Chapter 17 Exercises

Step-by-Step Exercises

First, set up the chart, including initial costs and fractions.

Question 1

Derbus, Inc. has three service departments (Cafeteria, Tech Support, and Maintenance) and three operating departments (Product A, Product B, and Product C). Cafeteria costs of $300,000 are allocated based on number of employees, tech support costs of $500,000 are allocated based on tech hours, and maintenance costs of $250,000 are allocated based on square footage. Each department had the following cost driver usage:

Description	Employees	Tech hours	Square footage
Cafeteria	10	250	1,500
Tech Support	15	200	750
Maintenance	5	100	500
Product A	35	750	2,000
Product B	40	1,000	2,500
Product C	30	2,000	1,000

Set up the chart, including initial costs and fractions, first for the direct method, then the step-down method (with service departments allocated in descending order of total costs before allocation), then the reciprocal method.

Question 2

Silvine, Inc. has two service departments, Maintenance and Human Resources, and two operating departments, Cutting and Assembly. Maintenance costs of $200,000 are allocated based on maintenance time, and Human Resources costs of $100,000 are allocated based on number of employees. The Maintenance department has 3 employees and uses 100 hours of maintenance time. The Human Resources department has 4 employees and uses 200 hours of maintenance time. Cutting has 40 employees and uses 250 hours of maintenance time. Assembly has 50 employees and uses 500 hours of maintenance time.

Set up the chart, including initial costs and fractions, first for the direct method, then the step-down method (with Human Resources allocated first), then the reciprocal method.

Question 3

Josephson Industries has two service departments and two operating departments:

Janitorial costs were $200,000, and tech support costs were $250,000.

Set up the chart, including initial costs and fractions, first for the direct method, then the step-down method (with Janitorial allocated first), then the reciprocal method.

Next, determine the amount allocated out of each service department (reciprocal only).

Question 4

Description	Service 1	Service 2	Operating 1	Operating 2	Total
Initial cost	$400,000	$544,000			$944,000
Service 1		20⁄100	30⁄100	50⁄100
Service 2	5⁄40		20⁄40	15⁄40
Total

Determine the amount allocated out of each service department.

Question 5

Description	Service 1	Service 2	Operating 1	Operating 2	Total
Initial cost	$50,000	$84,000			$134,000
Service 1		16⁄60	20⁄60	24⁄60
Service 2	10⁄100		60⁄100	30⁄100
Total

Determine the amount allocated out of each service department.

Question 6

(Note: This problem is challenging, and it is best solved with Excel. Download a copy of the data here: Exercise 17.6 Data)

Description	Service 1	Service 2	Service 3	Operating 1	Operating 2	Total
Initial cost	$50,000	$70,000	$30,000			$150,000
Service 1		5⁄64	12⁄64	27⁄64	20⁄64
Service 2	10⁄200		20⁄200	60⁄200	110⁄200
Service 3	12⁄60	6⁄60		22⁄60	20⁄60
Total

Determine the amount allocated out of each service department.

Next, allocate costs from the first service department.

Question 7

Direct Method

Description	Service 1	Service 2	Operating 1	Operating 2	Total
Initial cost	$40,000	$80,000			$120,000
Service 1			38⁄80	42⁄80

Step-Down Method

Description	Service 1	Service 2	Operating 1	Operating 2	Total
Initial cost	$40,000	$80,000			$120,000
Service 1		20⁄100	38⁄100	42⁄100

Reciprocal Method

Description	Service 1	Service 2	Operating 1	Operating 2	Total
Initial cost	$40,000	$80,000			$120,000
Service 1	(50,000)	20⁄100	38⁄100	42⁄100

Allocate costs from the first service department.

Question 8

Direct Method

Description	Service 1	Service 2	Operating 1	Operating 2	Total
Initial cost	$100,000	$200,000			$300,000
Service 1			16⁄40	24⁄40

Step-Down Method

Description	Service 1	Service 2	Operating 1	Operating 2	Total
Initial cost	$100,000	$200,000			$300,000
Service 1		10⁄50	16⁄50	24⁄50

Reciprocal Method

Description	Service 1	Service 2	Operating 1	Operating 2	Total
Initial cost	$100,000	$200,000			$300,000
Service 1	(120,000)	10⁄50	16⁄50	24⁄50

Allocate costs from the first service department.

Question 9

Direct Method

Description	Service 1	Service 2	Service 3	Operating 1	Operating 2	Total
Initial cost	$24,000	$16,000	$38,000			$78,000
Service 1				18⁄40	22⁄40

Step-Down Method

Description	Service 1	Service 2	Service 3	Operating 1	Operating 2	Total
Initial cost	$24,000	$16,000	$38,000			$78,000
Service 1		8⁄60	12⁄60	18⁄60	22⁄60

Reciprocal Method

Description	Service 1	Service 2	Service 3	Operating 1	Operating 2	Total
Initial cost	$24,000	$16,000	$38,000			$78,000
Service 1	(30,000)	8⁄60	12⁄60	18⁄60	22⁄60

Allocate costs from the first service department.

Next, allocate costs from subsequent service departments.

Question 10

Direct Method

Description	Service 1	Service 2	Operating 1	Operating 2	Total
Initial cost	$20,000	$14,000			$34,000
Service 1	(20,000)		12⁄20 $12,000	8⁄20 $8,000	0
Service 2			30⁄70	40⁄70

Step-Down Method

Description	Service 1	Service 2	Operating 1	Operating 2	Total
Initial cost	$20,000	$14,000			$34,000
Service 1	(20,000)	4⁄24 3,333	12⁄24 $10,000	8⁄24 $ 6,667	0
Service 2			30⁄70	40⁄70

Reciprocal Method

Description	Service 1	Service 2	Operating 1	Operating 2	Total
Initial cost	$20,000	$14,000			$34,000
Service 1	(24,000)	4⁄24 4,000	12⁄24 $12,000	8⁄24 $8,000	0
Service 2	20⁄90	(18,000)	30⁄90	40⁄90

Allocate costs from subsequent service departments.

Question 11

Direct Method

Description	Service 1	Service 2	Operating 1	Operating 2	Total
Initial cost	$70,000	$40,000			$110,000
Service 1	(70,000)		18⁄35 $36,000	17⁄35  $34,000	0
Service 2			8⁄20	12⁄20

Step-Down Method

Description	Service 1	Service 2	Operating 1	Operating 2	Total
Initial cost	$70,000	$40,000			$110,000
Service 1	(70,000)	5⁄40 8,750	18⁄40 $31,500	17⁄40 $29,750	0
Service 2			8⁄20	12⁄20

Reciprocal Method

Description	Service 1	Service 2	Operating 1	Operating 2	Total
Initial cost	$70,000	$40,000			$110,000
Service 1	(80,000)	5⁄40 10,000	18⁄40 $36,000	17⁄40 $34,000	0
Service 2	5⁄25	(50,000)	8⁄25	12⁄25

Allocate costs from subsequent service departments.

Question 12

Direct Method

Description	Service 1	Service 2	Service 3	Operating 1	Operating 2	Total
Initial cost	$20,000	$14,000	$17,500			$51,500
Service 1	(20,000)			30⁄46 $13,043	16⁄46 $6,957	0
Service 2				10⁄28	18⁄28

Step-Down Method

Description	Service 1	Service 2	Service 3	Operating 1	Operating 2	Total
Initial cost	$20,000	$14,000	$17,500			$51,500
Service 1	(20,000)	3⁄50 1,200	1⁄50 400	30⁄50 $12,000	16⁄50 $ 6,400	0
Service 2			21⁄49	10⁄49	18⁄49
Service 3				18⁄41	23⁄41

Reciprocal Method

Description	Service 1	Service 2	Service 3	Operating 1	Operating 2	Total
Initial cost	$20,000	$14,000	$17,500			$51,500
Service 1	(25,000)	3⁄50 1,500	1⁄50 500	30⁄50 $15,000	16⁄50 $8,000	0
Service 2	7⁄56	(16,000)	21⁄56	10⁄56	18⁄56
Service 3	6⁄48	1⁄48	(24,000)	18⁄48	23⁄48

Allocate costs from subsequent service departments.

 

Finally, find the total amount allocated to each operating department, and verify that the service department columns total zero and that the total in the Total row equals the total in the Total column.

Question 13

Direct Method

Description	Service 1	Service 2	Operating 1	Operating 2	Total
Initial cost	$20,000	$50,400			$70,400
Service 1	(20,000)		14⁄20 $14,000	6⁄20 $6,000	0
Service 2		(50,400)	3⁄12 12,600	9⁄12 37,800	0
Total

Step-Down Method

Description	Service 1	Service 2	Operating 1	Operating 2	Total
Initial cost	$20,000	$50,400			$70,400
Service 1	(20,000)	5⁄25 4,000	14⁄25 $11,200	6⁄25 $ 4,800	0
Service 2		(54,400)	3⁄12 13,600	9⁄12 40,800	0
Total

Reciprocal Method

Description	Service 1	Service 2	Operating 1	Operating 2	Total
Initial cost	$20,000	$50,400			$70,400
Service 1	(28,000)	5⁄25 5,600	14⁄25 $15,680	6⁄25 $6,720	0
Service 2	2⁄14 8,000	(56,000)	3⁄14 12,000	9⁄14 36,000	0
Total

Find the total amount allocated to each operating department, and verify that the service department columns total zero and that the total in the Total row equals the total in the Total column.

Question 14

Direct Method

Description	Service 1	Service 2	Operating 1	Operating 2	Total
Initial cost	$84,000	$7,125			$91,125
Service 1	(84,000)		9⁄21 $36,000	12⁄21 $48,000	0
Service 2		(7,125)	15⁄25 4,275	10⁄25 2,850	0
Total

Step-Down Method

Description	Service 1	Service 2	Operating 1	Operating 2	Total
Initial cost	$84,000	$ 7,125			$91,125
Service 1	(84,000)	3⁄24 10,500	9⁄24 $31,500	12⁄24 $42,000	0
Service 2		(17,625)	15⁄25 10,575	10⁄25 7,050	0
Total

Reciprocal Method

Description	Service 1	Service 2	Operating 1	Operating 2	Total
Initial cost	$84,000	$ 7,125			$91,125
Service 1	(87,000)	3⁄24 10,875	9⁄24 $32,625	12⁄24 $43,500	0
Service 2	5⁄30 3,000	(18,000)	15⁄30 9,000	10⁄30 6,000	0
Total

Find the total amount allocated to each operating department, and verify that the service department columns total zero and that the total in the Total row equals the total in the Total column.

Question 15

Direct Method

Description	Service 1	Service 2	Service 3	Operating 1	Operating 2	Total
Initial cost	$48,000	$80,000	$49,500			$177,500
Service 1	(48,000)			40⁄100 $19,200	60⁄100 $28,800	0
Service 2		(80,000)		120⁄200 48,000	80⁄200 32,000	0
Service 3			(49,500)	38⁄50 37,620	12⁄50 11,880	0
Total

Step-Down Method

Description	Service 1	Service 2	Service 3	Operating 1	Operating 2	Total
Initial cost	$48,000	$80,000	$49,500			$177,500
Service 1	(48,000)	25⁄150 8,000	25⁄150 8,000	40⁄150 $12,800	60⁄150 $19,200	0
Service 2		(88,000)	31⁄231 11,810	120⁄231 45,714	80⁄231 30,476	0
Service 3			(69,310)	38⁄50 52,676	12⁄50 16,634	0
Total

Reciprocal Method

Description	Service 1	Service 2	Service 3	Operating 1	Operating 2	Total
Initial cost	$48,000	$80,000	$49,500			$177,500
Service 1	(60,000)	25⁄150 10,000	25⁄150 10,000	40⁄150 $16,000	60⁄150 $24,000	0
Service 2	9⁄240 4,500	(120,000)	31⁄240 15,500	120⁄240 60,000	80⁄240 40,000	0
Service 3	10⁄100 7,500	40⁄100 30,000	(75,000)	38⁄100 28,500	12⁄100 9,000	0
Total

Finally, find the total amount allocated to each operating department, and verify that the service department columns total zero and that the total in the Total row equals the total in the Total column.

Complete Problems

Golber Manufacturing has two service departments, Administration and Maintenance, and two operating departments, Production 1 and Production 2. Administration costs of $180,000 are allocated based on number of employees, while Maintenance costs of $178,000 are allocated based on square footage. Administration, Maintenance, Production 1, and Production 2 have 12, 20, 60, and 120 employees, respectively, and 600, 1,500, 900, and 3,000 square feet of space, respectively.

Question 16

Allocate the service department costs to the operating departments using the direct method.

Question 17

Allocate the service department costs to the operating departments using the step-down method, with the department with higher costs allocated first.

Question 18

Allocate the service department costs to the operating departments using the reciprocal method.

Smithson, Inc. has four departments with the following information before allocation:

Department	Type	Cost	Allocated based on	Service hours	Square footage
Assembly	Operating	$70,000	n/a	600	800
Cleaning	Service	$24,000	Square footage	200	100
IT	Service	$30,000	Service hours	250	300
Finishing	Operating	$80,000	n/a	1200	400

Question 19

Allocate the service department costs to the operating departments using the direct method.

Question 20

Allocate the service department costs to the operating departments using the step-down method, with the Cleaning department allocated first.

Question 21

Allocate the service department costs to the operating departments using the reciprocal method.

Maestrodyne, Inc. has two operating departments, Production 1 and Production 2, and two service departments, Service 1 and Service 2. The direct costs of Service 1 are allocated to other departments using the total employees of each department as an allocation base. The direct costs of Service 2 are allocated using the number of service hours used by each department as an allocation base. Information about the four departments are as follows:

Description	Production 1	Production 2	Service 1	Service 2
Revenue	$450,000	$673,500	$0	$0
Direct Costs	$225,000	$300,000	$187,500	$262,500
Service Hours	1,500	3,000	750	375
Total Employees	30	40	25	35

Question 22

Allocate the service department costs to the operating departments using the direct method.

Question 23

Allocate the service department costs to the operating departments using the step-down method.

Question 24

Allocate the service department costs to the operating departments using the reciprocal method.

Assignment Problem

Note: Check figures are not provided for assignment problems so your instructor may use them for homework.

Question 25

Corallis Corporation uses the step-down method of allocating service department costs to operating departments. Corallis has three service departments (Service 1, 2, and 3) and three operating departments (Operating 1, 2, and 3). This year’s service department costs were as follows: for Service 1, $50,000; for Service 2, $40,000; and for Service 3, $90,000. Service 1 is allocated first, then Service 2, then Service 3. Cost allocation base usage for each department was as follows:

Description	Service 1	Service 2	Service 3	Operating 1	Operating 2	Operating 3
Service 1 base	0%	12%	8%	25%	38%	17%
Service 2 base	4%	4%	8%	24%	40%	20%
Service 3 base	2.5%	3.75%	6.25%	25%	15%	47.5%

Allocate the service department costs to the operating departments.

 

Challenge Problem

Question 26

Moriarity Enterprises produces two products, Duomite and Corbomite, in separate departments. The firm has two service departments, Human Resources and Facilities Management, which serve both production departments as well as each other. Moriarity outsources their tech support to a firm which provides computer support to Human Resources and Facilities Management, but not the production departments, whose computer needs are serviced by department employees. The cost of tech support is allocated between Human Resources and Facilities Management based on the number of computers in each department.Moriarity Enterprises uses the reciprocal method to allocate service department costs, with variable and fixed costs allocated separately. Variable Human Resources costs are allocated based on the number of employees in each department. Fixed Human Resources costs are allocated based on each department’s cost of payroll. Variable Facilities Management costs are allocated based on maintenance hours used by each department. Fixed Facilities Management costs are allocated based on square feet of space occupied by each department.

The costs of each department before allocation this month are listed in the table below, as are the usage of each allocation base. In addition to these costs, Moriarity Enterprises also paid $10,000 for tech support.

Description	Duomite	Corbomite	Human Resources	Facilities Management
Variable Costs
Direct Materials	$150,000	$200,000
Wage Labor	$100,000	$60,000	$40,000	$30,000
Other	$30,000	$90,000	$10,000	15,000
Fixed Costs
Salaried Labor	$24,000	$30,000	$32,000	$16,000
Other	$101,000	$70,000	$18,000	$24,000
Number of employees	34	25	15	11
Number of computers			17	3
Maintenance hours	600	700	200	100
Square Feet	5500	3500	1000	1000

Determine the variable, fixed, and total costs of the Duomite product line and the Corbomite product line after service department allocation.

Pre-Assessment Problems

Use this problem to check whether you are fully prepared for the assessment. Work the problem under assessment conditions – don’t use any notes or other materials!

Pilatech, Inc. has two operating departments, Production 1 (which employs 20 people) and Production 2 (which employs 18 people), and two support departments, Support 1 (which employs 5 people) and Support 2 (which employs 12 people). Support 1 costs of $283,632 are allocated on the basis of number of employees. Support 2 costs of $194,064 are allocated based on Support 2 hours. Support 2 uses 3,500 hours for Support 1, 10,000 hours for Production 1, 6,000 hours for Production 2, and 4,500 hours for itself.

Question 27

Allocate the service department costs to the operating departments using the direct method.

Question 28

Allocate the service department costs to the operating departments using the step-down method.

Question 29

Allocate the service department costs to the operating departments using the reciprocal method.