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# Direct and step-down methods with dual rates (Petro-X)

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Petro-X uses the direct method for allocating both fixed and variable costs from the physical plant and equipment maintenance support departments to operating departments X and Y. The bases for allocation are as follows:
Physical plant:
Fixed costs on the basis of square feet occupied
Variable costs on the basis of number of employees
Equipment maintenance
Fixed costs on the basis of budgeted machine hours
Variable costs on the basis of expected maintenance hours

Costs for physical plant and equipment maintenance are:
Physical equipment Equipment maintenance
Fixed costs \$39,000 \$75,000
Variable costs \$18,000 \$60,000

Allocation bases for all four departments are:
Support Operating
Physical plant Equip. Maintenance Department X Department Y
Square feet 1,600 3,900 5,000 8,000
Number of employees 10 12 40 50
Budgeted machine hours 0 100 10,000 15,000
Budgeted maintenance hours 10 20 200 400

A. Assign the support department costs to departments X and Y using the direct method
B. Assign the support department costs to departments X and Y using the step-down method with the physical plant costs allocated first.
C. Assign the support department costs to departments X and Y using the step-down method with equipment maintenance costs allocated first.
D. Under the step-down method, what criterion should be used to decide which support department costs to allocate first?

#### Solution Preview

Dear student,
>> Solution is provided in a separate excel file attached in the following parts. <<

(a) Table showing Allocation of Service Department costs to Production Departments- Direct Method

(b) Table showing Allocation of Service Department costs to Production Departments- Step Down Method ...

#### Solution Summary

The direct and step-down methods with dual rates for Petro-X is examined.

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