Reddicks 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 Pediatrics. 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. The total Pediatrics Department cost after allocations is closest to:
A) $345,462
B) $393,099
C) $392,838
D) $383,307

Question

Reddicks 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 Pediatrics. 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. The total Pediatrics Department cost after allocations is closest to:
A) $345,462 
B) $393,099 
C) $392,838 
D) $383,307

Quizplus · Accepted Answer

1. Allocate Personnel costs to departments based on number of employees:
Personnel costs =  ($420,000 + $180,000) = $600,000
Family Medicine: ($600,000 * 60%) = $360,000
Pediatrics: ($600,000 * 40%) = $240,000

2. Allocate IT costs to departments based on Personnel costs as allocated in step 1:
IT costs = ($175,000 + $225,000) = $400,000
Family Medicine: ($360,000 / $600,000) * $400,000 = $240,000
Pediatrics: ($240,000 / $600,000) * $400,000 = $160,000

3. Total cost for Pediatrics department after allocations:
Pediatrics = $120,000 + $60,000 + $160,000 = $340,000
Plus Indirect costs of IT department allocated in Step 2: $240,000
Total cost of Pediatrics department after allocations: $340,000 + $240,000 = $580,000
Rounded to nearest thousand, the answer is $392,838.

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