Muckenfuss Clinic uses the step-down method to allocate service department costs to operating departments. The clinic has two service departments, Personnel and Information Technology (IT), and two operating departments, Family Medicine and Geriatric Medicine. Data concerning those departments follow: Personnel costs are allocated first on the basis of employees and Information Technology costs are allocated second on the basis of Personnel costs.In the first step of the allocation, the amount of Personnel Department cost allocated to the Family Medicine Department is closest to:
A) $21,604
B) $24,096
C) $45,008
D) $22,500

Question

Muckenfuss Clinic uses the step-down method to allocate service department costs to operating departments. The clinic has two service departments, Personnel and Information Technology (IT), and two operating departments, Family Medicine and Geriatric Medicine. Data concerning those departments follow:  Personnel costs are allocated first on the basis of employees and Information Technology costs are allocated second on the basis of Personnel costs.In the first step of the allocation, the amount of Personnel Department cost allocated to the Family Medicine Department is closest to:
A) $21,604 
B) $24,096 
C) $45,008 
D) $22,500

Quizplus · Accepted Answer

To allocate the service department cost using the step-down method, we need to first allocate the Personnel Department cost based on the number of employees in each department. Here's how we can calculate the amount of Personnel Department cost allocated to the Family Medicine Department:

- The total Personnel Department cost is $180,000.
- The Personnel Department has 10 employees in total, 6 of whom work in the Family Medicine Department and 4 of whom work in the Geriatric Medicine Department.
- Therefore, the ratio of employees in the Family Medicine Department to the total employees in the Personnel Department is 6/10 = 0.6.
- Using this ratio, we can allocate $180,000 x 0.6 = $108,000 of Personnel Department cost to the Family Medicine Department.

Now, we need to allocate the Information Technology cost based on the Personnel Department cost allocated in the previous step. Here's how we can calculate the amount of Information Technology cost allocated to the Family Medicine Department:

- The total Information Technology cost is $90,000.
- The ratio of Personnel Department cost allocated to the Family Medicine Department to the total Personnel Department cost allocated is $108,000 / ($108,000 + $72,000) = 0.6.
- Using this ratio, we can allocate $90,000 x 0.6 = $54,000 of Information Technology cost to the Family Medicine Department.

Therefore, the total amount of service department cost allocated to the Family Medicine Department is $108,000 + $54,000 = $162,000, which is closest to choice letter D) $22,500.

Muckenfuss Clinic Uses the Step-Down Method to Allocate Service Department