Russet Company has two Service Departments and two Producing Departments. Budgeted costs and budgeted activity in the various departments for the most recent year are presented below:
$\begin{array} {| l | r | r | r | r | }
\hline & \begin{array} { r }
\text { Custodial } \
\text { Services }
\end{array} & \text { Cafeteria } & \begin{array} { r }
\text { Cutting } \
\text { Department }
\end{array} & \begin{array} { r }
\text { Assembly } \
\text { Department }
\end{array} \
\hline \text { Overhead Costs } & \$ 252,000 & \$ 140,000 & \$ 600,000 & \$ 900,000 \
\hline \begin{array} { l }
\text { Square Metres of Space } \
\text { Occupied }
\end{array} & 1,000 & 2,000 & 8,000 & 10,000 \
\hline \text { Number of Employees } & 20 & 30 & 150 & 200 \
\hline \text { Machine Hour } & & & 40,000 & 60,000 \
\hline
\end{array}$Service Department costs are allocated to Producing Departments with the costs of Custodial Services allocated first on the basis of square metres of space occupied. The costs of the Cafeteria are allocated on the basis of number of employees. Predetermined overhead rates in the Cutting and Assembly departments are based on machine hours. Round all calculations to the nearest dollar.

- Under the step-down method of allocation,what would be the amount of Custodial Services cost allocated to the Assembly Department?
A) $0.
B) $120,000.
C) $126,000.
D) $140,000.

Question

Russet Company has two Service Departments and two Producing Departments. Budgeted costs and budgeted activity in the various departments for the most recent year are presented below:
$\begin{array} {| l | r | r | r | r | } 
\hline & \begin{array} { r } 
\text { Custodial } \
\text { Services }
\end{array} & \text { Cafeteria } & \begin{array} { r } 
\text { Cutting } \
\text { Department }
\end{array} & \begin{array} { r } 
\text { Assembly } \
\text { Department }
\end{array} \
\hline \text { Overhead Costs } & \$ 252,000 & \$ 140,000 & \$ 600,000 & \$ 900,000 \
\hline \begin{array} { l } 
\text { Square Metres of Space } \
\text { Occupied }
\end{array} & 1,000 & 2,000 & 8,000 & 10,000 \
\hline \text { Number of Employees } & 20 & 30 & 150 & 200 \
\hline \text { Machine Hour } & & & 40,000 & 60,000 \
\hline
\end{array}$Service Department costs are allocated to Producing Departments with the costs of Custodial Services allocated first on the basis of square metres of space occupied. The costs of the Cafeteria are allocated on the basis of number of employees. Predetermined overhead rates in the Cutting and Assembly departments are based on machine hours. Round all calculations to the nearest dollar.

- Under the step-down method of allocation,what would be the amount of Custodial Services cost allocated to the Assembly Department?
A) $0.
B) $120,000.
C) $126,000.
D) $140,000.

Quizplus · Accepted Answer

The Custodial Services cost is allocated based on square metres of space occupied. The total space is 1,000 + 2,000 + 8,000 + 10,000 = 21,000 square metres. The Assembly Department occupies 10,000 square metres out of the total 21,000 square metres. Therefore, the Assembly Department's share of Custodial Services cost is (10,000 / 21,000) * $252,000 = $120,000. However, this calculation does not account for the step-down method where Service Department costs are allocated to other Service Departments before being allocated to Producing Departments. Since the Custodial Services are allocated first, its costs are not allocated to the Cafeteria (another Service Department), meaning the calculation should only consider the space occupied by the Producing Departments (8,000 + 10,000 = 18,000 square metres). Thus, the corrected allocation to the Assembly Department is (10,000 / 18,000) * $252,000 = $140,000. My initial calculation was incorrect; the correct answer is based on the direct allocation to producing departments without reallocating service department costs to other service departments under the step-down method.

Russet Company Has Two Service Departments and Two Producing Departments