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Reciprocal and Step Method Questions

Acie Company allocates service department costs to production departments based on annual sales. However, an internal audit recommends using service hours as a better basis. The audit report provides information on maintenance and engineering service hours and costs for two service departments and three production departments. It asks to calculate total costs for the service departments after allocating interdepartment costs but before allocating to production, and the maintenance cost allocated to Department A using step allocation.

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139 views2 pages

Reciprocal and Step Method Questions

Acie Company allocates service department costs to production departments based on annual sales. However, an internal audit recommends using service hours as a better basis. The audit report provides information on maintenance and engineering service hours and costs for two service departments and three production departments. It asks to calculate total costs for the service departments after allocating interdepartment costs but before allocating to production, and the maintenance cost allocated to Department A using step allocation.

Uploaded by

archibaldejosiah
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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QUESTION 1

Acie Company has two service departments and three production departments, each producing
a separate product. For a number of years, Acie has allocated the costs of the service
departments to the production departments on the basis of the annual sales dollars. In a recent
audit report, the internal auditor stated that the distribution of service department costs on the
basis of annual sales dollars would lead to serious inequities. It was recommended that
maintenance and engineering service hours be used as a better service cost allocation basis.
For illustration purposes, the following information was appended to the audit report:

Service Departments
Maintenance Engineering
Maintenance hours used.................................. 400
Engineering hours used................................... 400
Department direct costs................................... $12,000 $54,000

Production Departments
Department A Department B Department C
800 200 200
800 400 400
$80,000 $90,000 $50,000

a. Using the simultaneous method, what would be the total Engineering Department cost after
allocation of interservice department costs, but before allocation to the Maintenance and
Production Departments?
b. Using the simultaneous method, what would be the total Maintenance Department cost after
allocation of interservice department costs, but before allocation to the Engineering and
Production Departments?
c. Using the step method of cost allocation, what amount of maintenance cost would be
allocated to Department A, assuming that the service departments are distributed in the
order of total dollars of direct departmental costs?

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