Consider the following independent cases that relate to service department cost allocations:Case A: Aaron Company has two service departments [Human Resources (H/R) and Information Systems] and two production departments (Machining and Assembly). Human Resource cost is allocated by using the direct method based on the number of personnel in each department. For the period just ended, there were 189 employees in Machining, and Machining received $90,000 of H/R's overhead of $200,000. How many employees are in the Assembly Department?Case B: Drew Montana, controller of Butte Enterprises, wants service department managers to be aware that their use of other service departments costs the firm a substantial amount of money. Would Drew prefer the direct method or the step-down method of cost

Question

allocation? Why?Case C: Laramie Company has four service departments (S1, S2, S3, and S4) and two production departments (P1 and P2). The costs of S1 are allocated first, followed in order by the costs of S2, S3, and S4. Laramie uses the step-down method, and the costs of S2 are allocated based on the number of computer hours used. Computer hours logged during the period were as follows: S1, 4,600; S2, 7,100; S3, 10,400; S4, 17,600; P1, 37,000; and P2, 48,600. Over how many hours would S2's cost be allocated?Case D: A recently hired staff accountant noted that given the nature of the allocations, the total cost allocated to production departments is typically less under the step-down method than under the direct method. Do you agree with the accountant? Why?Required:Answer the questions that are raised in Cases A, B, C, and D.

What will be an ideal response?

Answer 1

Case A: Machining has been allocated 45% of H/R's cost ($90,000 ÷ $200,000) because it has 45% of the employees in the production departments. Since 189 represents 45% of the total, there are 420 employees in production (189 ÷ 0.45). Thus, Assembly has 231 personnel (420 - 189).
Case B: Drew Montana would prefer the step-down method because service department costs are allocated to other service departments (although not all). Such a practice makes managers aware that services are not cost-free to the organization.
Case C: 113,600 (10,400 + 17,600 + 37,000 + 48,600)
Case D: No. Under both approaches, all service department costs are allocated to production departments. This process yields equal totals for each method.