Question

Downhill Manufacturing produces snow skis in a two-step production process - cutting and laminating.

The manufacturing center is supported by two service centers - a health clinic and a janitorial service. The

following table reveals certain facts about each activity:

Health

	Health	Janitorial	Cutting	Laminating
Employees	3	5	12	16
Square footage	1,400	500	14,000	9,000
Cost incurred	$160,000	$150,000	$720,000	900,000

(a) Using the direct method, allocate the service department costs to production. The clinic costs are

to be allocated based on employees and the janitorial costs are to be allocated based on the square

footage.

(b) Using the step method, allocate the service department costs to production. The clinic costs are to

be allocated based on employees and the janitorial costs are to be allocated based on the square

footage. The first step will be to allocate clinic costs. The clinic employees maintain their space and

do not rely upon the janitorial service. However, janitorial employees occasionally sustain an injury

and utilize the clinic.

	A.	5(a) Health clinic $0 5(a) Janitorial $0 5(a) Cutting $879,875.78 5(a) Laminating $1,050,124.22 5(b) Health clinic $0 5(b) Janitorial $0 5(b) Cutting $884,242.41 5(b) Laminating $1,045,757.55
	B.	5(a) Health clinic $0 5(a) Janitorial $0 5(a) Cutting $174,876.00 5(a) Laminating $5,013,510 5(b) Health clinic $0 5(b) Janitorial $0 5(b) Cutting $894,242 5(b) Laminating $1,065,758

Answer 1

Solution Required 1: Allocation of service department costs to the production department using the direct method Under direct method, Service department cost is directly allocated to the production departments using the allocation base. In this method, no cost from one service department to another service department is allocated. This method is the simple method and ignores the services provided by one service department to another service department Service Departments Production Departments Cutting Health Janitorial Laminating $160,000.00 $720,000.00 $900,000.00 Direct costs $150,000.00 Allocations: ($160,000.00) $68,571.43 Health $0.00 $91,428.57 $160,000 x $160,000 x 12/(12+16) 16/12+16) ($150,000.00) Janitorial $91,304.35 $58,695.65 S150,000 x 14, $150,000 x 9,000 /(14,000 9,000) /(14,000 9,000) $0.00 $879,875.78 $1,050,124.22 Total costs after allcoation $0.00 Total cost after allocation Total Cost Health $0.00 Janitorial $0.00 Cutting $879,875.78 Laminating $1,050,124.22

Required 2: Allocation of service department costs to the production department using the step method Step method is a method of allocating the service department cost to the production departments and other service department in a sequential manner. In this method the ranking of allocating the service department cost is assigned based on the largest portion of cost consumed by the other service departments i.e. the department which has the largest portion of its costs consumed by other service department gets the first rank and so on. Once the cost of a department is allocated to other departments, that department is excluded while allocating cost of other departments. Thus in a sequential step down manner, all the service department cost is allocated to the production departments Service Departments Production Departments Health Janitorial Cutting Laminating $160,000.00 $720,000.00 $900,000.00 Direct costs $150,000.00 Allocations: ($160,000.00) $77,575.76 Health $24,242.42 $58,181.82 $160,000 x 5 $160,000 x 12 $160,000 x 16 /5+12+16) /5+12+16) /15+12+16) ($174,242.42) Janitorial $106,060.61 $68,181.82 $174,242.42 x 14,000/(14,000 $174,242.42 x 9,000 /(14,000+9,000) 9,000) $0.00 $0.00 $884,242.42 $1,045,757.58 Total costs after allcoation Total cost after allocation Total Cost Health $0.00 Janitorial $0.00 Cutting $884,242.42 Laminating $1,045,757.58