Problem

Donovan SteelDonovan Steel has two profit centers: Ingots and Stainless Steel. These profi...

Donovan Steel

Donovan Steel has two profit centers: Ingots and Stainless Steel. These profit centers rely on services supplied by two service departments: electricity and water. The profit centers’ consumption of the service departments’ outputs (in millions) is given in the following table:

 

Service Departments

Profit Centers

 

Service Departments

Electricity

Water

Ingots

Stainless Steel

Total

Electricity

2.500 kwh

2.500 kwh

3.000 kwh

2.000 kwh

10.000 kwh

Water

1.000 gal.

800 gal.

1.000 gal.

2.000 gal.

4.800 gal.

The total operating costs of the two service departments are

Electricity

$ 80 million

Water

60 million

Total cost

$140 million

Required:

a. Service department costs are allocated to profit centers using the step-down method. Water is the first service department allocated. Compute the cost of electricity per kilowatt-hour using the step-down allocation method.


b. Critically evaluate this allocation method.

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Solutions For Problems in Chapter 8