Asked by dhanashree sangaokar on May 27, 2024
Verified
Cervetti, Incorporated, allocates service department costs to operating departments using the step-down method. The company has two service departments, Administration and Physical Plant, and two operating departments, Assembly and Testing. Data concerning those departments follow: 
Administration Department costs are allocated first on the basis of employee time and Physical Plant Department costs are allocated second on the basis of space occupied. The total Testing Department cost after allocations is closest to:
A) $754,279
B) $757,240
C) $748,960
D) $757,368
Step-down Method
An allocation method used in cost accounting to distribute overhead costs to various cost centers and products in stages based on their usage of services.
Physical Plant Department
The division within an organization responsible for managing and maintaining the physical facilities, including buildings and grounds.
Space Occupied
The amount of physical area taken up by an object, person, or activity, typically measured in square feet or meters.
- Understand the cumulative budgetary effect on departments after implementing service department cost allocations with the step-down method.
- Adopt methodologies for cost allocation utilizing varied indicators including area in square feet, worker count, personnel-related costs, and duration of labor.
- Inspect the impact of cost assignments on the spending patterns of operational departments.
Verified Answer
Total employee time for all departments = 10,000 hours
Employee time for Administration Department = 2,500 hours
Employee time for Physical Plant Department = 1,500 hours
Allocation rate for Administration Department = Administration Department costs / Administration Department employee time
= $400,000 / 2,500 hours
= $160 per hour
Administration Department cost allocated to Physical Plant Department
= Administration Department employee time * Allocation rate
= 1,500 hours * $160 per hour
= $240,000
Now, we allocate the Physical Plant Department costs on the basis of space occupied.
Total square footage for all departments = 200,000 sq. ft.
Square footage for Physical Plant Department = 50,000 sq. ft.
Square footage for Assembly Department = 80,000 sq. ft.
Square footage for Testing Department = 70,000 sq. ft.
Allocation rate for Physical Plant Department = Physical Plant Department costs / Physical Plant Department square footage
= $360,000 / 50,000 sq. ft.
= $7.20 per sq. ft.
Physical Plant Department cost allocated to Assembly Department
= Physical Plant Department square footage of Assembly Department * Allocation rate
= 80,000 sq. ft. * $7.20 per sq. ft.
= $576,000
Physical Plant Department cost allocated to Testing Department
= (Physical Plant Department square footage of Assembly Department + Physical Plant Department square footage of Testing Department) * Allocation rate
= (80,000 sq. ft. + 70,000 sq. ft.) * $7.20 per sq. ft.
= $1,440,000
Total cost allocated to the Testing Department = Testing Department direct cost + Physical Plant Department cost allocated to Testing Department
= $1,200,000 + $1,440,000
= $2,640,000
Therefore, the closest answer is $757,240 (Option B).
Learning Objectives
- Understand the cumulative budgetary effect on departments after implementing service department cost allocations with the step-down method.
- Adopt methodologies for cost allocation utilizing varied indicators including area in square feet, worker count, personnel-related costs, and duration of labor.
- Inspect the impact of cost assignments on the spending patterns of operational departments.
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