Devon allocates support department costs using the direct method and estimated costs. The support department costs are budgeted at $88,000 for department A, $63,000 for department B, and $40,000 for department C. These costs are allocated using the proportion of total cost the firm would pay to an outside service provider.

REQUIRED

A. Allocate budgeted support department costs using the direct method, first using labor hours and then with the outside cost proportions as the allocation bases.

B. Could Devon Inc. uses the cost of purchasing outside as an efficiency benchmark for the cost of both the support departments and the user departments? List several advantages and disadvantages of this approach.

Support Operating Dept. A Dept. B Dept. C Casting Machine Direct costs Labor hours Machine hours $88,000 $63,000 $40,000 6,000 4,000 2,000 10,000 Costs if support services were purchased outside: Department A Department B Department C $50,000 $60,000 $40,000 $30,000 $20,000 $30,000