Third Company classifies its operations into three departments, commercial sales, residential sales, and property management. The owner
Question:
Third Company classifies its operations into three departments, commercial sales, residential sales,
and property management. The owner wants to know the full cost of operating each department.
Direct departmental costs and several allocation bases associated with each follow:
______ _
Available Allocation Bases______________________
Direct Costs Number of Employees/ Assets Employed Revenue
Salespersons
Administration P1,500,000 20 P2,480,000
N/A
Accounting
990,000 15 1,364,000 N/A
Promotion 720,000
12
720,000 N/A
Commercial Sales 10,490,000
45
900,000
P10,000,000
Residential Sales 9,179,000
210
1,440,000 18,000,000
Property Management 398,400 18
540,000
2,000,000
The support departments are shown in a benefit provided ranking. Third Co. has selected the following
allocation bases for each department: Number of employees/salespersons for administration; Amount
of assets employed for accounting; and Revenue for promotion.
Required:
a.
Use the direct method to allocate the support department costs to the revenue generating
departments and determine the operating income for each department.
b. Allocate the support department costs to the revenue generating departments using the step
method and determine the operating income for each department. Which department is the
most profitable?
Expert Answer:
a To allocate support department costs using the direct method we assign each support departments co... View the full answer
