Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 22

Cost Allocation: Direct Method

Warren Ltd. has two production departments, Building A and Building B, and two service departments, Maintenance and Cafeteria. Direct costs for each department and the proportion of service costs used by the various departments for the month of June follow:

Proportion of Services Used by
Department	Direct Costs	Maintenance	Cafeteria	Building A	Building B
Building A	$990,000
Building B	644,000
Maintenance	400,000	__	0.2	0.5	0.3
Cafeteria	320,000	0.8	__	0.1	0.1

Required

Compute the allocation of service department costs to producing departments using the direct method.

Step 1 of 4

Allocation of service department costs:

Service departments are the departments of an organization that support the production departments. Service department costs are to be allocated to the production department. This helps the managers for decision making to continue or eliminate the service departments. There are two methods of allocation of service department costs. They are direct method and step method.