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Cost Allocation Scenario

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Scenario: A Company has two production departments (Planting and Harvesting) and two service departments (Cafeteria and Repairs). The service department costs must be allocated to production departments. Management has decided to allocate the cost of the cafeteria to other departments based upon the average number of employees and the cost of the Repairs Department based upon the number of machine hours used. (please view attachment to see costs)

Regardless of the allocation method used, Pine Tar Forest Products always starts the allocation process with the Cafeteria Department. If A Company distributes costs directly (direct method) from service departments to productions departments, what additional overhead costs should be allocated from the service departments to the Planting Department?

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Solution Summary

1. Explains how to allocate the costs of two Service Department (Cafeteria and Repairs) to the two Production Departments that utilize these services.

2. The Direct Method of Cost Allocation is used in this scenario.

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Solution: The direct method allocates all costs to the production departments ignoring all services provided by service departments to each ...

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