Suarez Tool and Die has three service departments:

Budgeted ……………………….. Department Costs

Cafeteria, revenue of ……………… $100,000 less

expenses of $250,000 …………………. $  150,000

Engineering …………………………….. 1,600,000

General factory administration ………….. 950,000

Cost-allocation bases are budgeted as follows:

1. Suarez allocates all service department costs directly to the production departments without allocation to other service departments. Show how much of the budgeted costs of each service department are allocated to each production department. Choose the most logical cost-allocation base for each service department. To plan your work, examine number 2 before undertaking this question.

2. The company has decided to use the step-down method of cost allocation. General factory administration would be allocated first, then cafeteria, then engineering. Cafeteria employees work 36,000 labor hours per year. There were 60 engineering employees with 120,000 total labor hours. Recompute the results in number 1, using the step-down method. Show your computations. Compare the results in numbers 1 and 2. Which method of allocation do you favor? Why?

3. Refer to Exhibit 12-1 on page 482. For each type of cost assignment made in number 2 using the step-down method, indicate the assignment type from Exhibit 12-1

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Engineering Hours Worked for Production Departments 50,000 20,000 Production Total Labor Departments Machining Assembly Finishing and painting Employees 120 540 60 Hours 300,000 720,000 120,000 10,000