000 Maintenance (S2) $220,000 8 64,000 Molding (P1) 68 100,000 Finishing (P2) 40 60,000 Packaging (P3) 18 40,000

Explanation / Answer

Assuming total Payroll Cost = 145,000 (in case it is per employee cost, then multiply it by 2)

Payroll cost allocation:

P1 = 145000*68/(68+40+18) [ cost* employee in the division/ (total employees in all three divisions)

= 78,254

P2 = 145000*40/(68+40+18) = 46031.75

P3 = 145000*18/(68+40+18) = 20714.29

Maintenance cost

Likewise you can calculate cost for Maintenance using sq feet instead of employee

foe ex.

P1 = 220,000*(100,000)/(100000+60000+40000) = 110,000

P2 = 66,000

P3 = 44,000

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