Strzelecki Corporation uses the step-down method to allocate service department costs to operating departments. The company has two service departments, Service Department A and Service Department B, and two operating departments, Operating Department X and Operating Department Y. Data concerning those departments follow: Service Department A costs are allocated first on the basis of allocation base A and Service Department B costs are allocated second on the basis of allocation base B.The total Operating Department Y cost after allocations is closest to:
A) $320,486
B) $318,473
C) $320,260
D) $307,660

Question

Strzelecki Corporation uses the step-down method to allocate service department costs to operating departments. The company has two service departments, Service Department A and Service Department B, and two operating departments, Operating Department X and Operating Department Y. Data concerning those departments follow:  Service Department A costs are allocated first on the basis of allocation base A and Service Department B costs are allocated second on the basis of allocation base B.The total Operating Department Y cost after allocations is closest to:
A) $320,486 
B) $318,473 
C) $320,260 
D) $307,660

Quizplus · Accepted Answer

Using the step-down method, we first allocate the costs of Service Department A to Service Department B and Operating Department X based on its allocation base (i.e. number of employees). Then, we allocate the costs of Service Department B to Operating Department X and Operating Department Y based on its allocation base (i.e. number of machine hours).

Step 1: Allocate Service Department A costs to Service Department B and Operating Department X

Total Service Department A costs = $150,000
Allocation base A (number of employees) = 50 employees in Service Department A and 100 employees in Service Department B
Allocation rate = $150,000 / 50 employees = $3,000 per employee
Service Department A cost allocated to Service Department B = 100 employees x $3,000 per employee = $300,000
Service Department A cost allocated to Operating Department X = 50 employees x $3,000 per employee = $150,000

Step 2: Allocate Service Department B costs to Operating Department X and Operating Department Y

Total Service Department B costs = $200,000
Allocation base B (number of machine hours) = 10,000 machine hours in Operating Department X and 20,000 machine hours in Operating Department Y
Allocation rate = $200,000 / 30,000 machine hours = $6.67 per machine hour
Service Department B cost allocated to Operating Department X = 10,000 machine hours x $6.67 per machine hour = $66,700
Service Department B cost allocated to Operating Department Y = 20,000 machine hours x $6.67 per machine hour = $133,300

Total Operating Department Y cost after allocations = Operating Department Y direct cost + Service Department A allocation + Service Department B allocation
= $120,000 + $0 + $133,300
= $253,300

Therefore, the closest option is C) $320,260.

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