Question

Salado Inc. provides cleaning services through its Residential and Commercial divisions. Support services of the company are provided by Personnel and Administration areas. Costs of these two areas are allocated to the revenue producing departments. Personnel costs are allocated using number of employees; administration costs are allocated using direct department costs. The following 2013 budgeted information (presented in a benefits-provided ranking) is available:

Personnel Administration Residential Commericial
Direct costs $140,000 $180,000 $480,000 $800,000
Number of employees 12 30 72 48
Direct labor hours 60,000 90,000
Square feet deaned 450,000 570,000

Required:
a. Using the direct method, allocate the costs of Personnel and Administration to the Residential and Commercial divisions.
b. Using the step method, allocate the costs of Personnel and Administration to the Residential and Commercial divisions.
c. Salado prices jobs by the direct labor hour for Residential services and by the square foot cleaned for Commercial services. Compute the full cost of providing one direct labor hour of service for Residential and for one square foot cleaned for Commercial using (1) the direct method and (2) the step method. (Round cost per hour and cost per square foot to nearest cent.)

Answer 1

Salado Inc.

a. Direct Method Allocation:

Personnel Administration Residential Commercial

Direct costs $140,000 $180,000 $480,000 $800,000

Personnel costs (140,000) 84,000 56,000

Administration costs (180,000) 67,500 112,500

Total allocated costs $631,500 $968,500

b. Step Method Allocation:

Personnel Administration Residential Commercial

Direct costs $140,000 $180,000 $480,000 $800,000

Personnel costs (140,000) 28,000 67,200 44,800

Administration costs (208,000) 78,000 130,000

Total allocated costs $625,200 $974,800

c. Full Cost of providing one direct labor hour of service for Residential and Commercial:

Residential Commercial

(1) the direct method $631,500 $968,500

Direct labor hours 60,000

Square feet cleaned 570,000

Unit cost = $10.53 $1.70

(2) the step method $625,200 $974,800

Direct labor hours 60,000

Square feet cleaned 570,000

Unit cost = $10.42 $1.71

Step-by-step explanation:

a) Data and Calculations:

Personnel Administration Residential Commercial

Direct costs $140,000 $180,000 $480,000 $800,000

Number of employees 12 30 72 48

Direct labor hours 60,000 90,000

Square feet deaned 450,000 570,000