Global Book and Music Store, Direct, Sequential (step down) methods
Global Book and Music Store has two service departments, Warehouse and Data Center. Walter Burke, controller of Global Book and Music Store, wants department managers to be aware that their use of other service departments costs the firm a substantial amount of money. Warehouse Department costs of $350,000 are allocated on the basis of budgeted warehouse-hours. Data Center Department costs of $150,000 are allocated based on the number of computer log-on hours. Data on warehouse-hours and number of computer log-on hours are as follows:
Required:
a) Allocate the two service department costs using the direct method.
b) What is the direct method chief limitation?
c) Allocate the two service department costs using the step-down method with Warehouse Department as the first department allocated.
d) Does this method make an improvement over the direct method? Explain.
Support Departments Production Departments
Warehouse
Department Data Center
Department Music Books Total
Costs $90,000.00 $180,000.00 $270,000.00
Warehouse-hours % 2,000 4,000 7,000 7,000 20,000
10% 20% 35% 35% 100%
Number of computer hours
% 900 1,800 3,600 3,700 10,000
9% 18% 36% 37%