Suppose the company uses the step-down method and Personnel Department costs are allocated first. The amount of this cost allocated to the Engineering Department would be:
A)$70,560
B)$0
C)$72,000
D)$78,400

Question

Quizplus · Accepted Answer

The question uses the step-down method and allocates Personnel Department costs first. Therefore, we allocate the Personnel Department costs of $10,800 to the Engineering Department (100% of the Personnel Department costs).
After the Personnel Department costs are allocated, we allocate the remaining costs of the Maintenance Department to the Engineering Department and the Production Department based on their usage of Maintenance Department services. The Maintenance Department costs are $61,200 ($72,000 - $10,800 allocated to Personnel Department).
Engineering Department's usage percentage is 70% ($84,000 ÷ $120,000) and Production Department’s usage percentage is 30% ($36,000 ÷ $120,000).
Therefore, the Engineering Department's share of the Maintenance Department costs is $42,840 ($61,200 × 70%), and its total allocated cost is $53,640 ($10,800 + $42,840). 
Hence, the correct answer is option C ($72,000).

Suppose the Company Uses the Step-Down Method and Personnel Department