Question

Wolfpack Company has two service departments and two production departments. Budgeted costs and budgeted activity in the various departments for the year are shown here:

	Custodial	Cafeteria	Cutting	Assembly
Departmental Costs	12,600	7,000	30,000	50,000
Square Feet Occupied	1,000	2,000	8,000	10,000
Number of Employees	20	30	150	200

Custodial service department costs are allocated on the basis of square feet of space occu- pied. The costs of the cafeteria are allocated on the basis of the number of employees. Assume that the company uses the direct method of allocation. The amount of custodial ser- vices cost allocated to the cutting department using the direct method would be:
a. $5,108

b. $5,400

c. $4,725

d. none of the above

Answer 1

The correct option is d. none of the above.

Solution:

Under direct method cost are allocated to production department based on some ratio and in the question it is clearly provided that cost of Custodial Deaprtment will be allocated based on the Square Feet Occupied.

So cost allocated by Custodial Deaprtment to Cutting Department:

= Custodial Department Cost * (8,000/{8,000+10,000}

= 12,600 * (8,000/18,000)

= 12,600 * 0.4444

= 5,600

The correct answer is 5,600 and since such answer is not provided thus none of the above is correct option.