Question

Stormy Corporation has two service departments (S1 and S2) and two production departments (P1 and P2), and uses the step-down method of cost allocation. Management has determined that S1 provides more service to the firm than S2, and has decided that the number of employees is the best allocation base to use for S1. The following data are available:

Department Number of Employees
S1 10
S2 20
P1 50
P2 70
Which of the following statements is (are) true if S1 and S2 have respective operating costs of $280,000 and $350,000?
Multiple Choice
A. S2 should allocate a portion of its $350,000 cost to S1.
B. S1's cost should be allocated (i.e., spread) over 140 employees.
C. S1's cost should be allocated (i.e., spread) over 150 employees.
D. S2 should allocate a total of $390,000 to P1 and P2.
E. Both S1's cost should be allocated (i.e., spread) over 140 employees and S2 should allocate a total of $390,000 to P1 and P2.

Answer 1

E. Both S1's cost should be allocated (i.e., spread) over 140 employees and S2 should allocate a total of $390,000 to P1 and P2.

Step-by-step explanation:

As S1 gives more service, So it would be allocated first

Here

S1 cost of $280,000 would be allocated to S2 P1 and P2 based on number of employees

The total employees in S2 P1 and P2 is

= 20 + 50 + 70

= 140

And, the Cost to be allocated per employee is

= $280,000 ÷ 140

= $2,000

Now cost received by S2 is

= $2,000 × 20

= $40000

And, the cost received by P1 is

= $2,000 × 50

= $100,000

And, the cost received by P2 is

= $2,000 × $70

= $140,000

Now

S2 contains total cost of

= $350,000 + $40,000 (from S1)

= $390,000

So this would be allocated to P1 and P2 as S1 has already allocated

Hence, option D is correct