10.

29 (30 min) Cost allocation; step method

Gen'l
factory
admin
(GFA) Maintenance Cutting Assembly Row total
Amount of area occupied (sq ft) 1,000 1,000 3,000 5,000
Proportion of area occupied 0.2 0.20 0.60 1.00
Allocation of maintenance cost $ 9,600 $ (48,000) $ 9,600 $ 28,800 $ 0
Amount of labor hours 100 400 500
Proportion of labor hours 0.20 0.80 1.00
Direct GFA cost 20,000
Allocation of adjusted GFA cost $(29,600) 5,920 23,680 $ 0
Total allocated service costs to jobs $ 15,520 $ 52,480 $ 68,000

EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE

The direct method of allocation versus the step method yields these different total
service costs for the departments.

Cutting Assembly
Direct Method $ 16,000 $ 52,000
Step Method $ 15,520 $ 52,480
Difference $ 480 $ (480)

In this example the differences are minor; however, the differences can be quite
significant in other cases.

10.30 (20 min) Cost allocation comparisons

The direct method of allocation versus the step method yields these different total
service costs for the departments.

P1 P2
Direct Method $ 102,500 $ 77,500
Step Method $ 108,500 $ 71,500
Difference $ (6,000) $ 6,000

The difference between the two methods is $6,000, a relatively significant amount.
Although the direct method is simpler, the step method is more accurate because it reflects
the use of support-service resources by other support service departments.