Dainels Corporation uses the step-down method to allocate service department costs to operating departments. The company has two service departments, General Management and Physical Plant, and two operating departments, Sales and After-Sales. Data concerning those departments follow: General Management Department costs are allocated first on the basis of employee time and Physical Plant Department costs are allocated second on the basis of space occupied. The total After-Sales Department cost after allocations is closest to:
A) $516,196
B) $515,880
C) $503,980
D) $513,911

Question

Dainels Corporation uses the step-down method to allocate service department costs to operating departments. The company has two service departments, General Management and Physical Plant, and two operating departments, Sales and After-Sales. Data concerning those departments follow:  General Management Department costs are allocated first on the basis of employee time and Physical Plant Department costs are allocated second on the basis of space occupied. The total After-Sales Department cost after allocations is closest to:
A) $516,196 
B) $515,880 
C) $503,980 
D) $513,911

Quizplus · Accepted Answer

First, we need to allocate the costs of the two service departments to the operating departments using the step-down method.

Allocating General Management costs:

Total General Management cost = $412,000

General Management department employees:

Sales department: 2 employees

After-Sales department: 6 employees

Total: 8 employees

Allocation rate = $412,000 / 8 employees = $51,500 per employee

Allocating General Management costs:

Sales department: (2 employees x $51,500 per employee) = $103,000

After-Sales department: (6 employees x $51,500 per employee) = $309,000

Allocating Physical Plant costs:

Total Physical Plant cost = $144,000

Physical Plant space:

Sales department: 10,000 square feet

After-Sales department: 20,000 square feet

Total: 30,000 square feet

Allocation rate = $144,000 / 30,000 square feet = $4.80 per square foot

Allocating Physical Plant costs:

Sales department: (10,000 square feet x $4.80 per square foot) = $48,000

After-Sales department: (20,000 square feet x $4.80 per square foot) = $96,000

Total allocated costs:

Sales department: $103,000 + $48,000 = $151,000

After-Sales department: $309,000 + $96,000 = $405,000

Therefore, the total After-Sales department cost after allocations is closest to $515,880 (option B).

Dainels Corporation Uses the Step-Down Method to Allocate Service Department