Medusa Company allocates costs from the payroll department (S1) and the maintena
ID: 2495797 • Letter: M
Question
Medusa Company allocates costs from the payroll department (S1) and the maintenance department (S2) to the molding (P1), finishing (P2), and packaging (P3) departments. Payroll department costs are allocated based on the number of employees in the department and maintenance department costs are allocated based on the number of square feet which the production department occupies within the factory. Information about the departments is presented below:
Number of
Number of Square
Department
Costs
Employees
Feet Occupied
Payroll (S1)
$145,000
2
2,000
Maintenance (S2)
$220,000
8
64,000
Molding (P1)
62
100,000
Finishing (P2)
49
60,000
Packaging (P3)
24
40,000
Medusa uses the direct method to allocate costs. Round all answers to the nearest dollar.
What amount of the payroll department costs will be allocated to the molding department?
Number of
Number of Square
Department
Costs
Employees
Feet Occupied
Payroll (S1)
$145,000
2
2,000
Maintenance (S2)
$220,000
8
64,000
Molding (P1)
62
100,000
Finishing (P2)
49
60,000
Packaging (P3)
24
40,000
Explanation / Answer
Payroll cost allocation:
Molding= Cost of payroll department*(Employees in molding department)/ Total employees
=$145,000*62/(62+49+24)
=$66,593. (Nearest Dollar)
Note on Direct method: The characteristic feature of the direct method is that no information is necessary about whether any service departments utilized services of the Human Resources Department. It does not matter whether no other service department hired anybody, or whether three other service departments each hired five employees (implying that more than 50% of the hiring occurred in the service departments). Under the direct method, service department to service department services are ignored, and no costs are allocated from one service department to another