Gustavson Corporation uses the direct method to allocate service department costs to operating departments. The company has two service departments, Administrative and Facilities, and two operating departments, Assembly and Wholesaling. Administrative costs are allocated on the basis of employee hours and Facilities costs are allocated on the basis of space occupied. The total Wholesaling Department cost after the allocations of service department costs is closest to:
A)$337,530
B)$331,090
C)$340,240
D)$340,426

Question

Gustavson Corporation uses the direct method to allocate service department costs to operating departments. The company has two service departments, Administrative and Facilities, and two operating departments, Assembly and Wholesaling.  Administrative costs are allocated on the basis of employee hours and Facilities costs are allocated on the basis of space occupied. The total Wholesaling Department cost after the allocations of service department costs is closest to:
A)$337,530 
B)$331,090 
C)$340,240 
D)$340,426

Quizplus · Accepted Answer

To allocate Administrative costs, we use the following table:

| Department | Employee Hours | Rate per Hour | Total Cost |
|-----------|---------------|--------------|------------|
| Assembly  | 140           | $30          | $4,200     |
| Wholesaling | 60            | $30          | $1,800     |
| Total     | 200           |              | $6,000     |

To allocate Facilities costs, we use the following table:

| Department | Square Feet | Rate per Square Foot | Total Cost |
|-----------|-------------|---------------------|------------|
| Assembly  | 20,000      | $2                  | $40,000   |
| Wholesaling | 30,000      | $2                  | $60,000   |
| Total     | 50,000      |                     | $100,000  |

So the total cost allocated to the Wholesaling Department is $7,800 ($1,800 + $6,000) for Administrative costs and $60,000 for Facilities costs, which comes to a total of $67,800. Adding this to the original Wholesaling Department cost of $272,440, we get a total cost of $340,240. Therefore, the best choice is (C).

Gustavson Corporation Uses the Direct Method to Allocate Service Department