Step Down Method Accounting Question Need Help

Question

Pietro Corporation uses the step-down method to allocate service department costs to operating departments. The company has two service departments, General Management and Physical Plant , and two operating departments , Sales and After Sales. Data concerning those departments follow:

 

Service Department : General Management : Departmental Cost : $36,550

Service Department : Physical Plant : Departmental Cost : $70,300

Operating Department : Sales : Departmental Cost : $412,500 After Sales : $480,880

Service Department : General Management : Employee Time : 5,000

Service Department : Physical Plant : Employee Time : 2,000

Operating Department :  Sales : Employee Time : 27,000

Operating Department : After Sales : Employee Time : 14,000

Service Department : General Management : Space Occupied : 1,000

Service Department : Physical Plant : Space Occupied : 1,000

Operating Department : Sales : Space Occupied : Sales : 38,000

Operating Department : After Sales : Space Occupied : After Sales : 7,000

 

General Management Department costs are allocated first on basis of employee time and Physical Department costs are allocated second on basis of space occupied. The total after sales department cost after allocations is closest to :

a) 516,196 b) 515,880 c) 503,980 d) 513,911 e) none

 

answer was c) but I need help with steps as to how.

 

Answer 1

Answer: c) 503,980 Step 1: Allocate General Management first General Management costs = 36,550 It is allocated first based on employee time.

Since General Management is the first service department being allocated, its cost goes to: • Physical Plant = 2,000 • Sales = 27,000 • After Sales = 14,000 Do not allocate to General Management itself.

Total employee time used for this allocation:

2,000 + 27,000 + 14,000 = 43,000 Now allocate the 36,550: • To Physical Plant:

36,550 × (2,000 / 43,000) = 1,700 • To Sales:

36,550 × (27,000 / 43,000) = 22,950 • To After Sales:

36,550 × (14,000 / 43,000) = 11,900 So after the first allocation: • Physical Plant = 70,300 + 1,700 = 72,000 • Sales gets 22,950 • After Sales gets 11,900 Step 2: Allocate Physical Plant second Now Physical Plant has 72,000 total cost to allocate.

Physical Plant is allocated based on space occupied. Since this is the second service department, it only allocates to the operating departments: • Sales = 38,000 • After Sales = 7,000 Total space for this allocation:

38,000 + 7,000 = 45,000 Now allocate the 72,000: • To Sales:

72,000 × (38,000 / 45,000) = 60,800 • To After Sales:

72,000 × (7,000 / 45,000) = 11,200 Step 3: Compute total After Sales department cost Start with original After Sales cost:

480,880

Add General Management allocation:

480,880 + 11,900 = 492,780

Add Physical Plant allocation:

492,780 + 11,200 = 503,980 Final Answer: 503,980 Why c is correct: The After Sales department receives: • 11,900 from General Management

• 11,200 from Physical Plant So:

480,880 + 11,900 + 11,200 = 503,980 That is why the correct answer is c) 503,980.