Question

Consider the following information:

	Service Dept 1	Service Dept 2	Production Dept 1	Production Dept 2
Costs	$200,000	$150,000	$450,000	$480,000
Allocation base:
SF (for Service 1)	2,000	2,500	20,000	30,000
LH (for service 2)	15,000	16,000	40,000	40,000

Under the direct method of allocating service department costs, how much (in dollars) of Service Dept 1’s costs should be allocated to Production Department 2? (Service Dept 1 costs are allocated on the basis of square feet (SF). Service Dept 2 costs are allocated on the basis of labor hours (LH).)

(Use commas. No decimal points.)  

Answer 1

In the direct method, service department costs are directly allocated to production departments on the basis of given allocation base.

Here we are required to service department 1 costs on the basis of square feet given for production departments.

Service department 1 costs is 200000

And it is to be allocated between production department 1 and production department 2 on the basis of 20000 and 30000 square feet that is in the ratio of 2:3

Production department 1 = 200000*2/5 =80,000

Production department 2=200000*3/5=120,000