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Cost allocation - direct and step method

Problem 7
The Greater Insurance Company has two service departments -- actuarial (S1) and premium rating (S2), and two production departments -- marketing and sales. The distribution of each service department's efforts to the other departments is shown below:

FROM TO
Actuarial Premium Marketing Sales
S1 0% 40% 25% 35%
S2 50% 0% 10% 40%

The direct operating costs of the departments (including both variable and fixed costs) were as follows:

Actuarial $80,000
Premium Rating $30,000
Marketing $50,000
Sales $60,000

Required:
Question 1a- Allocate the service department costs to the production departments using the direct method.

Question 1b- Allocate the service department costs to the production departments using the step method.

Question 2- Why do organizations use budgeted rates instead of actual rates to allocate the costs
of support departments to each other and to user departments and divisions? Explain.

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Solution Summary

The solution explains how to allocate costs using direct method and step method

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