Question

Smeltzer uses the Direct Method to allocate support department costs. The Service Departments are HR and Custodial services. Production Departments are Fabrication and Assembly. Initial cost distribution is as follows:

HR Service Department costs = $120,000
Custodial Service Department costs = $60,000

Answer 1

The question deals with cost accounting and specifically the Direct Method of allocating support department costs to production departments without interdepartmental allocations.

Step-by-step explanation:

The student's question pertains to the Direct Method of allocating support department costs within a manufacturing setting, which falls under the broader category of cost accounting in business studies. The Direct Method involves direct allocation of support department (such as HR and Custodial services) costs to the production departments (Fabrication and Assembly in this case), without any interdepartmental allocations. Given the initial cost distribution of the Service Departments, you would allocate the HR Service Department costs of $120,000 and the Custodial Service Department costs of $60,000 directly to the Production Departments based on a pre-determined basis like square footage or number of employees serviced.

In general, the concept of cost allocation is important because it provides insight into the total costs of each product, which includes both fixed costs and variable costs. Understanding this concept helps businesses in pricing decisions, identifying cost-saving opportunities, and overall financial management.