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Accounting: Step-down Cost Allocation

A company has two producing department, mechanical (M) division and electronic (E) division, in addition to three service departments, facility management (FM) division, receiving and handling (RH) division, and human resource (HR) division. The company's main production activity is assembling, from a variety of components purchased. The assembly work in the mechanical division heavily relies on labor force. Its costs depend primarily on the direct-labor hours. On the other hand, the electronic division is highly automated and its costs can be mainly determined by the number of components used in each product. The costs of facility management depend primarily on the space used. The costs of receiving and handling division depend primarily on the number of components handled. The costs of human resource depend primarily on the labor hours.
Two products, PM1 and PM2, are produced in the mechanical division. Another two products, PE1 and PE2, are produced in the electronic division. The material costs, number of components and labor hours used are listed in the table below.
Direct- Materials Cost
PM2 $130 PE2 $150
Number of Components
16 12
Direct- Labor Hours
6.0 0.8

PM1 $115
18 3.0
PE1 $100
8 1.0
The company's budget for 20X5 has been prepared and listed below.
FM RH HR M E
Space occupied (ft2) 6,000 2,000 60,000 30,000 Number of components used 8 15
Hint: FM is the only service department that its cost is allocated to other service departments.
(1) Allocate the costs of service departments using the step-down method.
(2) Compute the cost per direct-labor hour in the mechanical division and the cost per
component in the electronic division.
(3) Compute the cost per unit of the product for all four products.

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A company has two producing department, mechanical (M) division and electronic (E) division, in addition to three service departments, facility management (FM) division, receiving and handling (RH) division, and human resource (HR) division. The company's main production activity is assembling, from a ...

Solution Summary

The problem set deals with questions under accounting: Cost allocation with step-down method.

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