Barletta Corporation has one service department and three producing departments. The budget for the following year allocates the service department costs to the producing departments based on the number of employees in each department. Currently, the budget for the service department is $2,400,000 and the number of employees in each department is as follows:
Department 1: 100
Department 2: 50
Department 3: 150
During the year, due to sudden expanded growth, Department 2 has had to add 50 new employees; however the service department costs have not increased due to budget constraints.
a) What were the expected service department allocations at the beginning of the year to each production department?
b) What will be the actual allocations if it is based on the number of employees each department has at year end?
c) Comment on the reasonableness of the situation. What are the potential causes of any problems created by this allocation method?
This solution goes through cost accounting using the example of Barletta corporation.