Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 24

Cost Allocation: Direct Method

University Printers has two service departments (Maintenance and Personnel) and two operating departments (Printing and Developing). Management has decided to allocate maintenance costs on the basis of machine-hours in each department and personnel costs on the basis of labor-hours worked by the employees in each.

The following data appear in the company records for the current period:

	Maintenance	Personnel	Printing	Developing
Machine-hours	—	1,000	1,000	3,000
Labor-hours	500	—	500	2,000
Department direct costs	$15,000	$36,000	$45,000	$30,000

Required

Use the direct method to allocate these service department costs to the operating departments.

Step 1 of 2

Direct method of allocation:

Direct allocation method is one of the techniques used to reallocate service departments costs to production departments in the ratio of specified percentages. In this method, overhead of service department is not reallocated to other service departments.