Cieslak, Inc., allocates service department costs to operating departments using the step-down method. The company has two service departments, Administration and Physical Plant, and two operating departments, Assembly and Testing. Data concerning those departments follow: Administration Department costs are allocated first on the basis of employee time and Physical Plant Department costs are allocated second on the basis of space occupied. The total Testing Department cost after allocations is closest to:
A)$623,963
B)$622,864
C)$623,760
D)$613,680

Question

Cieslak, Inc., allocates service department costs to operating departments using the step-down method. The company has two service departments, Administration and Physical Plant, and two operating departments, Assembly and Testing. Data concerning those departments follow:  Administration Department costs are allocated first on the basis of employee time and Physical Plant Department costs are allocated second on the basis of space occupied. The total Testing Department cost after allocations is closest to:
A)$623,963 
B)$622,864 
C)$623,760 
D)$613,680

Quizplus · Accepted Answer

First, let's allocate the Administration Department costs to the two operating departments based on employee time:

Administration Department costs to Assembly Department = $800,000 x 40% = $320,000
Administration Department costs to Testing Department = $800,000 x 60% = $480,000

Now, we can allocate the Physical Plant Department costs to the two operating departments based on space occupied:

Physical Plant Department costs to Assembly Department = $1,200,000 x 60% = $720,000
Physical Plant Department costs to Testing Department = $1,200,000 x 40% = $480,000

So the total costs for each operating department are:

Assembly Department = $320,000 + $720,000 = $1,040,000
Testing Department = $480,000 + $480,000 = $960,000

Therefore, the closest answer choice is C) $623,760.