Ockey Corporation uses the direct method to allocate service department costs to operating departments. The company has two service departments, Information Technology and Personnel, and two operating departments, Fabrication and Customization. Information Technology Department costs are allocated on the basis of computer workstations and Personnel Department costs are allocated on the basis of employees.The total Fabrication Department cost after service department allocations is closest to:
A) $270,110
B) $277,969
C) $280,623
D) $274,308

Question

Ockey Corporation uses the direct method to allocate service department costs to operating departments. The company has two service departments, Information Technology and Personnel, and two operating departments, Fabrication and Customization.  Information Technology Department costs are allocated on the basis of computer workstations and Personnel Department costs are allocated on the basis of employees.The total Fabrication Department cost after service department allocations is closest to:
A) $270,110 
B) $277,969 
C) $280,623 
D) $274,308

Quizplus · Accepted Answer

To allocate service department costs to operating departments using the direct method, we need to follow these steps:

1. Allocate Information Technology Department costs based on the number of computer workstations used by each operating department. 
2. Allocate Personnel Department costs based on the number of employees in each operating department. 
3. Add the allocated service department costs to the operating department costs to get the total department costs.

Using this method, we can calculate the allocated costs as follows:

- Information Technology Department costs:
Fabrication: 5/40 x $68,900 = $8,612.50 
Customization: 35/40 x $68,900 = $60,037.50
Total allocated IT costs = $68,650

- Personnel Department costs:
Fabrication: 120/300 x $55,600 = $22,240 
Customization: 180/300 x $55,600 = $33,360 
Total allocated personnel costs = $55,600

Now, we can add the allocated service department costs to the operating department costs to get the total department costs:

- Fabrication Department cost = $182,500 (given) + $68,650 + $22,240 = $273,390
- Customization Department cost = $127,000 (given) + $60,037.50 + $33,360 = $220,397.50

Therefore, the total cost of the Fabrication Department after service department allocations is $273,390, which is closest to option C: $280,623.

Ockey Corporation Uses the Direct Method to Allocate Service Department