Step Method with Three Service Departments
Model, Inc., produces model automobiles made from metal. It operates two production departments, Molding and Painting, and has three service departments, Administration, Accounting, and Maintenance. The accumulated costs in the three service departments were $270,000, $375,000, and $198,000, respectively. Management is concerned that the costs of its service departments are getting too high. In particular, managers would like to keep the costs of service departments under $3.50 per unit on average. You have been asked to allocate service department costs to the two production departments and compute the unit costs.
The company decided that Administration costs should be allocated on the basis of square footage used by each production and service department. Accounting costs are allocated on the basis of number of employees. Maintenance costs are allocated on the basis of the dollar value of the equipment in each department. The use of each base by all departments during the current period follows:
|
|
Used by
|
|
Allocation Base
|
Administration
|
Accounting
|
Maintenance
|
Molding
|
Painting
|
|
Building area
|
10,000
|
30,000
|
20,000
|
360,000
|
90,000
|
|
Employees
|
18
|
10
|
12
|
70
|
100
|
| Equipment value (in thousands) |
$6.00
|
$120.00
|
$17.50
|
$312.00
|
$162.00
|
Direct costs of the Molding Department included $237,500 in direct materials, $337,500 in direct labor, and $112,500 in overhead. The Painting Department's direct costs consisted of $210,000 in direct materials, $200,000 in direct labor, and $75,000 in overhead.
Required
a. Using the step method, determine the allocated costs and the total costs in each of the two producing departments. Ignore self-usage (for example, ignore work done by Administration for itself). Rank orders the allocation as follows: (1) Maintenance, (2) Accounting, and (3) Administration.
b. Assume that 100,000 units were processed through these two departments. What is the unit cost for the sum of direct materials, direct labor, and overhead (1) for Molding, (2) for Painting, and (3) in total?
c. Compute the cost per unit for the service department costs allocated to the production departments. Did the company meet management's standards of keeping service department costs below $3.50 per unit?