Question

Gustavson Corporation uses the direct method to allocate service department costs to operating departments. The company has two service departments, Administrative and Facilities, and two operating departments, Assembly and Wholesaling. Administrative costs are allocated on the basis of employee hours and Facilities costs are allocated on the basis of space occupied. The total Wholesaling Department cost after the allocations of service department costs is closest to which value:

a. $337,530b. $331,090c. $340,240d. $340,426

Answer 1

C) $340,240

Step-by-step explanation:

Service Department Operating Department

Administrative Facilities Assembly Wholesaling

Departmental costs $26,840 $59,400 $183,430 $321,190

Employee time (hours) 4,000 2,000 29,000 15,000

Space occupied - sq ft 2,000 2,000 30,000 6,000

total administrative costs = $26,840

total employee hours = 29,000 + 15,000 = 44,000

administrative cost per employee hour = $26,840 / 44,000 = $0.61

total facilities costs = $59,400

total square feet = 30,000 + 6,000 = 36,000

administrative cost per employee hour = $59,400 / 36,000 = $1.65

total Wholesaling Department cost = $321,190 + ($0.61 x 15,000) + ($1.65 x 6,000) = $321,190 + $9,150 + $9,900 = $340,240