Chapter 24, Problem 5E

To determine

Allocation of Indirect cost to Service and operating department:

Before allocation of cost of service department, it is necessary to allocate all the indirect cost associated with the all departments concernedso as to know the actual cost incurred by each department. After this process only, the total allocated cost of service department is re-allocated among operating department.

Requirement1:

To Determine: TheAllocation of Indirect expense among all the departments.

Answer to Problem 5E

Solution: The allocation of departmental expense shall be done on some suitable basis as under:

Supervision		Allocation	Percentage of allocation base			Cost to be	Allocated
		Base	Numerator	Denominator	% of total	Allocated	Cost
Department
Material		Employees	27	150	18.00%	82500	14850
Personnel		Employees	9	150	6.00%	82500	4950
Manufacturing		Employees	63	150	42.00%	82500	34650
Packaging		Employees	51	150	34.00%	82500	28050
Total			150		100.00%		82500

Utilities		Allocation	Percentage of allocation base			Cost to be	Allocated
		Base	Numerator	Denominator	% of total	Allocated	Cost
Department
Material		Sq. feet	25000	100000	25.00%	50000	12500
Personnel		Sq. feet	5000	100000	5.00%	50000	2500
Manufacturing		Sq. feet	55000	100000	55.00%	50000	27500
Packaging		Sq. feet	15000	100000	15.00%	50000	7500
Total			100000		100.00%		50000

Insurance		Allocation	Percentage of allocation base			Cost to be	Allocated
		Base	Numerator	Denominator	% of total	Allocated	Cost
Department
Material		Assets value	6000	60000	10.00%	22500	2250
Personnel		Assets value	1200	60000	2.00%	22500	450
Manufacturing		Assets value	37800	60000	63.00%	22500	14175
Packaging		Assets value	15000	60000	25.00%	22500	5625
Total			60000		100.00%		22500

Explanation of Solution

The Allocation of all indirect expense like Supervision, Utilities and insurance expense shall be done among the departments (service or operating) on some suitable basis. Like, Supervision expense shall be done on the basis of number of employees employed among the departments. The Utilities expense shall be allocated among the department on the basis of square feet of the area covered by the department. And the insurance expense shall be allocated on the assets value installed.

To determine

Requirement2:

To determine: The Summary of allocation sheet shall be made.

Answer to Problem 5E

Solution: The Summary of allocation has been prepared as under:

Indirect Expense Allocation Spreadsheet
		Allocation	Expense	Material	Personnel	Mfg	Packaging
		Base	Total	Deptt.	Deptt.	Deptt.	Deptt.
Indirect Expense
Supervision		Employees	82500	14850	4950	34650	28050
Utilities		Sq. feet	50000	12500	2500	27500	7500
Insurance		Assets value	22500	2250	450	14175	5625
Total Expense allocated			155000	29600	7900	76325	41175

Explanation of Solution

The indirect expense as allocated in the step-1 has been shown as a total of the respective department concerned for further analysis and allocation.

Conclusion

To conclude, it can be said that service department cost is an indirect cost for operating cost to be allocated among them on some suitable allocation base.

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