Question

of these beginning in uring the mon Total son rold Lady in a Shoe Inc. has two Support Departments (Engineering and Materials Managem Operating Departments (Machining and Assembly), which has this information about costs before they are Support Departments Operating Departments Engineering Materials Mgt. Machining Assembly Budgeted Costs: $480,000 $720,000 $350,000 $540,000 $209,000 Support Furnished By Engineering Salaries $60,000 $63,000 $27,000 $150,000 Percentage 40% 1895 By Materials Mgt. Budgeted Labor Hrs 800 hrs 1,050 hrs 3,150 hrs 5,000 hrs Percentage 16% 21% 63% 42% Old Lady in a shoe Inc. allocates Engineering costs first, and then Materials Management costs. With this information please find: a. The total cost of machining if support costs are allocated using the direct method: b. The total cost of assembly if support costs are allocated using the direct method: C. The total cost of machining if support costs are allocated using the step down method: d. The total cost of assembly if support costs are allocated using the step down method:

Answer 1

Solution Allocation of Support department cost to the operating departments using the direct method Under direct method, Support department cost is directly allocated to the operating departments using the allocation base. In this method, no cost from one Support department to another Support department is allocated. This method is the simple method and ignores the services provided by one Support department to another Support department. Allocation of cost Support Departments Operating Departments Engineering Materials Mgt. Machining Assembly Direct costs (a) $480,000 $720,000 $350,000 $540,000 Allocations: Engineering ($480,000) $336,000 $144,000 $480,000 x 42%/ (42%+18%) $480,000 x 18%/ (42%+18%) Materials Mgt. ($720,000) $180,000 $540,000 $720,000 x 21%/ (21%+63%) $720,000 x 63%/ (21%+63%) Total Support Dept. cost allocated (b) $516,000 $684,000 Total operating costs after allcoation (a + b) $866,000 $1,224,000 Allocation of Support department cost to the operating departments using the step method Step method is a method of allocating the Support department cost to the operating departments and other Support department in a sequential manner. In this method the ranking of allocating the Support department cost is assigned based on the largest portion of cost consumed by the other Support departments i.e. the department which has the largest portion of its costs consumed by other Support 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 Support department cost is allocated to the operating departments.

Support Departments Operating Departments Engineering Materials Mgt. Machining Assembly Direct costs (a) $480,000 $720,000 $350,000 $540,000 Allocations: Engineering ($480,000) $192,000 $201,600 $86,400 $480,000 x 40%/ (40%+42%+18%) $480,000 x 42%/ (40%+42%+18%) $480,000 x 18%/ (40%+42%+18%) Materials Mgt. ($912,000) $228,000 $684,000 $912,000 x 21%/ (21%+63%) $912,000 x 63%/ (21%+63%) Total Support Dept. cost allocated (b) $429,600 $770,400 Total operating costs after allcoation (a + b) $779,600 $1,310,400 Total cost of Machining if support costs are allocated using the direct method: Total cost of Assembly if support costs are allocated using the direct method: Total cost of Machining if support costs are allocated using the step down method: Total cost of Assembly if support costs are allocated using the step down method: $866,000 $1,224,000 $779,600 $1,310,400