County Company has two service departments, Maintenance and Personnel, as well as two production departments, Mixing and Finishing. Maintenance costs are allocated based on square footage, while personnel costs are allocated based on number of employees. The following information has been gathered for the current year:

-If the step-down method of allocating costs is used, and the Personnel Department renders the greatest service, then the total amount of overhead that would be allocated from Maintenance to Finishing is
A) $24,000.
B) $33,429.
C) $27,000.
D) $32,568.

Question

County Company has two service departments, Maintenance and Personnel, as well as two production departments, Mixing and Finishing. Maintenance costs are allocated based on square footage, while personnel costs are allocated based on number of employees. The following information has been gathered for the current year:
 
-If the step-down method of allocating costs is used, and the Personnel Department renders the greatest service, then the total amount of overhead that would be allocated from Maintenance to Finishing is
A) $24,000. 
B) $33,429. 
C) $27,000. 
D) $32,568.

Quizplus · Accepted Answer

To allocate overhead costs using the step-down method, we need to first allocate the costs of the service departments to each other based on the order of their significance. Since the Personnel department renders the greatest service, we allocate its costs first.

- Personnel costs are allocated first: 
 - $48,000 to Mixing ((2/3) * $48,000)
 - $24,000 to Finishing ((1/3) * $48,000)
- Maintenance costs are then allocated: 
 - $16,000 to Mixing ((4,000 sq. ft. /12,000 sq. ft.) * $48,000)
 - $8,000 to Finishing ((2,000 sq. ft. /12,000 sq. ft.) * $48,000)

Therefore, the total overhead allocated from Maintenance to Finishing is $8,000 + $24,000 = $33,429. The answer is B.

County Company Has Two Service Departments, Maintenance and Personnel, as Well