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

Exercise 43

Solve for Unknowns

Pat’s Print Shops has a warehouse that supplies paper and other supplies to its store locations. It has two service departments, Information Services (S1) and Operation Support (S2), and two operating departments, Printing (P1) and Customer Service (P2). As an internal auditor, you are checking the company’s procedures for cost allocation. You find the following cost allocation results for September:

Costs allocated to P1	$32,000 from S1 ? from S2
Costs allocated to P2	? from S1 $18,000 from S2

Total costs for the two service departments are $80,000. Operation Support’s services are provided as follows:

• 50 percent to Printing.

• 30 percent to Customer Service.

The direct method of allocating costs is used.

 Required

a.What are the total service department costs (S1 + S2) allocated to P2?

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b.Complete the following:

		To
From	Printing	Customer Service
Information Services	$32,000	?
Operation Support	?	$18,000

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c. What proportion of S1’s costs were allocated to P1 and P2?

Step 1 of 5

Cost accounting system

This is a system designed for inhouse or internal managers and their decision making. Cost accounting information is not needed for comparison with other companies. This information is commonly used in financial accounting also, but it is primarily used by company managers for their decision making. It is important that cost accounting information is relevant for the decision making of the manager.

Direct method

Under direct method, costs of service departments are not allocated to other service departments. Service department costs are allocated to production departments only.