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

Exercise 29

Departmental Cost Allocation

Robinson Products Company has two service departments (S1 and S2) and two production departments (P1 and P2). The distribution of each service department’s efforts (in percentages) to the other departments is

	To
From	S1	S2	P1	P2
S1	—	10%	20%	?%
S2	10%	—	?%	30%

The direct operating costs of the departments (including both variable and fixed costs) are

S1	$180,000
S2	60,000
P1	50,000
P2	120,000

Required

1. Determine the total cost of P1 and P2 using the direct method.

---

2. Determine the total cost of P1 and P2 using the step method.

---

3. Determine the total cost of P1 and P2 using the reciprocal method.

Step 1 of 5

There are two methods of cost allocation i.e. departmental costing which means that the allocation of cost between several departments and joint product costing in case when after several stages of production there are several different products. There are three methods to distribute service department cost to product departments i.e. direct method, step method and reciprocal method.