Question

State Financial Corp. has three service departments (Administration, Communications, and Facilities), and two production departments (Deposits...

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.

Administration Communications Facilities Deposits Loans
Direct costs $ 170,000 $ 310,000 $ 250,000 $ 7,860,000 $ 4,700,000
Employee hours 28,500 33,000 21,000 478,000 381,000
Number of employees 7 17 8 220 170
Square footage occupied 4,700 13,500 5,200 243,200 203,500

  

The costs of the service departments are allocated on the following bases: Administration, employee-hours; Communications, number of employees; and Facilities, square footage occupied.

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?

b. Assume the same method of allocation as in requirement (a). What amount of Administration Department costs is allocated to the Loans Department?

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?

d. Assume the same method of allocation as in requirement (c). What amount of Communication Department costs is allocated to Facilities?

Homework Answers

Answer #1

a.

Communication department cost to deposits department = $310,000 * 220/(220+170)

Communication department cost to deposits department = $310,000 * 220/390 = $174,872

b.

Administration department costs to loans department = $170,000 * 381,000/(478,000+381,000)

Administration department costs to loans department = $170,000 * 381,000/859,000 = $75,402

c.

Facilities department cost to communication department = $250,000 * 13,500/(4,700+13,500+243,200+203,500)

Facilities department cost to communication department = $250,000 * 13,500/464,900 = $7,260

d.

Communication department cost to facilities department = $0 (NIL)

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