Chapter 15, Problem 15.31P

Support-department cost allocations; single-department cost pools; direct, step-down, and reciprocal methods. The Martinez Company has two products. Product 1 is manufactured entirely in department X. Product 2 is manufactured entirely in department Y. To produce these two products, the Martinez Company has two support departments: A (a materials-handling department) and B (a power-generating department).

An analysis of the work done by departments A and B in a typical period follows:

	Used by
Supplied by	A	B	X	Y
A	—	400	1,000	600
B	1,500	—	250	750

The work done in department A is measured by the direct labor-hours of materials-handling time. The work done in department B is measured by the kilowatt-hours of power. The budgeted costs of the support departments for the coming year are as follows:

	Department A (Materials Handling)	Department B (Power Generation)
Variable indirect labor and indirect materials costs	$300,000	$ 30,000
Supervision	90,000	50,000
Depreciation	30,000	100,000
	$420,000	$180,000
	+ Power costs	+ Materials-handling costs

The budgeted costs of the operating departments for the coming year are $2,500,000 for department X and $1,900,000 for department Y.

Supervision costs are salary costs. Depreciation in department B is the straight-line depreciation of power-generation equipment in its 19th year of an estimated 25-year useful life; it is old, but well-maintained, equipment.

1. 1. What are the allocations of costs of support departments A and B to operating departments X and Y using (a) the direct method, (b) the step-down method (allocate department A first), (c) the step-down method (allocate department B first), and (d) the reciprocal method?
2. 2. An outside company has offered to supply all the power needed by the Martinez Company and to provide all the services of the present power department. The cost of this service will be $80 per kilowatt-hour of power. Should Martinez accept? Explain.