Question

The Ferre Publishing Company has three service departments and two operating departments. Selected data from a recent period on the five departments follow:
Service Departments Operating Departments
Administration Janitorial Maintenance Binding Printing Total
Costs $77,000 $60,000 $39,000 $255,000 $486,000 $917,000
Number of employees 140 100 400 1,000 500 2,140
Square feet of space occupied 4,500 18,000 15,000 30,000 105,000 172,500
Hours of press time 18,000 38,000 56,000
The company allocates service department costs by the step-down method in the following order: Administration (number of employees), Janitorial (space occupied), and Maintenance (hours of press time).
Required: Assuming that the company uses the direct method rather than the step-down method to allocate service department costs, few much cost would fee assigned to each operating department?

Answer 1

Answer:

The Ferre Publishing Company

Allocation of service department costs, using the direct method:

                   Service Departments                       Operating Departments

                Admin.     Janitorial   Maintenance   Binding    Printing   Total

Costs       $77,000  $60,000     $39,000    $255,000 $486,000 $917,000

Admin.      (77,000)                                             51,333      25,667     0

Janitorial                  (60,000)                             13,333      46,667     0

Maintenance                               (39,000)         12,536      26,464     0

Total       $0             $0                $0            $332,202  $584,798 $917,000

Explanation:

a) Data and Calculations:

                   Service Departments                       Operating Departments

                Admin.     Janitorial   Maintenance   Binding    Printing   Total

Costs       $77,000  $60,000     $39,000    $255,000 $486,000 $917,000

Number

of employees 140          100             400             1,000          500        2,140

Square feet of space

occupied    4,500    18,000         15,000          30,000   105,000   172,500

Hours of press time                                            18,000     38,000    56,000

Allocation bases:

Administration (number of employees),

Janitorial (space occupied)

Maintenance (hours of press time).

Allocation rate:

Administration = $77,000/1,500 = $51.33

Janitorial = $60,000/135,000 = $0.44

Maintenance = $39,000/56,000 = $0.696

The direct method of allocating costs is relatively straightforward.  It only involves the direct allocation of service departments' cost to the operating departments.  Service departments' costs are not allocated to any service department, but they are allocated directly to the operating activities.