Asked by Chris Milano on May 10, 2024
Verified
Strzelecki Corporation uses the step-down method to allocate service department costs to operating departments. The company has two service departments, Service Department A and Service Department B, and two operating departments, Operating Department X and Operating Department Y. Data concerning those departments follow: Service Department A costs are allocated first on the basis of allocation base A and Service Department B costs are allocated second on the basis of allocation base B.The total Operating Department Y cost after allocations is closest to:
A) $320,486
B) $318,473
C) $320,260
D) $307,660
Step-down Method
The step-down method is an accounting practice used to allocate costs among departments, beginning with the highest cost pool.
Allocation Base A
An allocation base is a measure or quantity, such as machine hours or labor costs, used to assign indirect costs to different products or services.
Allocation Base B
A criterion or standard used to distribute overhead costs among various cost objects.
- Resolve the total departmental charges after dividing service department costs using the step-down approach.
- Execute principles for distributing costs founded on multiple bases such as spatial size, personnel numbers, employee-related expenditures, and labor hours employed.
- Review the effects of cost dispersal on the financial expenditures of operational divisions.
Verified Answer
Step 1: Allocate Service Department A costs to Service Department B and Operating Department X
Total Service Department A costs = $150,000
Allocation base A (number of employees) = 50 employees in Service Department A and 100 employees in Service Department B
Allocation rate = $150,000 / 50 employees = $3,000 per employee
Service Department A cost allocated to Service Department B = 100 employees x $3,000 per employee = $300,000
Service Department A cost allocated to Operating Department X = 50 employees x $3,000 per employee = $150,000
Step 2: Allocate Service Department B costs to Operating Department X and Operating Department Y
Total Service Department B costs = $200,000
Allocation base B (number of machine hours) = 10,000 machine hours in Operating Department X and 20,000 machine hours in Operating Department Y
Allocation rate = $200,000 / 30,000 machine hours = $6.67 per machine hour
Service Department B cost allocated to Operating Department X = 10,000 machine hours x $6.67 per machine hour = $66,700
Service Department B cost allocated to Operating Department Y = 20,000 machine hours x $6.67 per machine hour = $133,300
Total Operating Department Y cost after allocations = Operating Department Y direct cost + Service Department A allocation + Service Department B allocation
= $120,000 + $0 + $133,300
= $253,300
Therefore, the closest option is C) $320,260.
Learning Objectives
- Resolve the total departmental charges after dividing service department costs using the step-down approach.
- Execute principles for distributing costs founded on multiple bases such as spatial size, personnel numbers, employee-related expenditures, and labor hours employed.
- Review the effects of cost dispersal on the financial expenditures of operational divisions.
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