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

Exercise 48

Allocate Service Department Costs: Direct and Step Methods

Not-A-Mega Bank has three service departments (Administration, Communications, and Facilities), and two production departments (Deposits and Loans). A summary of costs and other data for each department prior to allocation of service department costs for the year ended December 31 follows:

	Administration Communications		Facilities	Deposits	Loans
Direct costs	$160,000	$240,000	$203,200	$6,730,000	$4,850,000
Employee hours	15,500	21,000	13,500	281,250	218,750
Number of
Employees	6	10	4	140	100
Square footage
occupied	3,500	9,600	4,000	176,000	144,000

The costs of the service departments are allocated on the following bases: Administration, employee hours; Communications, number of employees; and Facilities, square footage

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occupied.

Required

Round all final calculations to the nearest dollar.

a.Assume that Not-A-Mega Bank elects to distribute service department costs directly to production departments using the direct method. What amount of Communications Department costs is allocated to the Deposits Department?

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b.Assume the same method of allocation as in requirement (a). What amount of Administration Department costs is allocated to the Loans Department?

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c.Assuming that Not-A-Mega Bank elects to distribute service department costs to other departments using the step method (starting with Facilities and then Communications), what amount of Facilities Department costs is allocated to the Communications Department?

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d.Assume the same method of allocation as in requirement (c). What amount of Communication Department costs is allocated to Facilities?

Step 1 of 8

Cost allocation:

Cost allocation is the assigning of a common cost to numerous cost objects. For instance, an enterprise would possibly allocate or assign the value of a high-priced laptop to the three important regions of the company that use the gadget. A company with most effective one electric meter may allocate the energy invoice to several departments inside the agency.