Question

Model, Inc., produces model automobiles made from metal. It operates two production departments, Molding and Painting, and has three service departments, Administration, Accounting, and Maintenance. The accumulated costs in the three service departments were $230,000, $399,000, and $216,000, respectively. Management is concerned that the costs of its service departments are getting too high. In particular, managers would like to keep the costs of service departments under $3.50 per unit on average. You have been asked to allocate service department costs to the two production departments and compute the unit costs.

The company decided that Administration costs should be allocated on the basis of square footage used by each production and service department. Accounting costs are allocated on the basis of number of employees. Maintenance costs are allocated on the basis of the dollar value of the equipment in each department. The use of each base by all departments during the current period follows:
Used by
Allocation Base Administration Accounting Maintenance Molding Painting
Building area 12,000 63,000 69,300 441,000 56,700
Employees 44 14 22 66 88
Equipment value
(in thousands) $ 177.00 $ 236.00 $ 17.50 $ 118.00 $ 59.00
Direct costs of the Molding Department included $242,500 in direct materials, $327,500 in direct labor, and $105,000 in overhead. The Painting Department’s direct costs consisted of $211,000 in direct materials, $219,000 in direct labor, and $82,500 in overhead.
Required:
a. Using the step method, determine the allocated costs and the total costs in each of the two producing departments. Ignore self-usage (for example, ignore work done by Administration for itself). Rank order the allocation as follows: (1) Maintenance, (2) Accounting, and (3) Administration. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.)
b. Assume that 100,000 units were processed through these two departments. What is the unit cost for the sum of direct materials, direct labor, and overhead (1) for Molding, (2) for Painting, and (3) in total? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
c. Compute the cost per unit for the service department costs allocated to the production departments. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Answer 1

Using the step method, we can allocate the service department costs to the production departments. The allocated costs for maintenance, accounting, and administration are $137,600, $164,900, and $1,767,273.94 for molding, and $78,400, $234,100, and $32,726.06 for painting, respectively.

Step-by-step explanation:

To allocate the service department costs to the production departments, we can use the step method. First, we need to allocate the maintenance costs based on the dollar value of equipment. Given that the molding department has equipment worth $118,000 and the painting department has equipment worth $59,000, the allocation would be ($118,000 / ($118,000 + $59,000)) * $216,000 = $137,600 for molding and ($59,000 / ($118,000 + $59,000)) * $216,000 = $78,400 for painting.

Next, we allocate the accounting costs based on the number of employees. The molding department has 66 employees and the painting department has 88 employees. So, the allocation would be (66 / (66 + 88)) * $399,000 = $164,900 for molding and (88 / (66 + 88)) * $399,000 = $234,100 for painting.

Finally, we allocate the administration costs based on the square footage used by each department. The molding department uses 441,000 square feet and the painting department uses 56,700 square feet. Therefore, the allocation would be (441,000 / (441,000 + 56,700)) * $230,000 = $1,767,273.94 for molding and (56,700 / (441,000 + 56,700)) * $230,000 = $32,726.06 for painting.