Question

Zachary Information Services, Inc., has two service departments: human resources and billing. Zachary's operating departments, organized according to the special industry each department serves, are health care, retail, and legal services. The billing department supports only the three operating departments, but the human resources department supports all operating departments and the billing department. Other relevant information follows. Legal Services Human Resources 20 $900,000 Number of employees Annual cost* Annual revenue Billing 50 $2,310,000 84 Health Care 208 $ 6,180,000 $ 10,800,000 Retail 158 $4,980,000 $5,300,000 $2,980,000 $3,900,000 * This is the operating cost before allocating service department costs. Required a. Allocate service department costs to operating departments, assuming that Zachary adopts the step method. The company uses the number of employees as the base for allocating human resources department costs and department annual revenue as the base for allocating the billing department costs. b. Allocate service department costs to operating departments, assuming that Zachary adopts the direct method. The company uses the number of employees as the base for allocating the human resources department costs and department annual revenue as the base for allocating the billing department costs. c. Compute the total allocated cost of service centers for each operating department using each allocation method. Complete this question by entering your answers in the tabs below. Req A1 Req A2 Req B1 Req B2 Req C1 Req c2 Allocate service department costs to operating departments, assuming that Zachary adopts the step method. The company uses the number of employees as the base for allocating human resources department costs. Department Allocation Rate Weight of Base Allocated Cost Billing

Answer 1

Direct method of allocation for Service Department cost :

The direct method allocates costs of each of the service departments to each operating department based on each department’s share of the allocation base. Services used by other service departments are ignored. This means the direct method does not recognize service performed by other service departments

Step method of allocation for Service Department cost :

The second method of allocating service department costs is the step method. This method allocates service costs to the operating departments and other service departments in a sequential process. The sequence of allocation generally starts with the service department that has incurred the greatest costs. After this department’s costs have been allocated, the service department with the next highest costs has its costs allocated, and so forth until the service department with the lowest costs has had its costs allocated. Costs are not allocated back to a department that has already had all of its costs allocated.

Human Resource Department cost allocation - Step Method
Department	Allocation Rate	Weight Base	Allocated Cost
Billing	1,800	50	90,000
Health Care	1,800	208	374,400
Retail	1,800	158	284,400
Legal Services	1,800	84	151,200
Total			900,000

Human Resource Department cost allocation - Direct Method
Department	Allocation Rate	Weight Base	Allocated Cost
Billing		0	-
Health Care	2,000	208	416,000
Retail	2,000	158	316,000
Legal Services	2,000	84	168,000
Total			900,000

Billing Department cost allocation - Step Method
Department	Allocation Rate	Weight Base	Allocated Cost
Health Care	0.1200	10,800,000	1,296,000
Retail	0.1200	5,300,000	636,000
Legal Services	0.1200	3,900,000	468,000
Total		20,000,000	2,400,000

Billing Department cost allocation - Direct Method
Department	Allocation Rate	Weight Base	Allocated Cost
Health Care	0.1155	10,800,000	1,247,400
Retail	0.1155	5,300,000	612,150
Legal Services	0.1155	3,900,000	450,450
Total			2,310,000

Working of Step Method :

Particulars	Allocation Rate	Human Resource	Billing	Health Care	Retail	Legal Services
Number of Employees		20	50	208	158	84
Annual Cost		900,000	2,310,000	6,180,000	4,980,000	2,980,000
Annual Revenue				10,800,000	5,300,000	3,900,000
Allocation of cost for Human Resource on employee headcount ratio ((2400000/Total headcount of billing, health care, Retail & legal service * Headcount of respective operating department)	1,800	-900000	90,000	374,400	284,400	151,200
Total cost		-	2,400,000
Allocation of cost for Billing department on revenue ratio (2400000/Total Revenue * Revenu of respective operating department)	0.12		(2,400,000)	1,296,000	636,000	468,000