Muckenfuss Clinic uses the step-down method to allocate service department costs to operating departments. The clinic has two service departments, Personnel and Information Technology (IT), and two operating departments, Family Medicine and Geriatric Medicine. Data concerning those departments follow: Personnel costs are allocated first on the basis of employees and Information Technology costs are allocated second on the basis of Personnel costs.The total Geriatric Medicine Department cost after allocations is closest to:
A) $165,264
B) $188,449
C) $207,995
D) $207,988

Question

Muckenfuss Clinic uses the step-down method to allocate service department costs to operating departments. The clinic has two service departments, Personnel and Information Technology (IT), and two operating departments, Family Medicine and Geriatric Medicine. Data concerning those departments follow:  Personnel costs are allocated first on the basis of employees and Information Technology costs are allocated second on the basis of Personnel costs.The total Geriatric Medicine Department cost after allocations is closest to:
A) $165,264 
B) $188,449 
C) $207,995 
D) $207,988

Quizplus · Accepted Answer

Step 1: Allocate Personnel Costs based on Employees

Total Personnel Costs = $900,000

Geriatric Medicine: (2/7)*$900,000 = $257,143

Family Medicine: (5/7)*$900,000 = $642,857

Step 2: Allocate IT Costs based on Personnel Costs

Total Personnel Costs after allocation = $257,143 + $642,857 = $900,000

Total IT Costs = $300,000

IT allocation rate = ($300,000 / $900,000) = 0.3333

Geriatric Medicine IT Allocation = 0.3333*$257,143 = $85,715

Family Medicine IT Allocation = 0.3333*$642,857 = $214,285

Total Geriatric Medicine Department cost after allocations = $257,143 + $85,715 = $342,858

Therefore, the closest option is C) $207,995.

Muckenfuss Clinic Uses the Step-Down Method to Allocate Service Department