Question

Downhill Manufacturing produces snow skis in a two-step production process-cutting and laminating. The manufacturing center is supported by two service centers-a health clinic and janitorial service. The following table reveals certain facts about each activity:

Health clinic Janitorial service Cutting department Laminating department
Employees 2 4 10 15
Square footage 1,200 600 12,000 8,000
Cost incurred $180,000 $125,000 $700,000 $800,000

Using the direct method, allocate the service department costs to production. The clinic costs are to be allocated based on employees, and the janitorial costs are to be allocated based on the square footage.

Answer 1

To allocate the service department costs using the direct method, we divide the total costs by the respective allocation bases. The clinic costs are allocated based on employees, and the janitorial costs are allocated based on square footage.

Step-by-step explanation:

To allocate the health clinic costs, we divide the total clinic costs ($180,000) by the number of employees in the cutting department and laminating department (10 + 15 = 25). This gives us an allocation rate of $7,200 per employee.

To allocate the janitorial service costs, we divide the total janitorial costs ($125,000) by the total square footage of the cutting department and laminating department (12,000 + 8,000 = 20,000). This gives us an allocation rate of $6.25 per square foot.

Finally, we allocate the service department costs to the production departments by multiplying the allocation rates by the respective allocation bases. The allocated service department costs for the cutting department would be $7,200 per employee multiplied by 10 employees, which equals $72,000. The allocated service department costs for the laminating department would be $7,200 per employee multiplied by 15 employees, which equals $108,000. The allocated service department costs for the cutting department would be $6.25 per square foot multiplied by 12,000 square feet, which equals $75,000. The allocated service department costs for the laminating department would be $6.25 per square foot multiplied by 8,000 square feet, which equals $50,000.