Question

Salado Inc. provides cleaning services through its Residential and Commercial divisions. Support services of the company are provided by Personnel and Administration areas. Costs of these two areas are allocated to the revenue producing departments. Personnel costs are allocated using number of employees; administration costs are allocated using direct department costs. The following 2013 budgeted information (presented in a benefits-provided ranking) is available:
Personnel Administration Residential Commericial
Direct costs $140,000 $180,000 $480,000 $800,000
Number of employees 12 30 72 48
Direct labor hours 60,000 90,000
Square feet deaned 450,000 570,000

Required:
a. Using the direct method, allocate the costs of Personnel and Administration to the Residential and Commercial divisions.
b. Using the step method, allocate the costs of Personnel and Administration to the Residential and Commercial divisions.
c. Salado prices jobs by the direct labor hour for Residential services and by the square foot cleaned for Commercial services. Compute the full cost of providing one direct labor hour of service for Residential and for one square foot cleaned for Commercial using (1) the direct method and (2) the step method. (Round cost per hour and cost per square foot to nearest cent.)

Answer 1

Answer:

Salado Inc.

a. Direct Method Allocation:

                                     Personnel Administration Residential Commercial

Direct costs                   $140,000       $180,000     $480,000   $800,000

Personnel costs             (140,000)                                84,000       56,000

Administration costs                             (180,000)        67,500       112,500

Total allocated costs                                               $631,500   $968,500

b. Step Method Allocation:

                                     Personnel Administration Residential Commercial

Direct costs                   $140,000       $180,000     $480,000   $800,000

Personnel costs             (140,000)          28,000         67,200        44,800

Administration costs                            (208,000)        78,000      130,000

Total allocated costs                                              $625,200   $974,800

c. Full Cost of providing one direct labor hour of service for Residential and Commercial:        

                                         Residential       Commercial

(1) the direct method          $631,500         $968,500

Direct labor hours                 60,000

Square feet cleaned                                     570,000

Unit cost =                            $10.53              $1.70

(2) the step method         $625,200         $974,800

Direct labor hours                60,000

Square feet cleaned                                    570,000

Unit cost =                           $10.42              $1.71

Explanation:

a) Data and Calculations:

                                     Personnel Administration Residential Commercial

Direct costs                   $140,000       $180,000     $480,000   $800,000

Number of employees             12                   30                 72                48

Direct labor hours                                                        60,000        90,000

Square feet deaned                                                  450,000      570,000