Spivey Corporation has two service departments and two operating departments. Budgeted costs and budgeted activity in the various departments for the current year are shown below:??Service DepartmentsOperating Departments??AB12?Departmental costs$126,000$70,000$300,000$500,000?Square feet occupied1,0002,0008,00010,000?Number of employees2030150200?Machine hours??40,00060,000The company uses the step-down method to allocate service department costs to operating departments. The costs of Service Department A are allocated first on the basis of square feet of space occupied. The costs of Service Department B are then allocated on the basis of number of employees in other departments. Predetermined overhead rates in the operating departments are based on machine
hours.Required:a. Prepare a schedule showing the allocation of service department costs to other departments.b. Compute the predetermined overhead rate for each operating department.
What will be an ideal response?
a. Step-down method
Allocation base for Service Department A costs = 2,000 + 8,000 + 10,000 = 20,000
Allocation base for Service Department B costs = 150 + 200 = 350
| ? | ? | Service Department | Operating Department | ||
| ? | ? | A | B | 1 | 2 |
| ? | Departmental costs | $126,000 | $70,000 | $300,000 | $500,000 |
| ? | Allocation: | ? | ? | ? | ? |
| ? | Service Department A costs (2,000/20,000, 8,000/20,000, 10,000/20,000) | (126,000) | 12,600 | 50,400 | 63,000 |
| ? | Service Department B costs (150/350, 200/350) | ? | (82,600) | 35,400 | 47,200 |
| ? | Total costs after allocation | $0 | $0 | $385,800 | $610,200 |
b. Dept. 1: $385,800 ÷ 40,000 MHs = $9.65 per MH
Dept. 2: $610,200 ÷ 60,000 MHs = $10.17 per MH
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