The Scarsdale Clinic has two service departments (S1 and S2) and two "production" departments (P1 and P2). The service departments service the "production" departments as well as each other, and studies have shown that S2 provides the greatest amount of service. Which one of the following choices correctly denotes an allocation that would occur under the direct method?
A)S1's cost would be allocated to P1 and P2.
B)P1's cost would be allocated to P2.
C)S2's cost would be allocated to S1.
D)P1's cost would be allocated to S1.
E)P1's cost would be allocated to S2.

Question

Quizplus · Accepted Answer

Under the direct method, service department costs are allocated directly to the production departments that use them. Therefore, S1's cost would be allocated to P1 and P2, as they are the only production departments. Option A correctly denotes this allocation. Option B is incorrect because P1's cost should not be allocated to another production department but to one of the service departments. Option C is incorrect because S2's cost should not be allocated to another service department. Option D is incorrect because P1's cost should not be allocated to another service department. Option E is incorrect because P1's cost should not be allocated to S2, which is a service department.

The Scarsdale Clinic Has Two Service Departments (S1 and S2)