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8) John Company has two service departments, Maintenance and Human Resources. John Company also has two...

8) John Company has two service departments, Maintenance and Human Resources. John Company also has two production departments, Mixing and Finishing. Maintenance costs are allocated based on square footage while Human Resources costs are allocated based on number of employees. The following information has been gathered for the current year:

                                                                        Human

                                         Maintenance          Resources             Mixing           Finishing

Direct costs                              $126,000              $84,000           $105,000            $175,000

Square footage                                 800                    400                1,600                 1,200

Number of employees                         8                     12                    24                     32

If the direct method is used to allocate service department costs, then the total cost of the Mixing Department after allocation would be ________.

A) $36,000

B) $105,000

C) $108,000

D) $213,000 this is correct. Please explain why!

Business   Accounting   
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Homework Answers

Answer #1

Maintenance costs are to be allocated on the basis of square footage

Ratio of square footage in mixing and finishing department = 1,600 : 1,200

= 4 : 3

Human resource costs are to be allocated on the basis of number of employees

Ratio of number of employees in mixing and finishing department = 24 : 32

= 3 : 4

Maintenance cost allocated to mixing department = 126,000 x 4/7

= $72,000

Human resource cost allocated to mixing department = 84,000 x 3/7

= $36,000

Direct cost of mixing department = $105,000

Total cost of mixing department after allocation = Direct cost of mixing department + Maintenance cost allocated to mixing department + Human resource cost allocated to mixing department

= 105,000 + 72,000 + 36,000

= $213,000

Correct option is (D)

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