Question

The following information is departmental cost allocation with two service departments and two production departments. Percentage Service Provided toDepartment Cost S1 S2 P1 P2Service 1 (S1) $ 40,000 0 % 25 % 30 % 45 %Service 2 (S2) 31,000 20 0 20 60 Production 1 (P1) 210,000 Production 2 (P2) 260,000 1)What is the amount of service department cost allocated to P1 and P2 using the direct method?2)What is the total cost in P1 and in P2 after allocation using the direct method?3)What is the amount of service department cost allocated to P1 and P2 using the step method with S1 going first?4)What is the amount of service department cost allocated to P1 and P2 using the direct method if the cost in P1 is changed from $210,000 to $230,000?

Answer 1

To determine the best production method, we calculate the total costs for each method given the costs of labor and capital. Method 1 is the least expensive at $9,000 when labor costs $100/unit. If labor increases to $200/unit, Method 1 still remains the most cost-effective option at $14,000.

Step-by-step explanation:

Calculation of Production Method Costs

To determine the best production method given the costs of labor and capital, we need to calculate the total cost for each method.

• Method 1: (50 units of labor × $100/unit) + (10 units of capital × $400/unit) = $5,000 + $4,000 = $9,000
• Method 2: (20 units of labor × $100/unit) + (40 units of capital × $400/unit) = $2,000 + $16,000 = $18,000
• Method 3: (10 units of labor × $100/unit) + (70 units of capital × $400/unit) = $1,000 + $28,000 = $29,000

With labor at $100/unit, Method 1 is the cheapest with a total cost of $9,000.

If the cost of labor increases to $200/unit, the new costs are:

• Method 1: (50 units of labor × $200/unit) + (10 units of capital × $400/unit) = $10,000 + $4,000 = $14,000
• Method 2: (20 units of labor × $200/unit) + (40 units of capital × $400/unit) = $4,000 + $16,000 = $20,000
• Method 3: (10 units of labor × $200/unit) + (70 units of capital × $400/unit) = $2,000 + $28,000 = $30,000

With labor at $200/unit, Method 1 remains the cheapest with a new total cost of $14,000.