Step Down Method Accounting Question Need Help Today !

Question

Daniels 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 Costs : $36,550 Employee Time 5,000 Space Occupied : 1,000

 

Service Department :

 

Physical Plant : Departmental Costs : $70,300 Employee Time : 2,000 Space Occupied : 1,000

 

Operating Departments

 

Sales : Departmental Costs : $412,500 Employee Time : 27,000 Space Occupied : 38,000

 

After Sales : Departmental Costs : $480,880 Employee Time : 14,000 Space Occupied : 7,000

 

Question : General Management Department Costs are allocated first on basis of employee hours and Physical Plant Department costs are allocated second on basis of space occupied. The total after-sales department costs 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.

 

Solution was shown as :

 

1) General To Physical : 36,550 x 2,000 / 43,000 = $1,700 (I DO NOT GET WHERE THE 43,000 COMES FROM)

2) General to After Sales : 36,550 x 14,000 / 43,000 = $11,900 (AGAIN I DO NOT GET WHERE 43,000 COMES FROM)

3) Physical Total = 70,300 + 1,700 = 72,000

4) Physical to After Sales : 72,000 x 7,000 / 45,000 = $11,200 (I DO NOT GET WHERE THE 45,000 COMES FROM)

5) Total After Sales = 480,880 + 11,900 + 11,200 = 503,980

 

Thanks.

Answer 1

The 43,000 comes from adding the employee hours for all the departments receiving costs from General Management:

2,000 + 27,000 + 14,000 = 43,000

We don't include General Management's own 5,000 hours.

So General Management allocates:

To Physical Plant:

36,550 × (2,000 / 43,000) = 1,700

To After Sales:

36,550 × (14,000 / 43,000) = 11,900

Physical Plant now has:

70,300 + 1,700 = 72,000

The 45,000 comes from the space occupied by Sales and After Sales:

38,000 + 7,000 = 45,000

General Management isn't included because its costs have already been allocated.

So Physical Plant allocates this amount to After Sales:

72,000 × (7,000 / 45,000) = 11,200

Finally:

480,880 + 11,900 + 11,200 = 503,980

So the answer is C) $503,980.