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    Cost allocation - direct and step method

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    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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    https://brainmass.com/business/financial-accounting-bookkeeping/cost-allocation-direct-and-step-method-360337

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

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