Question

Madison Park Co-op, a whole foods grocery and gift shop, has provided the following data to be used in its service department cost allocations: Departmental costs before allocations Employee-hours Space occupied square feet Service Departnents Naministration Janitorial $200,000 $60,000 320 700 Operating Departments Groceries $3,900,000 $340,000 2,740 9,200 500 1.400 Required: Using the step-down method, allocate the costs of the service departments to the two operating departments. Allocate Administration first on the basis of employee-hours and then Janitorial on the basis of space occupied. (Please enter allocations from a department as negative and allocations to a department as positive. The line should add across to zero. Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.) Service Departments Administration Janitorial $ 200,000 $ 60,000 Operating Departments Groceries Gifts $ 3,900,000 $ 340,000 Total 4,500,000 $ Departmental costs before allocations Allocation: Administration costs Janitorial costs Total costs after allocation

Answer 1

Step method takes into factor the services provided by one department to another. Under this method, the cost of service departments need to be allocated to operating departments.

If there are segments in service departments, the segment with highest cost shall be allocated between remaining segment and operating departments.

	Service departments		Operating departments
	Administration	Janitorial	Groceries	Gifts	Total
Department costs before allocation	$           200,000	$                0,000	$      3,900,000	$           340,000	$       4,500,000
Allocation
Administration costs	$        (200,000)	$               20,000	$          71,250	$            8,750	$     -
Janitorial costs		$             80,000)	$         73,600	$      6,400	$    -
Total costs after allocation	$       -	$           -	$      4,144,850	$          355,150	$       4,500,000

Working notes :

Administration costs

Based on employee hours in the other three departments: 320 +2740 + 140 = 3200.

Janitorial: $200,000 × 320/3200 = $ 20,000

Groceries: $200,000 × 2740/3200 = $ 171,250

Gifts: $200,000 × 140/3200 = $ 8,750

Janitorial costs

Based on space occupied by the two operating departments: 9200 + 800 = 10,000

Both the Janitorial Department costs of $60,000 and the Administration costs of $20,000 that have been allocated to the Janitorial Department are allocated to the two operating departments.

Groceries: $80,000 × 9,200/10,000 = $ 73600

Gifts: $80,000 × 800/10,000 = $ 6400

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