Question

Model, Inc., produces model automobiles made from metal. It operates two production departments, Molding and Painting, and has three service departments, Administration, Accounting, and Maintenance. The accumulated costs in the three service departments were $250,000, $401,000, and $218,000, respectively. Management is concerned that the costs of its service departments are getting too high. In particular, managers would like to keep the costs of service departments under $3.50 per unit on average. You have been asked to allocate service department costs to the two production departments and compute the unit costs.

The company decided that Administration costs should be allocated on the basis of square footage used by each production and service department. Accounting costs are allocated on the basis of number of employees. Maintenance costs are allocated on the basis of the dollar value of the equipment in each department. The use of each base by all departments during the current period follows:  
  

	Used by
Allocation Base	Administration			Accounting			Maintenance			Molding			Painting
Building area		12,000			63,000			69,300			441,000			56,700
Employees		44			14			22			66			88
Equipment value (in thousands)	$	177.00		$	236.00		$	17.50		$	118.00		$	59.00

      
Direct costs of the Molding Department included $227,500 in direct materials, $330,000 in direct labor, and $112,500 in overhead. The Painting Department’s direct costs consisted of $210,000 in direct materials, $220,000 in direct labor, and $70,000 in overhead.

  
Required:

a. Using the step method, determine the allocated costs and the total costs in each of the two producing departments. Ignore self-usage (for example, ignore work done by Administration for itself). Rank order the allocation as follows: (1) Maintenance, (2) Accounting, and (3) Administration. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.)

	Maintenance	Accounting	Administration	Molding	Painting
Direct Costs
FROM	-	-	-	-	-
Maintenance
Accounting
Administration
Totals

b. Assume that 100,000 units were processed through these two departments. What is the unit cost for the sum of direct materials, direct labor, and overhead (1) for Molding, (2) for Painting, and (3) in total? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

	Unit Cost
Molding
Painting
Total

c. (1) Compute the cost per unit for the service department costs allocated to the production departments. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

	Unit Cost
Molding
Painting

(2) Did the company meet management's standards of keeping service department costs below $3.50 per unit in the Molding Department?

	Yes
	No

(3) Did the company meet management's standards of keeping service department costs below $3.50 per unit in the Painting Department?

	Yes
	No

Thank You!!!!!

Answer 1

Requirement a Allocation of service department costs using Step Method Maintenance Accounting Administration Molding $ 2,27,500 $ 3,30,000 $ 1,12,500 2,18,000 $ 4,01,000 $ 2,50,000 $ 6,70,000 -2,18,000 $ 87,200 $ 65,400 $ 43,600 $ $ $ $ $ Painting 2,10,000 2,20,000 70,000 5,00,000 21,800 Direct Materials Direct labor ОН Total Direct costs Maintenance Dept. costs of $ 218,000 in 236:177:118:59 ratio Sub-Total Accounting Dept. costs of $ 488,200 in 44:66:88 ratio Sub-Total Administration Dept. costs of $ 423,889 in 4410:567 ratio Total Costs 4,88,200 -4,88,200 $ $ $ 3,15,400 1,08,489 $ $ 7,13,600 $ 1,62,733 $ 5,21,800 2,16,978 $ . $ $ $ 4,23,889 $ -4,23,889 $ 8,76,333 $ 3,75,598 $ 7,38,778 48,291 - $ - $ - $ 12,51,931 $ 7,87,069 Requirement b Total cost (A) 12,51,931 7,87,069 No. of units (B) 100000 100000 Unit cost (A/B) 12.52 7.87 20.39 Molding Painting Total 000 $

Requirement c (1) Total cost (A) 5,81,931 2,87,069 No. of units (B) 100000 100000 Molding (43600+162733+375598) Painting (21800+216978+48291) Total Unit cost (A/B) $ 5.82 $ 2.87 $ 8.69 Requirement c (2) No The company did not meet the management's standard of keeping the service department costs below $ 3.50 in the Molding Department. Requirement c (3) Yes The company did meet the management's standard of keeping the service department costs below $ 3.50 in the Painting Department.