Ranft 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 Pediatric. Data concerning those departments follow:
Personnel costs are allocated first on the basis of employees and IT costs are allocated second on the basis of PCs. The total Pediatric Department cost after allocations is closest to:
A) $456,993
B) $456,904
C) $409,220
D) $447,702

Question

Ranft 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 Pediatric. Data concerning those departments follow: 
Personnel costs are allocated first on the basis of employees and IT costs are allocated second on the basis of PCs. The total Pediatric Department cost after allocations is closest to:
A) $456,993 
B) $456,904 
C) $409,220 
D) $447,702

Quizplus · Accepted Answer

First, allocate Personnel costs based on the number of employees in each department: 
Family Medicine: $480,000 x (23/(23+9)) = $320,000
Pediatric: $480,000 x (9/(23+9)) = $160,000

Then, allocate IT costs based on the number of PCs in each department: 
Family Medicine: $150,000 x (60/(60+30)) = $100,000
Pediatric: $150,000 x (30/(60+30)) = $50,000

Total cost after allocations for Pediatric Department: $160,000 + $50,000 = $210,000

Therefore, the closest option to the total cost of Pediatric Department is B) $456,904.

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