1.

Tan and Co Consultancy is a small firm which has two service departments, Finance and Human
Resources, as well as two operating departments providing advisory services to clients, Merger
and Acquisition and International Taxation. Finance costs are allocated based on payroll costs
while Human Resources costs are allocated based on number of employees. The following
information has been gathered for the current year:

Human Merger and International

Finance
Resources Acquisition Taxation
Total Direct department costs $36,000 $18,000 $400,000 $700,000
Department payroll costs $30,000 $16,000 $300,000 $450,000
Number of employees 2 2 10 20

i) If the direct method is used to allocate costs, what is the total departmental cost for
International Taxation after all the costs have been allocated?

Direct
Merger and International
Finance Human Resource
Acquisition Taxation Advisory
Direct department costs $36,000 $18,000 $400,000 $700,000
Department payroll costs $30,000 $16,000 $300,000 $450,000
Number of employees 2 2 10 20
Department payroll costs % 40.00% 60.00%
Allocate Finance $14,400 $21,600
Dept plus Finance $6,000 $12,000
Number of employees % 33.33% 66.67%
Total Dept Costs $420,400 $733,600

ii) If the step-down method is used to allocate costs and the Finance Department is
allocated first, what is the total departmental cost for International Taxation after all the
costs have been allocated?

Step Down
Merger and International
Finance Human Resource
Acquisition Taxation Advisory
Direct department costs $36,000 $18,000 $400,000 $700,000
Department payroll costs $30,000 $16,000 $300,000 $450,000
Number of employees 2 2 10 20
Department payroll costs % 2.09% 39.16% 58.75%
Allocate Finance $752 $14,099 $21,149
Dept plus Finance $18,752 $414,099 $721,149
Number of employees % 33.33% 66.67%
$6,251 $12,501
Total Dept Costs $420,350 $733,650

iii) Comment on the difference in the total departmental cost for International Taxation
under the Direct and the Step Down methods calculated in the previous two questions.
Provide possible reason(s) for the size of the difference.

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  Difference is small.
 For normal profit making companies, service departments expenses should be relatively a lot
smaller than the operating departments’ expenses. Therefore, only a small total has to be
allocated to the operating departments and whichever method is used, it should not make a
big difference to the final department cost.

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2. Simpson Pte Ltd uses the step-down method to allocate service department costs to
operating departments. The company has two service departments, Administration and
Facilities, and two operating departments, Assembly and Finishing.

Administration Facilities Assembly Finishing

Departmental costs $44,160 $77,040 $248,170 $504,070
Labour Hours 5,000 2,000 34,000 10,000
Space occupied 8,000 1,000 38,000 9,000

Administration Department costs are allocated first on the basis of labour hours and
Facilities Department costs are allocated second on the basis of space occupied. The
total Finishing Department cost after allocations was:

Administration Facilities Assembly Finishing

Departmental costs $44,160 $77,040 $248,170 $504,070

Allocation
Administration (44,160) 1,920 32,640 9,600
Facilities - ($78,960) 63,840 15,120
Total after allocation - - 344,605 528,790

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 3. MA Consultancy offers a variety of law services. The operating departments, Family Law,
Corporate Practice and Government Practice, are supported by 2 service departments,
Information Technology and Administration. The company provided the following data to be
used in its service department cost allocations:

Service Department Operating Department

Information Corporate Government
Department costs: ($) Technology Administration Family Law Practice Practice Total
Fixed 30,080 39,730 139,700 589,000 701,490 1,500,000
Variable 20,400 16,312 171,000 201,000 132,500 541,212
Total 50,480 56,042 310,700 790,000 833,990 2,041,212

Square feet of space

occupied 5,000 2,000 10,000 12,000 16,000 45,000
No. of files 25 30 60 111 129 355

No. of computers 15 12 10 20 22 79
No. of employees 12 10 8 15 17 62

The costs of the service departments are allocated by the step-down method starting with
Information Technology and using the allocation bases in the following table:

Service Departments Costs Allocation Bases

Information Technology Fixed Square feet of space occupied
Variable No. of computers

Administration Fixed No. of files

Variable No. of employees

Required

Compute the total overhead costs to the department of Family Law after the allocation of overhead
costs from the service departments.

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 Information Administration Family Law Corporate Government
Technology Practice Practice
Department costs - Fixed 30,080 39,730 139,700 589,000 701,490
Allocation:
Information Tech costs (30,080) 1,504 7,520 9,024 12,032
Square feet of space occupied
2k, 10k, 12k, 16k / 40k 5.0% 25.0% 30.0% 40.0%

- 41,234 147,220 598,024 713,522

Administration costs (41,234) 8,247 15,257 17,731
Number of files
60, 111, 129 / 300 20.0% 37.0% 43.0%

Total fixed costs - - 155,467 613,281 731,253

Information Administration Family Law Corporate Government

Technology Practice Practice
Department costs - Variable 20,400 16,312 171,000 201,000 132,500
Allocation:
Information Tech costs (20,400) 3,825 3,188 6,375 7,013
Number of computers
12, 10, 20, 22 / 64 18.8% 15.6% 31.3% 34.4%

- 20,137 174,188 207,375 139,513

Administration costs (20,137) 4,027 7,551 8,558
Number of employees
8, 15, 17 / 40 20.0% 37.5% 42.5%

Total variable costs - - 178,215 214,926 148,071

Total overhead costs 333,682 828,207 879,323

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4. ABC Bank has two service departments (Administration and Communications), and two
operating departments (Deposits and Loans). The following data summarize costs and
other information for October 2009 prior to service cost allocations. Administration
department costs tend to vary over employee hours and communication department
costs the number of employees.
Administration Communications Deposits Loans
Direct Costs $30,000 $40,000 $150,000 $100,000
Employee Hours 300 200 600 400
No. of Employees 15 20 200 300

a) Assuming that ABC Bank allocates service department costs to operating

departments using the Direct Method, what amount of Administration
Department costs is allocated to Deposit Department?

b) Assuming that ABC Bank allocates service department costs to operating

departments using the Step-Down Method in the order of Administration and
Communications, what amount of service department costs is allocated to Loan
Department?

a)
Admin Deposits Loans
(30,000) 18,000 12,000
Employee Hours 30,000 * 600/1,000 30,000 * 400/1,000

OR
Deposits
30,000x(600/1000)=18,000

Loans
30,000x(400/1000)=12,000

b)
Admin Communication Deposits Loans
30,000 40,000 150,000 100,000
Emp’ee Hrs (30,000) 5,000 15,000 10,000
1200 Hrs 30,000*200/1200 30,000*600/1200 30,000*400/1200
Emp’ee No. (45,000) 18,000 27,000
500 45,000*200/500 45,000*300/500

OR

Loan
30,000x(400/1200)+[30,000x(200/1200)+40,000]x(300/500)=37,000

Deposit
30,000x(600/1200)+[30,000x(200/1200)+40,000]x(200/500)=33,000

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McGraw-Hill (Asia) 2015 ©