Pardee, Inc. allocates engineering costs on the basis of the supervisor's time and administration costs on the basis of the number of employees. The company's accountant determined that engineering provides more services to administration than administration provides to engineering. The following data have been collected: Support Departments Operating Departments
Engineering Administration Assembly Finishing
Direct costs $25,000 $15,000 $200,000 $350,000
Number of employees 15 10 300 450
Engineering supervisor's time 30% 15% 35% 20%
If the step-down method is used and engineering costs are allocated first, the fraction of engineering costs allocated to the assembly department will be:
A)35/55
B)35/100
C)35/70
D)35/85

Question

Quizplus · Accepted Answer

The step-down method allocates the costs of the support departments to other support departments and operating departments in a sequential manner, starting from the department that provides the most services to other departments.

In this case, engineering provides more services to administration than vice versa. Therefore, we'll allocate engineering costs first and then allocate administration costs based on the remaining costs after allocating engineering costs.

Step 1: Allocate engineering costs
Engineering costs to be allocated = $25,000
Total direct costs for all departments = $25,000 + $15,000 + $200,000 + $350,000 = $590,000
Fraction of engineering supervisor's time spent in each department:
- Assembly = 35%
- Finishing = 20%
- Administration = 15%
Total supervisor's time = 30% + 15% + 35% + 20% = 100%

Allocate engineering costs to assembly department:
Fraction of supervisor's time in assembly * engineering costs / total direct costs for all departments = 0.35 * $25,000 / $590,000 = $1,178.81

Step 2: Allocate administration costs
Administration costs to be allocated = $15,000
Total direct costs for remaining departments (assembly, finishing) = $200,000 + $350,000 = $550,000
Number of employees in each remaining department:
- Assembly = 300
- Finishing = 450

Allocate administration costs to assembly department:
Fraction of employees in assembly * administration costs / total number of employees in remaining departments = 300 / (300 + 450) * $15,000 / $15,000 = $5,000

Total costs allocated to assembly department = $1,178.81 + $5,000 = $6,178.81
Fraction of engineering costs allocated to assembly department = $1,178.81 / $25,000 = 35/70 = 0.5 or 50%

Therefore, the fraction of engineering costs allocated to the assembly department is 35/70 or 0.5. The correct answer is C.