Question

Williams manufactures a variety of iron products, made to customer specifications, in small batches. Willie Williams, owner, is concerned that he does not have an accurate understanding of the costs of production. You, a newly-minted MBA, have researched his business and identified various costs and cost drivers.

	Janitorial	Welding	HR	Data Svcs	Assembly	Total
Own costs	$12,000	$90,000	$37,200	$32,400	$54,000	$225,600
Square feet	500	3,000	1,500	2,000	4,500	11,500
# employees	7	25	8	10	75	125
# transactions (thou)	30	100	180	600	140	1,050
Power usage	22	730	11	17	220	1,000

If the step-down method is used in this case, which sequence of allocations is not valid?

The service departments (Janitorial, HR, and Data Services) are allocated to the two production departments (Welding and Assembly). Janitorial costs are allocated using square feet, HR using number of employees, and Data Services using number of transactions. You recall that there are several approaches to the allocation of service department costs, direct, step-down and reciprocal methods.

Data, Janitorial, HR

HR, Data, Janitorial

Data, HR, Janitorial

Janitorial, Welding, HR, Data Svcs, Assembly

All sequences above are acceptable

Answer 1

Using Step-down method, we allocate the service department overhead to the production departments.

Here the service departments are HR, Janitorial, Data Services.

Production departments are Welding and Assembly.

Using step down method, we can follow any of the following sequences:

1. HR, Janitorial, Data Services (or)

2. Janitorial, Data Services , HR (or)

3. Data Services, HR, Janitorial.

All the above sequences are acceptable.

But,

Janitorial, Welding, HR, Data Services, Assembly, this sequence includes the production departments too. Hence it is not acceptable or not valid.

Therefore, Option D is correct answer.