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    Critically evaluate this allocation method

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    Please help with the following problem.

    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

    - 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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    Please see the attached file for a formatted solution.

    Direct method Ingots stainless steel
    total operating costs of electricity 48000000 32000000 80000000
    total operating costs of water 20000000 40000000 60000000
    hours ...

    Solution Summary

    The following problem helps critically evaluate an allocation method.