Critically evaluate this allocation method
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Direct Method
Service Departments Profit Centers
Service Dept. Electricity Water Ingots Stainless steel Total
Electricity 2500 kwh 2500 kwh 3000 kwh 2000 kwh 10000 kwh
Water 1000 gal 800 gal 1000 gal 2000 gal 4800 gal
The total operating costs of the two service departments are
Electricity $80 million
Water $60 million
Total cost $140 million
Require
- Service department costs are allocated to profit centers using the step-down method and direct method. Water is the first service department allocated. Compute the cost of electricity per kilowatt-hour using step-down method and direct method.
- Critically evaluate this allocation method
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The following problem helps critically evaluate an allocation method.
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Direct method Ingots stainless steel
total operating costs of electricity 48000000 32000000 80000000
total operating costs of water 20000000 40000000 60000000
hours ...
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