Question

Evergreen Company has two support departments (S1 and S2) and two producing departments (P1 and P2). Department S1 costs are allocated on the basis of number of employees, and Department S2 costs are allocated on the basis of space occupied expressed in square feet.
Data on direct department costs, number of employees, and space occupied are as follows:

	S1	S2	P1	P2
Direct dept. costs	$7,500	$11,000	$27,500	$30,000
Number of employees	10	5	20	25
Space occupied (sq. ft.)	1,000	500	1,500	2,500

If Evergreen uses the direct method, the ratio representing the portion of Department S2 allocated to P1 is

Select one:

a. 1,500/5,000.

b. 1,500/4,000.

c. 1,500/5,500.

d. 1,500/2,000.

Answer 1

In direct method, the cost of support department are allocated to only the production department directly using the given basis of allocation.

Here the S1 & S2 are the support departments and P1 & P2 are the production departments. Basis for allocation of cost of S2 department is the space occupied ( sq. ft. ).

Total space occupied by P1 & P2 = 1,500 + 2,500 = 4,000 sq. ft.

Space occupied by P1 = 1,500 sq. ft.

Thus, Portion of S2 allocated to P1 = Space occupied by P1 / Total space occupied by P1 & P2 = 1,500 / 4,000 [ option b ]