Grant Corporation Grant Corporation distributes its service department overhead costs directly to producing departments without allocation to the other service departments. Information for January is presented here.
Refer to Grant Corporation. Using the step method, how much of Grant Corporation's Utilities Department cost is allocated between Departments A and B?

Question

Grant Corporation Grant Corporation distributes its service department overhead costs directly to producing departments without allocation to the other service departments. Information for January is presented here.
 Refer to Grant Corporation. Using the step method, how much of Grant Corporation's Utilities Department cost is allocated between Departments A and B?

Quizplus · Accepted Answer

Step 1: Allocate the Utilities Department's costs to the two service departments based on their respective square footage. 
Utilities Department cost allocated to Department A = ($180,000 x 9,000 sq. ft.) / (9,000 sq. ft. + 6,000 sq. ft.) = $135,000
Utilities Department cost allocated to Department B = ($180,000 x 6,000 sq. ft.) / (9,000 sq. ft. + 6,000 sq. ft.) = $90,000

Step 2: Allocate the service department costs (including the Utilities Department) to the producing departments based on their respective usage of the services provided. 
Department A Costs: 
Direct costs = $800,000 
Service department costs: 
Personnel Department = $66,000 
Purchasing Department = $40,000 
Utilities Department = $135,000 x (12,000 machine-hours / 24,000 machine-hours) = $67,500 
Total Department A costs = $973,500

Department B Costs: 
Direct costs = $500,000 
Service department costs: 
Personnel Department = $66,000 
Purchasing Department = $20,000 
Utilities Department = $90,000 x (12,000 machine-hours / 24,000 machine-hours) = $45,000 
Total Department B costs = $641,000

Therefore, the amount of Utilities Department cost allocated between Departments A and B using the step method is $67,500 + $45,000 = $112,500. 
To allocate this cost between Departments A and B, we need to know the proportion of machine-hours each department used: 
Department A = 8,000 machine-hours / 12,000 machine-hours = 2/3 
Department B = 4,000 machine-hours / 12,000 machine-hours = 1/3

Allocated Utilities Department cost to Department A = $112,500 x 2/3 = $75,000 
Allocated Utilities Department cost to Department B = $112,500 x 1/3 = $37,500

Therefore, the answer is C) $12,740.

Grant Corporation Grant Corporation Distributes Its Service Department Overhead Costs