Exercise 11-23 Cost Allocation: Direct Method (LO 11-2) Warren Ltd. has two prod
ID: 2563550 • Letter: E
Question
Exercise 11-23 Cost Allocation: Direct Method (LO 11-2)
Warren Ltd. has two production departments, Building A and Building B, and two service departments, Maintenance and Cafeteria. Direct costs for each department and the proportion of service costs used by the various departments for the month of June follow:
Compute the allocation of service department costs to producing departments using the direct method. (Do not round intermediate calculations.)
Warren Ltd. has two production departments, Building A and Building B, and two service departments, Maintenance and Cafeteria. Direct costs for each department and the proportion of service costs used by the various departments for the month of June follow:
Explanation / Answer
Service Departments overhead costs are allocated to the user departments by three methods:
Direct Method
Under this method all the service department cost is allocated to the user departments only. No allocation is made among other service departments.
Warren Ltd. has two service departments (Maintenance and Cafeteria) and two production departments (Building A and Building B). Now service department cost is allocated to the production departments on the basis of proportion of services used as shown in the table below:
Cost of production departments is as follows:
Production department
Cost allocated from Service Departments
Department Direct Costs
Total Overhead Costs
Building A
420,000
$595,000
$1,015,000
Building B
340,000
362,000
702,000
Total
760,000
957,000
1,717,000
Service Department Cost Allocation Computations A B C D E F Proportion of services used (S1) (S2) Departments Maintenance (S1) 70.00% Cafeteria (S2) 20% Building A (P1) 60% 10.00% Building B (P2) 20% 20.00% Total Usage 100% 100% Direct Method: Percent Allocable to Dept. Building A Building B Service Department Direct Cost P1 P2 Maintenance (S1) $ 400,000 75% .6/.8 25% .2/.8 Cafeteria (S2) $ 360,000 33% .1/.3 67% .2/.3 Amount Allocable to Dept. Building A Building B Service Department Direct Cost P1 P2 Maintenance (S1) $ 400,000 $ 300,000 400,000*75% $ 100,000 400,000*25% Cafeteria (S2) $ 360,000 $ 120,000 360,000*33% $ 240,000 360,000*67% $ 760,000 $ 420,000 $ 340,000Related Questions
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