Problem:
Denver Building Maintenance provides cleaning services for a variety of clients. The company has 2 producing divisions, residential and commercial, and 2 service departments, personnel and administrative. The company uses an activity-based allocation system in each of its producing divisions. Previously, the costs of service support departments has been unallocated. However, the company has decided to allocate all service department costs to the producing departments personnel on the basis of the number of employees and administrative on the basis of the direct costs of the activities in each division. Denver uses a process map as part of its activity-based allocation system.
Top of process map = Personnel department = $92,000
Administrative department is shown separately and it contains 5 people at $180,000
Map broken down into 2 divisions: Residential and Commercial
1. Residential:
Activity 1: 3 People
Cost: $60,000
Activity 2: 12 people
Cost: $240,000
2. Commercial department
Activity 3: 18 people
Cost: $400,000
Activity 4: 0 people
Cost: $90,000
Activity 5: 8 people
Cost: $110,000
Question 1. Determine the costs allocated to the residential and commercial divisions using the direct method.
Question 2. Determine the costs allocated to the residential and commercial divisions using the step-down method. The personnel department costs should be allocated first.
Question 3. Explain how costs would be allocated to each customer in both the residential and commercial divisions.