M&P Tool has three service departments that support the production area. Outline
ID: 2594429 • Letter: M
Question
M&P Tool has three service departments that support the production area. Outlined below is the estimated overhead by department for the upcoming year:
Estimated
Number of
Service Departments
Overhead
EmployeesReceiving
$25,000
2
Repair
35,000
2
Tool
10,000
1
Production DepartmentsAssembly
25
Bolting
12
The Repair Department supports the greatest number of departments, followed by the Tool Department. Overhead cost is allocated to departments based upon the number of employees.
If M&P uses the step-down method of allocation, the allocation from the Repair Department to the Tool Department would be
A. $0
B. $875
C. $7,000
D. $11,667
Explanation / Answer
B. 875
The tool department will receive 1/40 of the Repair Department since it has 1 employee and the Receiving Department and production departments have 39 employees. In the step down method the costs of the first service department are allocated to the other servicedepartments and the production departments. The costs of the second service department are allocated to the remaining service departments (but not back to the first service department) and the production departments. Since the Repair Department provides the most services to the other service departments, it isallocated first. This amount is $875
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