Suppose the company uses the step-down method of allocation and Personnel Department costs are allocated first. The amount of this cost allocated to the Engineering Department under the step-down method would be:
A)$466,200
B)$55,500
C)$0
D)$58,275

Question

Quizplus · Accepted Answer

The step-down method first allocates the costs of the department that provides services to other departments. In this case, the Personnel Department provides services to the Engineering Department.

The total cost of the Personnel Department is $174,900 ($63,900 + $111,000). If we allocate this cost based on the allocation rate of 50% for the Engineering Department, we get:

Allocated cost for Engineering Department = $174,900 x 50% = $87,450

However, since the Personnel Department also provides services to the Administration Department, we need to remove the portion of the cost that is attributed to the Administration Department. The Administration Department has a direct cost of $76,800, which means it is responsible for 44% of the Personnel Department's total cost ($76,800 ÷ $174,900).

Therefore, the amount of Personnel Department cost allocated to the Engineering Department under the step-down method is:

$87,450 - ($174,900 x 44%) = $58,275

The correct answer is D.

Suppose the Company Uses the Step-Down Method of Allocation and Personnel