Question

XYZ Steel has two profit centers: Ingots and Stainless Steel. These profit centers rely on services supplied by two service departments: electricity and water. The profit centers' consumption of the service departments' outputs (in millions) is given in the following table:

                                       Service Departments                        Profit Centers             

                                  Electricity            Water                  Ingots           Stainless Steel              Total

Electricity             2,500 kwh           2,500 kwh                3,000 kwh            2,000 kwh        10,000 kwh

Water                    1,000 gal.            800 gal.                1,000 gal.            2,000 gal.           4,800 gal.

The total operating costs of the two service departments are:

Electricity       $ 80 million

Water              60 million

Total cost     $ 140 million

Required:

Service department costs are allocated to profit centers using the step-down method. Water is the first service department allocated. Compute the total cost of allocated service department costs for each of the profit centers using the step-down allocation method.

Answer 1

Solution :

Profit Center	Cost Allocated
Ingots	$ 72,000,000 or 72 Millions
Stainless Steel	$ 68,000,000 or 68 Millions

Working :

Particulars	Service Department		Profit Center
	Water	Electricity	Ingots	Stainless Steel
Cost Before Allocation	$ 60,000,000	$ 80,000,000
Allocation :
Water (1:1:2)	( $ 60,000,000)	$ 15,000,000	$ 15,000,000	$ 30,000,000
Electricity (3:2)		($ 95,000,000)	$ 57,000,000	$ 38,000,000
Total Overhead Allocated			$ 72,000,000	$ 68,000,000

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