METHODS OF ALLOCATING SERVICE DEPARTMENT COSTS

1. Direct Method
2. Step Method
3. Algebraic Method
DIRECT METHOD AND STEP METHOD
Toby's Company has three service departments- Factory Personnel, Building Maintenance and Power Plant-- and two producing
departments- Machining and Assembly.
The following data are obtained:
DEPARTMENT COST NO. OF FLOOR SPACE KILOWATTT
EMPLOYEES HOURS
Service Departments:
Factory Personnel P7,200 10 3,000 -
Building Maintenance 4,000 8 5,000 -
Power Plant 2,000 4 8,000 -
P13,200 22 16,000 -
Producing Departments:
Machining 23,600 10 10,000 700
Assembly 17,200 20 10,000 300
54,000 30 28,000 1,000
Required:
1. Using the DIRECT method, allocate the service department costs to the producing departments.
2. Using STEP method, allocate the service department costs to the producing departments.

ALGEBRAIC METHOD
The following information for Department A, B and C provide services to each other and to producing departments J and K.
Percentage of Services
Total Costs A B C J K
A 400,000 - 15% 5% 55% 25%
B 280,000 10% - 9% 18% 63%
C 200,000 - - - 20% 80%
Required: Allocate service department costs using ALGEBRAIC METHOD.

METHODS OF ALLOCATING SERVICE DEPARTMENT COSTS

1. Direct Method
2. Step Method
3. Algebraic Method
DIRECT METHOD AND STEP METHOD
Toby's Company has three service departments- Factory Personnel, Building Maintenance and Power Plant-- and two producing
departments- Machining and Assembly.
The following data are obtained:
DEPARTMENT COST NO. OF FLOOR SPACE KILOWATTT
EMPLOYEES HOURS
Service Departments:
Factory Personnel P7,200 10 3,000 -
Building Maintenance 4,000 8 5,000 -
Power Plant 2,000 4 8,000 -
P13,200 22 16,000 -
Producing Departments:
Machining 23,600 10 10,000 700
Assembly 17,200 20 10,000 300
54,000 30 28,000 1,000
Required:
3. Using the DIRECT method, allocate the service department costs to the producing departments.
4. Using STEP method, allocate the service department costs to the producing departments.

ALGEBRAIC METHOD
The following information for Department A, B and C provide services to each other and to producing departments J and K.
Percentage of Services
Total Costs A B C J K
A 400,000 - 15% 5% 55% 25%
B 280,000 10% - 9% 18% 63%
C 200,000 - - - 20% 80%
Required: Allocate service department costs using ALGEBRAIC METHOD.