Question

RC Ltd (“RC”) manufactures and distributes products in the healthcare industry. RC has two operating departments - E and C, and three support departments - Administration, Marketing, and Engineering. The Engineering department allocates costs using budgeted total maintenance hours. The Administration and Marketing departments use the number of labour hours incurred. The budgeted costs for Administration, Marketing, and Engineering departments are $140,000, $280,000, and $600,000 respectively. The budgeted manufacturing costs for departments E and C are $750,000 and $850,000 respectively. The following table summarizes the support services usage by each department.

Operating Support
E C Admin Marketing Engineering
Administration (in labour hours) 4,000 5,000 0 1,000 1,000
Marketing (in labour hours) 6,000 7,000 1,000 0 0
Engineering (in maintenance hours) 15,000 12,000 2,000 1,000 0
(a) If RC uses the step-down method to allocate support department costs, which order of departments would you propose for cost allocation? Explain.
(b) Ignore your answer to part (a). Assume that support departments’ costs are allocated in the order of Engineering, then Administration, and finally Marketing; calculate the new total cost of Marketing department after using the step-down method.

Answer 1

a.

Rank department reason

1st engineering Engineering Department serves 2 other support depart: 1. Admin Department (2,000 maintenance hours) 2. Marketing Department (1,000 maintenance hours)

2nd admin Admin departmt also server 2 other support depart.

1. marketing depart. (1000 labour hours)

2. engineering depart. (1000 labour hours)

3rd marketing marketing depart. serves the smallest no. of other support departments.

b. engineering admin marketing

department cost 600000 140000 280000

allocation of engineering (600000)

allocation of admin 318000