MANAGEMENT ACCOUNTING
CONCEPTS AND TECHNIQUES
By Dennis Caplan, University
at Albany (State University of New York)
CHAPTER
12: Allocation of Service Department Costs
Exercises
and Problems
12-1: The Bola Tie Company has two service departments (Departments A and B) and three production departments (Departments X, Y and Z). Service Department A provides services to all three production departments as well as to Service Department B. However, Service Department B only provides services to the other service department (Department A). In other words, Service Department B provides no services directly to the production departments. Which of the following methods for allocating service department costs makes the most sense in this situation?
(A) The direct method.
(B) The step-down method, beginning with Service Department A.
(C) The step-down method, beginning with Service Department B.
(D) We would want to know the costs incurred by each service department before determining which allocation method makes the most sense.
12-2: The “Big One” accounting firm has three divisions: audit, tax and
consulting; two support departments: administration and human resources. The
following table shows the utilization of support department services by the
user departments:
|
|
Administration |
Human Resources |
Audit |
Tax |
Consulting |
|
Administration |
|
10% |
30% |
25% |
35% |
|
Human Resources |
10% |
|
30% |
35% |
25% |
Which of the following allocation methods will result
in the smallest allocation of support department costs to the Consulting
Division?
(A) The
direct method.
(B) The
step-down method, beginning with Administration.
(C) The
step-down method, beginning with Human Resources.
(D) Cannot
be determined from the information given.
12-3: One advantage of the step-down method of allocating service department
costs to production departments, over the direct method, is the following:
(A) Some
interaction among service departments (i.e., service departments providing
services to other service departments) is accounted for.
(B) The
step-down method is easier to apply (i.e., it is less complicated).
(C) All
service department costs are eventually allocated to production departments.
(D) All
interaction among service departments (i.e., service departments providing
services to other service departments) is accounted for.
12-4: The MIS department of Coldwater Industries provides services to two
other service departments (Accounting and Personnel) and two factories. The
cost of operating the MIS department is $100,000 annually. The volume of
services provided to Accounting, Personnel, and the factories is measured by
the number of computer terminals in each area.
|
|
Factory X |
Factory Y |
Accounting |
Personnel |
|
Number of terminals |
30 |
10 |
40 |
20 |
Using the direct method of service department
allocation, calculate the allocation of MIS costs to Factory X.
12-5: Amber Industries has two service departments: Human Resources (H.R.)
and Accounting. These two service departments provide services to each other,
and to three factories, as shown in the following table:
|
Service Department |
Service Dept Operating Costs |
Percentage
of services provided by the service department indicated in the far left
column to each of the factories and service departments |
||||
|
|
|
H.R. |
Accounting |
Factory A |
Factory B |
Factory C |
|
H.R. |
$350,000 |
|
15% |
35% |
40% |
10% |
|
Accounting |
$880,000 |
25% |
|
25% |
15% |
35% |
Required: Calculate the amount of service department costs that
will be allocated to each of the factories, using the Direct Method of service
department cost allocation.
12-6: Global-Mega-Corp allocates the costs of three service departments to
its three production departments. The following table shows the percentage of
services that each service department provides to each production department
and to the other two service departments:
|
|
Human Resources |
Data Processing |
Legal Department |
Production |
Production |
Production |
|
Human Resources |
|
15% |
15% |
35% |
15% |
20% |
|
Data Processing |
15% |
|
10% |
25% |
30% |
20% |
|
Legal Department |
15% |
25% |
|
25% |
20% |
15% |
The following table shows the costs incurred by each
service department, prior to the allocation of any service department costs to
the other service departments:
|
Human Resources Data Processing Legal Department |
$101,000 $324,000 $253,000 |
Required: Using the Direct Method of service department cost allocation, calculate the total service department costs
that are allocated to each production department.
12-7: Xancar Corporation has three factories, and allocates the costs of two service departments to these factories using the Direct Method of service department cost allocation. The table below shows the costs incurred by these two service departments for the most recent year, the allocation base used to allocate the costs of each department, and the amount of the allocation base incurred by the factories and service departments.
|
|
Costs incurred |
Allocation base |
Accounting & Computing |
Human Resources |
Factory in Zancobar |
Factory in Yebasta |
Factory in Quinzotet |
|
Accounting & Computing |
$850,000 |
Operating costs |
$850,000 |
$930,000 |
$1,200,000 |
$1,100,000 |
$1,700,000 |
|
Human Resources |
$930,000 |
Number of employees |
45 |
33 |
110 |
75 |
145 |
Required: Calculate service department costs allocated to each factory.
12-8: A company has three service departments that provide services to each other and to four production departments. Details for 2005 are shown below:
|
|
Human Resources |
Accounting |
Data Processing |
|
Costs incurred to run the department: |
$700,000 |
$1,200,000 |
$1,400,000 |
|
Allocation base used to allocate costs of the service department to the four production departments: |
FTE’s (full-time employee equivalents) |
Invoices processed |
# of computers |
|
Amount of services provided by the service department to itself and to each of the recipient departments, as measured by the quantity of the allocation base incurred in each department: |
|
|
|
|
Human Resources |
9 |
467 |
13 |
|
Accounting |
23 |
117 |
25 |
|
Data Processing |
32 |
83 |
40 |
|
Production Department A |
101 |
223 |
32 |
|
Production Department B |
157 |
319 |
44 |
|
Production Department C |
33 |
444 |
37 |
|
Production Department D |
69 |
190 |
17 |
|
Total quantity of the allocation base |
424 |
1,843 |
208 |
Required: Using the Direct Method of service department cost allocation, what are the total service department costs from the three service departments that will be allocated to production department B?
12-9: The Franklin Corporation allocates the costs of three service
departments to its three production departments. The following table shows the
percentage of services that each service department provides to each production
department and to the other two service departments:
|
|
Service Dept A |
Service Dept B |
Service Dept C |
Production |
Production |
Production |
|
Service Dept A |
|
20% |
20% |
30% |
10% |
20% |
|
Service Dept B |
15% |
|
10% |
25% |
30% |
20% |
|
Service Dept C |
15% |
25% |
|
30% |
20% |
10% |
The following table shows the costs incurred by each
service department, prior to the allocation of any service department costs to
the other service departments:
|
Service Dept A Service Dept B Service Dept C |
$ 80,000 $124,000 $153,000 |
Required:
A) Using the
Direct Method of service department cost allocation, calculate the total
service department costs that are allocated to each production department.
B) Use the
Step-Down Method of service department cost allocation, and calculate the total
service department costs allocated to Production Department 1. Assume that
Service Department A is allocated first, then Service Department C, and finally
Service Department B.
12-10: State Farmers Insurance Company has three revenue-generating divisions:
Property Insurance, Life Insurance, and Automobile Insurance. The Legal
Department is a service department that provides services to these three
revenue-generating divisions, and not to any other department. To allocate
legal department costs to the user departments, the lawyers in the Legal
Department track the hours they spend providing services to each department.
(These hours are called “lawyer-billed” hours.) Relevant information about
lawyer-billed hours is as follows:
|
|
Peak Demand |
Average Demand |
Actual May Usage |
|
Property Insurance
Division Life Insurance Division Automobile Insurance
Division |
600 hours 200 hours 200 hours |
300 hours 180 hours 180 hours |
420 hours 170 hours 180 hours |
The Legal Department budgets fixed costs at $100,000
monthly, and variable costs at $16 per lawyer-billed hour. During May, actual
costs incurred were as follows: $70,000 in fixed costs, and $7,000 in variable
costs.
Required:
A) What is the actual cost per
lawyer-billed hour, using actual costs (fixed and variable) and the actual
level of activity for the month?
B) Allocate May legal costs to the Auto Division, using
the rate calculated in Part (A), based on actual usage.
C) What
amount of legal costs for May will be allocated to the Life Division if a dual
allocation rate is used, in which budgeted fixed costs are allocated based on
peak usage requirements, and budgeted variable costs are allocated based on
actual usage?
Return to
the Table of Contents
Management
Accounting Concepts and Techniques; copyright 2006; most recent update:
November 2010
For a printer-friendly version, contact Dennis Caplan at dcaplan@uamail.albany.edu