San Juan Minerals (SJM) has two service departments and two operating departments. Operating data for these departments for last year are as follows: Costs of the Maintenance Department are allocated on the basis of machine hours. Cafeteria costs are allocated on the basis of number of employees. San Juan Minerals does not distinguish between variable and fixed overhead costs.Assume that San Juan Minerals uses the step-down method to allocate service department costs, starting with Maintenance. The total overhead allocated from Cafeteria to Processing would be closest to:
A) $21,316
B) $22,398
C) $21,279
D) $23,643

Question

San Juan Minerals (SJM) has two service departments and two operating departments. Operating data for these departments for last year are as follows:  Costs of the Maintenance Department are allocated on the basis of machine hours. Cafeteria costs are allocated on the basis of number of employees. San Juan Minerals does not distinguish between variable and fixed overhead costs.Assume that San Juan Minerals uses the step-down method to allocate service department costs, starting with Maintenance. The total overhead allocated from Cafeteria to Processing would be closest to:
A) $21,316 
B) $22,398 
C) $21,279 
D) $23,643

Quizplus · Accepted Answer

To allocate the service department costs using the step-down method, we first allocate the costs of the Maintenance department to both the Cafeteria and Processing departments. Then, we allocate the costs of the Cafeteria department to the Processing department.

1. Allocate Maintenance costs:
Maintenance department costs = $120,000
Machine hours used by Maintenance department = 12,000

Allocation rate = $120,000 ÷ 12,000 machine hours = $10 per machine hour

Maintenance costs allocated to Cafeteria department: 
Machine hours used by Cafeteria department = 5,000
Allocated maintenance costs = $10 per machine hour x 5,000 machine hours = $50,000

Maintenance costs allocated to Processing department:
Machine hours used by Processing department = 20,000
Allocated maintenance costs = $10 per machine hour x 20,000 machine hours = $200,000

2. Allocate Cafeteria costs:
Cafeteria department costs = $80,000
Number of employees in Cafeteria department = 10
Total number of employees in both departments = 300
Employees in Processing department = 290

Allocation rate = $80,000 ÷ 300 employees = $266.67 per employee

Cafeteria costs allocated to Processing department:
Employees in Processing department = 290
Allocated Cafeteria costs = $266.67 per employee x 290 employees = $77,333.30

Therefore, the total overhead allocated from Cafeteria to Processing would be $200,000 (allocated Maintenance costs) + $77,333.30 (allocated Cafeteria costs) = $277,333.30 ≈ $22,398. The closest option to this value is B, so the answer is B.

San Juan Minerals (SJM) Has Two Service Departments and Two