The managers of Alphabet Co. are investigating the allocation of service department costs. They have gathered the following information to help in the analysis of their options.

The cost drivers for each department are as follows:

Department A...................................Kilowatt hours (kwh)

Department B...................................Square metres (m²)

Department C...................................Number of employees

Department X...................................Machine hours (MH)

Department Y...................................Direct labour hours (DLH)

Required:

A. Allocate the service department costs using the direct method.

B. Allocate the service department costs using the step-down method. Choose the order of allocation based on the amount of service provided (determined by costs).

C. Allocate the service department costs using the reciprocal method. Use either simultaneous equations or Excel Solver.

D. Explain each method to the managers. Provide the pros and cons of each method.

E. Identify which managers, if any, will be upset using each of the allocation methods. Explain why this manager might feel that s/he is being unfairly treated.

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Overhead Costs Service Service Service Department A $800,000 Department B $650,000 Department C $400,000 (Personnel) Production Production Department X $1,230,000 Department Y $370,000 (Power) (Maintenance) 33,300 kwh 800 kwh 1,200 kwh 500 kwh 35,000 kwh 1,000 m? 1,000 m? 1,000 m? 40,000 m? 5,000 m? 12 employees 21 employees 15 employees 147 employees 20 employees 500,000 MH 10,000 MH 250,000 DLH 60,000 DLH