**Cost Allocation Exercise**A company has two service departments (S1 and S2) and two manufacturing divisions (M1 and M2). The following information is available:| Costs Incurred | Service Department | Percent Allocable to | S1 | S2 | M1 | M2 ||-----------------|---------------------|----------------------|-----|-----|-----|-----|| $200,000 | S1 | | - | 20% | 30% | 50% || $500,000 | S2 | | 50% | - | 20% | 30% |**Questions:**2. Using the direct method, what proportion of S1's costs will be allocated to M2? - a. 20% - b. 37.5% - c. 50% - d. 62.5%3. Using the direct method, how much of the service department costs will be allocated to M1? - a. $195,250 - b. $205,750 - c. $308,750 - d. $326,4504. Using the step method, how much of the service department costs will be allocated to M1? - a. $243,000 - b. $265,700 - c. $274,000 - d. $302,5005. Using the reciprocal method, how should the total service department costs of S1 be expressed? - a: S1 = $290,000 + 0.5 × S2 - b: S1 = $290,000 + 0.2 × S2 - c: S1 = $290,000 + 0.3 × S2 - d: S1 = $500,000 + 0.5 × S26. Using the reciprocal method, how much of the service department costs will be allocated to M1? - a. $241,000 - b. $286,000 - c. $304,000 - d. $403,000Note: Use these data and methods to explore different cost allocation scenarios and their impact on departmental budgeting and financial analysis.

Direct method and step down allocation method are two ways to allocate cost of service departments…

Answered: Service Department $1 Percent Allocable…

Service Department $1 Percent Allocable to ŠK1 20% MD direct method, what proportion of $1's costs will be allocated to M

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Concept explainers

Overheads

In cost accounting, overhead refers to those expenses which occur during the operating of a business. Overhead includes the fixed, variable, or semi-variable which is not directly involved with a company product or service. It is very important to analyze overhead expense as it helps the company in determining how much a company must charge for its products and services so that they can generate profit. Overhead expenses depend upon the nature of the business operations.

Question

**Cost Allocation Exercise**

A company has two service departments (S1 and S2) and two manufacturing divisions (M1 and M2). The following information is available:

| Costs Incurred | Service Department | Percent Allocable to | S1 | S2 | M1 | M2 |
|-----------------|---------------------|----------------------|-----|-----|-----|-----|
| $200,000 | S1 | | - | 20% | 30% | 50% |
| $500,000 | S2 | | 50% | - | 20% | 30% |

**Questions:**

2. Using the direct method, what proportion of S1's costs will be allocated to M2?
- a. 20%
- b. 37.5%
- c. 50%
- d. 62.5%

3. Using the direct method, how much of the service department costs will be allocated to M1?
- a. $195,250
- b. $205,750
- c. $308,750
- d. $326,450

4. Using the step method, how much of the service department costs will be allocated to M1?
- a. $243,000
- b. $265,700
- c. $274,000
- d. $302,500

5. Using the reciprocal method, how should the total service department costs of S1 be expressed?
- a: S1 = $290,000 + 0.5 × S2
- b: S1 = $290,000 + 0.2 × S2
- c: S1 = $290,000 + 0.3 × S2
- d: S1 = $500,000 + 0.5 × S2

6. Using the reciprocal method, how much of the service department costs will be allocated to M1?
- a. $241,000
- b. $286,000
- c. $304,000
- d. $403,000

Note: Use these data and methods to explore different cost allocation scenarios and their impact on departmental budgeting and financial analysis.

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