Question

Woodstock Binding has two service departments, IT (Information Technology) and HR (Human Resources), and two operating departments, Publishing and Binding. Management has decided to allocate IT costs on the basis of IT Tickets (issued with each IT request) in each department and HR costs on the basis of employees in each department.

The following data appear in the company records for the current period:
IT HR Publishing Binding
IT tickets 0 1,200 1,200 3,600
Employed 16 0 24 40
Department direct costs $152,000 $249,600 $430,000 $390,000
Required: Use the step method to allocate the service costs, using the following:
a. The order of allocation starts with IT.
b. The order of allocation starts with HR.

Answer 1

Cost allocation in Woodstock Binding is executed using the step method with two sequences: first allocating IT costs based on IT tickets, and then allocating HR costs based on the number of employees in each department. After the service departments' costs are allocated, the total costs for the operating departments can be calculated.

Step-by-step explanation:

Cost Allocation Using the Step Method

When dealing with the allocation of service department costs to operating departments, management can opt for distinct methods like the step method. Here, we have a scenario in which Woodstock Binding wants to allocate IT and HR service costs based on IT tickets and number of employees, respectively. To do that, we need to follow two separate sequences of allocation.

Allocation Starting with IT: First, we'll allocate the IT department's costs based on IT tickets to the HR, Publishing, and Binding departments. The Publishing and Binding departments will receive larger portions of the cost since they have more IT tickets compared to HR.

Allocation Starting with HR: Second, we allocate the costs of the HR department based on the number of employees in each operating department. With Publishing having 24 employees and Binding 40, the Binding department will bear a higher proportion of HR costs.

After allocating the service departments' costs, the total costs for Publishing and Binding can be computed by adding these allocated costs to their direct costs. This approach ensures that internal support services are fairly charged to the parts of the company that actually use them.

Answer 2

The question is about cost allocation using the step method where IT and HR department costs are allocated to Publishing and Binding departments based on IT Tickets and the number of employees. It involves determining total costs, which are the sum of fixed and variable costs, and then proportionally allocating service department costs to operating departments.

Step-by-step explanation:

The student is asking about the allocation of service department costs to operating departments within a company. Woodstock Binding wants to allocate IT department costs based on IT tickets and HR department costs based on the number of employees. To allocate costs accurately, one needs to perform cost allocation using the step method. This method involves allocating service department costs to operating departments in a sequential manner, using the most direct cost driver as the basis for allocation.

Two scenarios are presented: (a) Allocating IT costs first, then HR costs; and (b) Allocating HR costs first, then IT costs. It is essential to first calculate total costs, which include both fixed and variable costs. These are used to allocate service department costs to operating departments proportionally based on the predetermined cost drivers (IT Tickets and number of employees, respectively).