Question

The Bola Tie Company has two service departments (Departments A and B) and three production departments...

The Bola Tie Company has two service departments (Departments A and B) and three production departments (Departments X, Y and Z). Service Department A provides services to all three production departments as well as to Service Department B. However, Service Department B only provides services to the other service department (Department A). In other words, Service Department B provides no services directly to the production departments. Which of the following methods for allocating service department costs makes the most sense in this situation?

(A)       The direct method.

(B)       The step-down method, beginning with Service Department A.

(C)       The step-down method, beginning with Service Department B.

(D)       We would want to know the costs incurred by each service department before determining which allocation method makes the most sense.

12-2: The “Big One” accounting firm has three divisions: audit, tax and consulting; two support departments: administration and human resources. The following table shows the utilization of support department services by the user departments:

Administration

Human Resources

Audit

Tax

Consulting

Administration

10%

30%

25%

35%

Human Resources

10%

30%

35%

25%

Which of the following allocation methods will result in the smallest allocation of support department costs to the Consulting Division?

(A)       The direct method.

(B)       The step-down method, beginning with Administration.

(C)       The step-down method, beginning with Human Resources.

(D)       Cannot be determined from the information given.

Business   Accounting   
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Homework Answers

Answer #1

1.

In the given situation, the step-down method, beginning with Service Department B makes most sense because Department B only provides services to Service Department A. If the said method of allocation is used, service department B's cost will be allocated to A and the production departments.

Therefore, the correct answer is (C).

2.

In the given situation, the step-down method, beginning with Administration will result in the smallest allocation of support department costs to the Consulting Division.

Therefore, the correct answer is (B).

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