Problem 11-56 Allocate Service Department Costs: Direct and Step Methods (LO 11-
ID: 2594613 • Letter: P
Question
Problem 11-56 Allocate Service Department Costs: Direct and Step Methods (LO 11-2, 3)
State Financial Corp. has three service departments (Administration, Communications, and Facilities), and two production departments (Deposits and Loans). A summary of costs and other data for each department prior to allocation of service department costs for the year ended December 31 follows:
The costs of the service departments are allocated on the following bases: Administration, employee-hours; Communications, number of employees; and Facilities, square footage occupied. (Do not round intermediate calculations.)
Required:
a. Assume that the bank elects to distribute service department costs to production departments using the direct method. What amount of Communications Department costs is allocated to the Deposits Department?
Amount:
b. Assume the same method of allocation as in requirement (a). What amount of Administration Department costs is allocated to the Loans Department?
Amount:
c. Assuming that the bank elects to distribute service department costs to other departments using the step method (starting with Facilities and then Communications), what amount of Facilities Department costs is allocated to the Communications Department?
Amount:
d. Assume the same method of allocation as in requirement (c). What amount of Communication Department costs is allocated to Facilities?
Amount:
Administration Communications Facilities Deposits Loans Direct costs $ 170,000 $ 310,000 $ 250,000 $ 8,130,000 $ 4,700,000 Employee hours 29,000 40,000 20,000 451,000 368,000 Number of employees 6 13 7 210 130 Square footage occupied 5,400 14,100 5,400 241,400 202,700Explanation / Answer
Administration Communication Facilities Deposits Loans Total Direct Costs $ 170,000 310,000 250,000 8,130,000 4,700,000 13,560,000 Employee hrs 29,000 40,000 20,000 451,000 368,000 908,000 Number of employees 6 13 7 210 130 366 Sq footage occupied 5,400 14,100 5,400 241,400 202,700 469,000 Basis of allocation Employee hrs No. of employees Sq feet a) Direct method of allocation: (allocation of Communications dept cost to Deposits Dept) Allocation basis: No. of employees Total cost of communication department $ 310,000 Total no. of employees in Production departments: 340 (210+130) Commu cost allocation to Deposit dept $ 191,471 (210/340*310000) b) Direct method of allocation: (allocation of Admin dept cost to Loans Dept) Allocation basis: Employee hrs Total cost of Administration department $ 170,000 Total Employee hrs in Production departments: 819,000 (451000+368000) Admin cost allocation to Loans dept $ 76,386 (368000/819000*170000) c) allocation of service dept costs to other departments using step method: (First facilities, next communications dept) 1. Allocation of facility dept cost: Total facility dept cost 250,000 Allocation to: Administration Communication Deposits Loans Total No. of sq foot used 5,400 14,100 241,400 202,700 463,600 Allocation ratio 1.16% 3.04% 52.07% 43.72% 100.00% (eg., 5400/463600=1.16%) Allocated cost 2,911.99 7,603.54 130,176.88 109,307.59 250,000 Hence, $7603.54 of facility dept cost is allocated to Communications dept. Note: In step method, service dept costs are allocated to production as well as other service departments, which received services from it. Thereafter, the allocated costs of service departments are reallocated to other departments, until entire costs of service depts are allocated to production departments. d) 1. Allocation of communication dept cost: Total communication dept cost 310,000 Allocation to: Administration Facilities Deposits Loans Total No. of employees 6 7 210 130 353 Allocation ratio 1.70% 1.98% 59.49% 36.83% 100.00% (eg., 6/353=1.70%) Allocated cost 5,269.12 6,147.31 184,419.26 114,164.31 310,000 Hence, $6147.31 of communication dept cost is allocated to facilities dept.