Question: Direct and Step-Down Allocations, Activity-Based Allocation M&O Partners provides consulting services for a variety of clients. The company has two producing divisions, one for retail companies and one for industrial companies, and two service departments, personnel and administrative. Until now the company has not allocated service department costs. However, M&O has decided to allocate these costs to the producing departments using an activity-based allocation system. The retail division has Activity 1 and Activity 2 and the industrial division has Activity 3, Activity 4, and Activity 5. The company has decided to allocate personnel costs on the basis of number of employees and administrative costs on the basis of the direct costs of the activities in each division. However, administrative services are provided only to activities 2 and 3, so no administrative costs are allocated to activities 1, 4, and 5. Data for the activities follow:
1. Determine the costs allocated to the retail and industrial divisions using the direct method.
2. Determine the costs allocated to the retail and industrial divisions using the step-down method. The personnel department costs should be allocated first.