ACCOUNTING 201 COST ACCOUNTING

SUPPORT DEPARTMENT COST ALLOCATION

I. Identify the following items given below as either Producing Department (PD) or Service
Department (SD).

1. Receiving Department
2. Brewing
3. Mixing
4. Refining
5. Storage
6. Security
7. Purchasing
8. Assembly Commented [S1]:
9. Bottling
10. Canning

II. True (T) or False (F).

1. Servicing departments are those departments that are directly involved in the production process.
2. Servicing departments are never allocated with its chare of cost of factory overhead.
3. Inter-service departments activities are fully ignored by both the direct and step methods of
allocation.
4. The direct method is a method of cost allocation that charges costs of service departments to user
departments and ignores any services used by other service departments.
5. Under the step method of cost allocation, the final amount of pesos allocated to any production
department is influenced by the order in which the allocation is made from the service departments.
6. An administrative department provides services that benefit other internal units of an organization.
7. An service department provides services that benefit the entire organization.
8. The most theoretically correct method of allocating service department costs is the algebraic
method.
9. The direct method of service department cost allocation allows a partial recognition of reciprocal
relationships among service departments before assigning costs to revenue-producing areas. IF:
10. The most straight-forward method of assigning service department costs to revenue-producing
areas is the direct method.

III. Multiple choice. Write the letter of your choice.

1. Indirect costs should be allocated for all of the following reasons except to
a. motivate managers.
b. determine the full cost of a product.
c. motivate general administration.
d. compare alternatives for decision making. C
2. All of the following objectives are reasons that service department allocations can motivate
managers except to
a. instill a consideration of support costs in production managers.
b. encourage production managers to help service departments control costs.
c. encourage the usage of certain services.
d. determine divisional profitability.
3. Which of the following is a reason for allocating service department costs and thereby motivating
management?

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 a. provides for cost recovery
b. provides relevant information in determining corporate-wide profits generated by alternative
actions
c. meets regulations in some pricing instances
d. reflects usage of services on a fair and equitable basis
4. In determining the right method for allocating equipment depreciation to departments, the best
recommendation is to:
a. use the cost of equipment in the department as a basis for allocation
b. allocate on the basis of square footage used in a given department
c. charge the amounts to General Plant
d. use algebraic techniques
e. allocate on the basis of companywide rates
5. The most reasonable basis for allocating worker's compensation insurance is:
a. departmental payroll
b. building depreciation
c. kilowatt-hours
d. number of employees
e. materials used
6. A company is attempting to allocate the costs of electricity in various departments. The variable
portion of electricity expense is to be allocated using kilowatt-hours. The information needed in
order to allocate the fixed portion of the current period's electricity expense is:
a. rated horsepower of equipment
b. number of machines in each department
c. estimated materials consumption
d. number of employees
e. square footage in each department
7. The method for allocating service department costs that requires the least clerical work is:
a. use of square footage in each department
b. step method
c. allocation to other service departments only
d. simultaneous method
e. direct method
8. The following statement that best describes cost allocation is:
a. a company, as a general rule, should allocate indirect costs randomly or based on an "ability-to-
bear" criterion
b. a company can affect total income the most strongly by using the algebraic method of allocating
indirect costs
c. a company can maximize or minimize total company income by selecting different bases on
which to allocate indirect costs
d. a company should select an allocation base to raise or lower reported income on given products
e. a company's total income will remain unchanged no matter how indirect costs are allocated
9. An automotive company has three divisions. One division manufactures new replacement parts for
automobiles; another rebuilds engines; and the third does repair and overhaul work on a line of
trucks. All three divisions use the services of a central payroll department. The best method of
allocating the cost of the payroll department to the various operating divisions is:
a. total labor hours incurred in the divisions
b. value of production in the divisions
c. direct materials costs incurred in the divisions
d. machine hours used in the divisions
e. none of the above

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 10. The Janitorial Department provides cleaning services to all departments of a large store.
Management wishes to allocate the janitorial costs to the various departments that benefit from the
service. The most reasonable allocation base for janitorial costs would be:
a. sales of each department
b. square footage of each department
c. number of employees in each department
d. total direct costs of each department before any allocations
e. none of the above

IV. Problem Solving. Present your solutions and fill in the table.

Driller Corporation has three production departments A, B, and C. Driller Corporation also has two
service departments, Administration and Personnel. Administration costs are allocated based on
value of assets employed, and Personnel costs are allocated based on number of employees.
Assume that Administration provides more service to the other departments than does the
Personnel Department.

Dept. Direct Costs Employees Asset Value

Admin. P900,000 25 P450,000
Personnel 350,000 10 600,000
A 700,000 15 300,000
B 200,000 5 150,000
C 250,000 10 800,000
What are the total costs of Department Admin., Personnel, A, B and C after Service Department
Costs are allocated?

DEPARTMENT
Admin. Personnel A B C
a. Using direct method 5,362.50 6,087.50
b. Using step-down method 5,350 6,100
c. Using algebraic method 5,365.21 6,084.21