A. The Grey Manufacturing Company has two service departments: Maintenance and Accounting. The Maintenance Department's costs of $300,000 are allocated on the basis of machine hours. The Accounting Department's costs of $120,000 are allocated on the basis of the number of employees within a specific department. The direct departmental costs for A and B are $300,000 and $500,000, respectively. Maintenance Accounting A B Machine hours 480 20 2,300 200 Number of employees 2 2 8 4 What are the total service department costs allocated to Department A using the step method if the maintenance department costs are allocated first

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Explanation:

Allocation of service costs - Accounting

Particulars Calculation Maintenance Dept A Dept B Total

Number of

employees Given 2 8 4 14

Cost to be allocated $120,000 x 2/14 $17,142.86

$120,000 x 8/14 $68,571.43

$120,000 x 4/14 $ 34,285.71$

1,20,000.00

Allocation of service costs - Maintenance

Particulars Calculation Dept A Dept B Total

Machine hours Given 2300 200 2500

Cost to be allocated $317,142x 2300/2500 $ 2,91,771.43

$317,142x 200/2500 $ 25,371.43 $ 3,17,142.86

Particulars Maintenance Accounting Department A Department B

Department cost before allocation $ 3,00,000.00 $ 1,20,000.00 $ 3,00,000.00 $ 5,00,000.00

Allocation:

Accounting Department $ 17,142.86 $ -1,20,000.00 $ 68,571.43 $ 34,285.71

Balance $ 3,17,142.86 $ - $ 3,68,571.43 $ 5,34,285.71

Maintenance Department $ -3,17,142.86 $ 2,91,771.43 $ 25,371.43

Total Costs after allocation $ - $ 6,60,342.86 $ 5,59,657.14

B. The joint cost to be allocated to product X will be in the proportion of Net realizable value at the point of split off. Further total joint costs should be reduced by the revenue from by product Z.