The RAH Manufacturing Company has two service departments: Maintenance and Accou

Question

The RAH Manufacturing Company has two service departments: Maintenance and Accounting. The Maintenance Department's costs of $305,000 are allocated on the basis of machine hours. The Accounting Department's costs of $125,000 are allocated on the basis of the number of employees within a specific department. The direct departmental costs for A and B are $305,000 and $505,000, respectively.

                                          Maint         Acctg       A         B

Machine hours                     490           25        2,400     250

Number of employees            7             7            13          9

What is the Maintenance Department's cost allocated to Department B using the step method and assuming the Maintenance Department's costs are allocated first?

a)   $278,500.

b)   $232,500.

c)   $324,500.

d)     $28,505.

Explanation / Answer

Correct Answer is d) $28,505

Calculation and Explanation

Step down method used where one service department render services to other service department. this method considers the services rendered by Service dept to another Service dept. Complicated method since it describes the sequence of distribution of cost. Service Dept that serves largest number of services to other Depts. (Service & Production) is distributed FIRST On the basis of given % and thereafter this next largest number of departments is apportioned.

Maintenance Department's costs of $305,000

Allocated in the ratio of Machine Hours (given) 25:2400:250 to Accounts Dept., A Dept and B dept respectively..

Hence the Maintenance Department's cost allocated to Department B = $305,000 *250 / (25+2400+250) = $28.505

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