Nashville Inc. has two service departments and two operating departments. Operat

Question

Nashville Inc. has two service departments and two operating departments. Operating for last year are as follows: data for these departments Service Departments Operating Departments Cafeteria Assembly Finishi nsg 44,000 S 30,000 S 70,000 S 130,000 8,000 100 Maintenance Departmental costs Machine hours 2,500 2,000 12, Number of employees 400 The controller of Nashville is wondering how to allocate the cost of service departments to their operating departments. She is looking into the two methods of allocation: direct and step-down. She has decided that the costs of the Maintenance Department should be allocated on the basis of machine hours and Cafeteria costs on the basis of number of employees. She does not think it is necessary to distinguish between variable and fixed overhead costs. In addition, she thinks the costs of the Maintenance Department should be allocated first if she used the step-down method. 2 Which of the following statements is correet? A. Finishing Department's allocation is higher under the direct method by roughly $800 B Assembly Department's allocation is lower under the direct method by roughly $830. The total cost of Assembly Department after allocation under the direct method is The total cost of Finishing Department after allocation under the direct method is None of the above. C. D. E. S 152,800 S 120,400 Page 2 of 12 Page 12 or I

Explanation / Answer

1 Direct method Maintenance Cafeteria Assembly Finishing Department cost 44000 30000 70000 130000 Allocate maintenance -44000 26400 17600 44000*12000/20000 44000*8000/20000 Allocate cafeteria -30000 24000 6000 30000*400/500 30000*100/500 Total cost 0 0 120400 153600 2 Allocate AS first Step down method Maintenance Cafeteria Assembly Finishing Department cost 44000 30000 70000 130000 Allocate maintenance -44000 4000 24000 16000 44000*2000/22000 44000*12000/22000 44000*8000/22000 Allocate cafeteria -34000 27200 6800 34000*400/500 34000*100/500 Total cost 121200 152800 Assembly cost is lower under direct method by 800 (121200-120400) Finishing department cost is higher under direct method by 800 (153600-152800) So correct answer is A

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