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    The direct and step-down method of costing

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    12-59 Allocating Costs Using Direct and Step-Down Methods

    Goal: Create an Excel spreadsheet to allocate costs using the direct method and the stepdown
    method. Use the results to answer questions about your findings.

    Scenario: Antonio Cleaning has asked you to help them determine the best method for
    allocating costs from their service departments to their producing departments.

    Additional background information for your spreadsheet appears in Fundamental Assignment Material
    12-B2.

    12-B2 Allocation of Service Department Costs
    Antonio Cleaning provides cleaning services for a variety of clients. The company has two producing
    departments, Residential and Commercial, and two service departments, Personnel and
    Administrative. The company has decided to allocate all service department costs to the producing
    departments-Personnel on the basis of number of employees and Administrative on the basis of
    direct department costs. The budget for 20X7 shows

    When you have completed your spreadsheet, answer the following questions:
    1. What are the total costs for the Residential department using the direct method?
    What are the total costs for the Commercial department using the direct method?
    2. What are the total costs for the Residential department using the step-down method?
    3. What are the total costs for the Commercial department using the step-down method?
    4. Which method would you recommend that Antonio Cleaning use to allocate their
    service departments' costs to their producing departments? Why?

    Step-by-Step:
    1. Open a new Excel spreadsheet.
    2. In column A, create a bold-faced heading that contains the following:
    Row 1: Chapter 12 Decision Guideline
    Row 2: Dallas Cleaning
    Row 3: Cost Allocations from Service Departments to Producing Departments
    Row 4: Today's Date
    3. Merge and center the four heading rows across columns A through H.
    4. In row 7, create the following bold-faced, center-justified column headings:
    Column B: Personnel
    Column C: Administrative
    Column D: Residential
    Column E: Commercial
    Column F: Total Res/Comm
    Column G: Total Admin/Res/Comm
    Column H: Grand Total
    5. Change the format of the column headings in row 7 to permit the titles to be displayed
    on multiple lines within a single cell.
    Alignment tab: Wrap Text: Checked
    Note: Adjust column widths so that headings use only two lines.
    Adjust row height to ensure that row is same height as adjusted headings.
    6. In column A, create the following row headings:
    Row 8: Direct Department Costs
    Row 9: Number of Employees
    Skip 2 rows
    Note: Adjust the width of column A to 27.14.
    7. In column A, create the following bold-faced, underlined row heading:
    Row 12: Direct Method:
    8. In column A, create the following row headings:
    Row 13: Direct Department Costs
    Row 14: Personnel Allocation
    Row 15: Administrative Allocation
    Row 16: Total Costs
    Skip 2 rows
    9. In column A, create the following bold-faced, underlined row heading:
    Row 19: Step-down Method:
    10. In column A, create the following row headings:
    Row 20: Direct Department Costs
    Row 21: Step 1-Personnel Allocation
    Row 22: Step 2-Administrative Allocation
    Row 23: Total Costs
    11. Use data from Fundamental Assignment 12-B2 to enter the amounts in columns B
    through E for rows 8, 9, 13, and 20.
    12. Use the appropriate calculations to do the totals in row 8 for columns F and H.
    Use the appropriate calculations to do the totals in row 9 for columns F and G.
    13. Use the appropriate formulas to allocate the costs from the service departments to the
    producing departments using each of the methods.
    14. Use the appropriate calculations to do the totals in columns B through E and in column H,
    rows 16 and 23.
    15. Format amounts in columns B through H, rows 8, 13, 16, 20, and 23 as
    Number tab: Category: Accounting
    Decimal: 0
    Symbol: $
    16. Format the amount in columns B through E, rows 14, 15, 21, and 22 as
    Number tab: Category: Accounting
    Decimal: 0
    Symbol: None
    17. Change the format of the total costs amounts in columns B through E, rows 16 and 23,
    to display a top border, using the default line style.
    Border tab: Icon: Top Border
    18. Change the format of the amounts in row 9, columns B through G to center justified.

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    Attachments

    Solution Preview

    Please see the attached spreadsheet.

    The difference between the two methods is, in essence, how to determine the level of burden placed on an operating division.
    The direct method simply chooses a denominator and ...

    Solution Summary

    Illustrated the steps to follow to determine the step-down and direct method of cost allocations

    $2.19

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