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Cost Allocation


QUESTION 10 Service department cost allocation Review the examples in your textbook. Direct, step and reciprocal methods of overhead allocation: moderately difficult A company has two production departments (Component Manufacture and Assembly) and two service departments (Staff Cafeteria and Materials Handling). The budgeted costs of these departments are: Component Assembly Cafeteria Materials Handling Manufacture $ $ $ $ Direct (to centre) Material & labour 200 000 150 000 5 000 15 000 Indirect costs 120 000 110 000 3 000 5 000 The services of the Cafeteria are allocated according to the number of employees in the other departments: Materials Handling has 20 employees, Component Manufacture 50 employees and Assembly 40 employees. The services of the Materials Handling department are allocated according to the number of budgeted requisitions per period. These are estimated as 30 for the Cafeteria, 40 for Component Manufacture and 30 for Assembly. Required: Allocate service department costs to the production departments using (a) the direct method (b) the step method (c) the reciprocal services method. You can choose if you wish to answer with a spreadsheet. Or not.