Service Cost Allocation
1. Direct Method
Service department OH cost is directly allocated to the revenue producing departments only.
2. Step Method
Service department OH cost is allocated not only to the revenue producing departments, but also to
other service departments with the following conditions:
o Use of benefit provided ranking table
o If the OH cost of the service department is already exhausted, then that service department will
not receive any allocation from other service departments.
3. Algebraic / Reciprocal Method
No use of benefit provided ranking table.
Even if the OH cost of the service department is already exhausted, that service department will still
receive any allocation from other service departments.
Problem
A Manufacturing Company has two production departments (Fabrication and Assembly) and two service departments
(General Factory Administration and Factory Maintenance).
A summary of the year's overhead costs and other data for each department prior to allocation of service department
costs appears below:
The overhead costs of the General Factory Administration Department and Factory Maintenance Department are
allocated on the basis of direct labor hours and square footage occupied respectively. It is the company’s policy that the
order of distribution is based on the highest peso amount of costs originating in the service departments.
1. Under the DIRECT METHOD, what is the total overhead cost allocated to the Fabrication department?
a. 315,972
b. 292,500
c. 269,028
d. 311,528
2. Under the STEP METHOD, what is the total overhead cost of the Assembly department?
a. 272,097
b. 312,903
c. 5,122,097
d. 4,850,000
3. Under the ALGEBRAIC / RECIPROCAL METHOD, what is the total overhead cost to be allocated by the Factory
Maintenance department?
a. 425,000
b. 250,000
c. 441,000
d. 450,000
Solutions
Item #1.
Allocation Table Application Table
Fabrication Assembly Total Fabrication Assembly
Gen. Fadmin 46,250 43,750 90,000 Gen. Fadmin 82,222 77,778
Fmaintenance 88,000 72,000 160,000 Fmaintenance 233,750 191,250
315,972 269,028
Gen. FAdmin OH allocated to Fabrication
(160,000 x 46.25/90) = 82,222
Gen. FAdmin OH allocated to Assembly
(160,000 x 43.75/90) = 77,778
FMaintenance OH allocated to Fabrication
(425,000 x 88/160) = 233,750
FMaintenance OH allocated to Assembly
(425,000 x 72/160) = 191,250
Item #2.
Allocation Table
Gen.
Fmaintenance Fadmin Fabrication Assembly Total
Fmaintenance - 40000 88,000 72,000 200,000
Gen. Fadmin - - 46,250 43,750 90,000
Application Table
Gen.
Fmaintenance Fadmin Fabrication Assembly
425,000 160,000 6,730,000 4,850,000
Fmaintenance (425,000) 85,000 187,000 153,000
Gen. Fadmin ___- ____ (245,000) 125,903 119,097
- - 7,042,903 5,122,097
Item #3.
Allocation Table
Fmaintenance Fen. Fadmin Fabrication Assembly Total
Fmaintenance -
40,000 88,000 72,000 200,000
Gen. Fadmin -
10,000 46,250 43,750 100,000
Fmaintenance Fen. Fadmin Fabrication Assembly
Fmaintenance - 0.20 0.44 0.36
Gen. Fadmin 0.10 - 0.4625 0.4375
FM = 425,000 + .10FA
FA = 160,000 + .20FM
FM = 425,000 + .10(160,000 + .20FM
FM = 425,000 + 16,000 + .02FM
FM = 441,000 + .02FM
FM = (441,000 / .98)
FM = 450,000
FA = 160,000 + .20(450,000)
FA = 160,000 + 90,000
FA = 250,000
Application Table
Fmaintenance Fen. Fadmin Fabrication Assembly
425,000 160,000 6,730,000 4,850,000
Fmaintenance (450,000) 90,000 198,000 162,000
Gen. Fadmin 25,000 (250,000) 115,625 109,375
- - 7,043,625 5,121,375
