Prozma Company has three service departments and two operating departments. The following is the selected data of five departments:
- Allocate the costs of service departments to operating departments assuming the company uses direct method. The allocation basis to be used for distributing service departments’ costs to operating departments are: number of employees for administrative department, square feet of space occupied for janitorial department and machine hours for maintenance department.
- Allocate the cost of service departments to operating departments assuming the company uses step down method and allocates the costs in the following order: (1). Administrative department (number of employees), (2). Janitorial department (square feet of space occupied), (3). Maintenance department (machine hours).
1. If the company uses direct method of cost allocation:
$42,000/450 employees* = 93.33333
*300 + 150 = 450 employees
$33,900/45,000 sq. ft.* = 0.75333
*10,000 + 30,000 = 45,000 employees
$18,000/20,000 machine hours* = 0.9
*5,000 + 15,000 = 20,000 machine hours
2. If the company uses step down method of cost allocation
$42,000/600 employees* = $70 per employee
*30 + 120 + 300 + 150 = 600 employees
$36,000/50,000 sq.ft.* = $0.72 per sq. ft.
*5,000 + 10,000 + 35,000 = 50,000 sq. ft.
$30,000/20,000 machine hours* = $1.2 per hour
*5,000 + 15,000 = 20,000 hours