Question

Donovan Steel has two profit centers: Ingots and Stainless Steel. These profit centers rely on services supplied by two service departments: electricity and water. The profit centers’ consumption of the service departments’ outputs (in millions) is given in the following table:


The total operating costs of the two service departments are
Electricity $ 80 million Water 60 million Total cost $ 140 million

Required:
a. Service department costs are allocated to profit centers using the step- down method. Water is the first service department allocated. Compute the cost of electricity per kilowatt- hour using the step- down allocation method.
b. Critically evaluate this allocationmethod.


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  • CreatedDecember 15, 2014
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