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 $232,000, $400,000, and $183,000, 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		14,000			52,200			46,400			423,400			58,000
Employees		42			14			21			84			63
Equipment value (in thousands)	$	55.00		$	165.00		$	17.50		$	220.00		$	110.00

      
Direct costs of the Molding Department included $227,500 in direct materials, $335,000 in direct labor, and $117,500 in overhead. The Painting Department’s direct costs consisted of $237,000 in direct materials, $173,000 in direct labor, and $65,000 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.)

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.)

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.)

Molding

Painting

Answer 1

Step method is one of the allocation method to allocate service costs to the producing department.
In this method, the service costs are allocated to other service department as well as the producing department in a sequential manner
In this case, we have been given the order of allocation in case it is not given it begins with service department which provides highest percentage of service to other service department
a.)	We will have to find the percentage base to allocate cost to each of the service department
Allocation of maintenance costs	Accounting	Administration	Molding	Painting	Total
Allocation bases (Dollar value of equipment)	165	55	220	110	550
Percentage allocation (Dollar value of equipment/Total value of equipment)	30.00%	10.00%	40.00%	20.00%	100.00%
	165/550	55/550	220/550	110/550
Allocation amount	$54,900.00	$18,300.00	$73,200.00	$36,600.00	$183,000.00
	183000*30%	183000*10%	183000*40%	183000*20%
Allocation of Accounting costs	Administration	Molding	Painting	Total
Allocation bases (number of employees)	42	84	63	189
Percentage allocation (Number of employee/Total number of employees)	22.22%	44.44%	33.33%	100.00%
	42/189	84/189	63/189
Allocation amount (400000+54900)	$101,088.89	$202,177.78	$151,633.33	$454,900.00
	454900*22.22%	454900*44.44%	454900*33.33%
Allocation of Administrative costs	Molding	Painting	Total
Allocation bases (Square footage used)	423400	58000	481400
Percentage allocation	87.95%	12.05%	100.00%
	423400/481400	58000/481400
Allocation amount (232000+18300+101088.89)	$309,052.88	$42,336.01	$351,388.89
	351388.89*87.95%	351388.89*12.05%
Summary of allocation of costs is shown below
	Model Inc
	Step Method
	Administration	Accounting	Administration	Molding	Painting
Direct costs	$183,000	$400,000	$232,000	$680,000	$475,000
Allocation of maintenance cost	-$183,000	$54,900	$18,300	$73,200	$36,600
Allocation of accounting costs		-$454,900	$101,089	$202,178	$151,633
Allocation of administration cost			-$351,389	$309,053	$42,336
Totals	$0	$0	$0	$1,264,431	$705,569
b.
Formula to calculate cost per unit = Total direct costs/No of units produced
Cost per unit Molding = 1,264,431/100,000	$12.64
Cost per unit painting = 705,569/100,000	$7.06
Total cost per unit	$19.70
c.
Formula to calculate cost per unit = Service department costs allocated/No of units produced
Cost per unit molding = 584,431/100,000	$5.84
Cost per unit painting = 230,569/100,000	$2.31