Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 12

Involve departmental cost allocation with two service departments and two production departments. Use the following information for these four exercises:

		Percentage Service Provided to:
Department	Cost	S1	S2	P1	P2
Service 1 (S1)	$ 30,000	0%	30%	35%	35%
Service 2 (S2)	20,000	20	0	20	60
Production 1 (P1)	100,000
Production 2 (P2)	150,000

What is the amount of service department cost allocated to P1 and P2 using the direct method?

Step 1 of 3

Allocation of costs of Service Department:

The indirect costs allocated to the service departments are allocated to the production departments using three methods. They are:

1. Direct method

2. Step method

3. Reciprocal method

Direct method is a method of allocation of indirect costs of service departments to production departments, by ignoring reciprocal flows of costs. It is the simplest method of allocation. It allocates the costs to only production departments by ignoring the share of one service department costs in other service department.