Allocating service department costs adapted from CPA exam Co

Allocating service department costs (adapted from CPA exam). Cowboy Enterprises has three service departments (administration, maintenance, and computer support) and two production departments (creative and assembly). A summary of costs and other data for each department prior to allocation of service department costs for the year ended June 30, Year 1, follows Computer Administration Maintenance Support Creative Assembly Direct Material Costs Direct Labor Costs Overhead Costs Direct Labor Hours.. Number of Computers Square Footage Occupied 90,000 $70,000 3,100 12 1,750 65,000 $91,000 3,130,000 950,000 582,100 87,000 1,950,000 $2,050,000 56,100 62,000 1,650,000 $1,850,000 56,25043,750 200 88,000 72,000 2,700 8 2,000 4,200 20 4,800 280 The company allocates the costs of the administration, maintenance, and computer support departments on the basis of direct labor hours, square footage occupied, and number of computers, respectively. Round all final calculations to the nearest dollar.

Solution

(a) Total cost of maintenance department to be allocated = 65000+82100+56100 = $203,200

Cost of maintenance department is allocated on the basis of square footage occupied, and assuming that the cost of service departments is directly allocated to two production departments:

Square footage occupied by Creative department = 88000

Total square footage of Creative and Assembly department = 88000+72000 = 160,000

Cost allocated to Creative department of maintenance department = Total cost of maintenance dept. * Square footage occupied by Creative dept. / Total square footage of two production departments

= 203,200*88000/160000 = $111,760

(b) Total cost of administration department to be allocated = 0+90000+70000 = $160,000

Cost of maintenance department is allocated on the basis of direct labour hours, and assuming that the cost of service departments is directly allocated to two production departments:

Direct labour hours of Assembly department = 43,750

Direct labour hours of Creative and Assembly department = 56250+43750 = 100,000

Cost allocated to Assembly department of administration department = Total cost of administration dept. * Direct labour hours of Assembly dept. / Total labour hours of two production departments

= 160,000*43750/100000 = $70,000

(c)

Total cost of computer support department to be allocated = 91000+87000+62000 = $240,000

Cost of maintenance department is allocated on the basis of number of computers, and assuming that the cost of service departments is allocated to two production departments and other two service departments:

No. of computers of Maintenance department = 8

Total no. of computers of other 4 departments (except Computer support) = 12+8+280+200 = 500

Cost allocated to Maintenance department of computer support department = Total cost of computer support dept. * No. of computers of Maintenance dept. / Total number of computers of 4 production departments

= 240,000*8/500 = $3,840

(d) Assuming the same method of allocation as in pact c, NO cost of maintenance department will be allocated to computer support department. It clearly says that once the firm has allocated a service department\'s costs, no subsequent service department costs are allocated back to it. Here, computer support department has already allocated its costs, so no other department costs will be allocated back to it.