Items 1 and 2 are based on the following information:
The power and maintenance departments of a manufacturing company are service departments that provide support to each other as well as to the organization’s two production departments, plating and assembly. The manufacturing company employs separate departmental manufacturing overhead rates for the two production departments requiring the allocation of the service department costs to the two manufacturing departments. Square footage of area served is used to allocate the maintenance department costs while percentage of power usage is used to allocate the power department costs. Department costs and operation data are as follows:
|
Service Departments |
Production Departments |
|||
|
Costs: |
Power |
Maintenance |
Plating |
Assembly |
|
Labor |
$60,000 |
$180,000 |
||
|
Overhead |
1,440,000 |
540,000 |
||
|
Total costs |
$1,500,000 |
$720,000 |
||
|
Operating Data: |
||||
|
Square feet |
6,000 |
1,500 |
6,000 |
24,000 |
|
Percent of Usage: |
||||
|
Long-run capacity |
— |
5% |
60% |
35% |
|
Expected actual use |
— |
4% |
70% |
26% |
The allocation method that would provide this manufacturer with the theoretically best allocation of service department costs would be
- A dual-rate allocation method allocating variable cost on expected actual usage and fixed costs on long-run capacity usage.
- The step-down allocation method.
- The direct allocation method.
- The reciprocal (or linear algebra) allocation method.
Without prejudice to your answer in 11, assume that the manufacturing company employs the step-down allocation method to allocate service department costs. If it allocates the cost of the maintenance department first, then the amount of the maintenance department’s costs that are directly allocated to the plating department would be
- $144,000
- $120,000
- $115,200
- $ 90,000