Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 31

Departmental Cost Allocation

Haywood Manufacturing has two production departments— assembly and finishing. These are supported by two service departments—sourcing (purchasing and handling of raw materials and human resources) and operations (work scheduling, supervision, and inspec­tion). Haywood has the following labor-hours devoted by each of the service departments to the other departments.

	Total Labor-Hours Used by Departments
		Sourcing	Operation	Assembly	Finishing
Sourcing			20,000	35,000	70,000
Operations		12,000	—	48,000	40,000

The costs incurred in the plant are as follows:

Departments	Departmental Costs
Sourcing	$ 155,000
Operations	222,000
Assembly	387,000
Finishing	466,000
Total	$1,230,000

Required

1. What are the costs allocated to the two production departments using (a) the direct method, (b) the step method with the sourcing department going first, and (c) the reciprocal method?

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2. What are the total costs in the production departments after allocation?

Step 1 of 6

Significance of cost allocation:

1. It motivates the management personnel to give more efforts in achieving goal of the organisation

2. Managers should me by incentivised properly for making decisions that are consistent with the goals of top management.

3. It is used to determine the rewards that should be awarded to managers for their efforts and skills in decision making.