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 $269,000, $402,000, and $199,000, 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 $ 177.00 $ 236.00 $ 17.50 $ 118.00 $ 59.00
(in thousands)
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:
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

Answer 1

Total Service Costs Molding :350031.22 Painting: 205081. 46

Step-by-step explanation:

Given Data

Model, Inc.

Service

Administration, Accounting, Maintenance

Costs $269,000, $402,000, $199,000,

Building area 12,000 63,000 69,300

Employees 44 14 22

Equipment value

(in thousands) $ 177.00 $ 236.00 $ 17.50

Production

Molding Painting

Costs

Direct Materials $242,500 $211,000

Direct Labor $327,500 $219,000

Overheads $105,000 $82,500

Building area 441,000 56,700

Employees 66 88

Equipment value

(in thousands) $ 118.00 $ 59.00

First we find the activity rates for each cost using total cost driver except self usage

1) Maintenance $ 199,000

Equipment Value= 177 + 236+ 118+ 59= 590 ( in thousands) ( all but maintenance itself )

Maintenance per equipment = 199,000/590,000= 0.3373 per equipment

2) Accounting,= $402,000,

Employees=44 + 22 + 66 + 88 = 220

Accounting per Employee= $402,000,/220= 1827.27 per Employee

3) Administration= $269,000

Building area =63,000 +69,300 +441,000+ 56,700= 630,000

Administration per square footage= 269,000/ 630,000= 0.4269= 0.43 per square

Then we multiply the rates to find the service costs allocated.

Production

Molding Painting

Costs

Direct Materials $242,500 $211,000

Direct Labor $327,500 $219,000

Overheads $105,000 $82,500

Service Cost Allocated

Building area 0.43*441,000 0.43* 56,700

= 189630 =24381

Employees 66* 1827.27 88 *1827.27

= 120599.82 = 160799.76

Equipment value

(in thousands) $ 118.00* 0.3373 $ 59.00 *0.3373

= 39801.4 = 19900.7

Total Service Costs 350031.22 205081. 46

Total Costs 1025031.22 717581. 46