Allocating the service department costs by step method


Response to the following problem:

Computer Information Services is a computer software consulting company. Its three major functional areas are computer programming, information systems consulting, and software training. Carol Birch, a pricing analyst in the Accounting Department, has been asked to develop total costs for the functional areas. These costs will be used as a guide in pricing a new contract. Birch assembled the following data on overhead from its two service departments, the Information Systems Department and the Facilities Department.

                                         Service Department                  User Department

                                       System        Facilities                    Computer Programming     Consulting     Training        Total

Budgeted Overhead           $50,000       $25,000                          $75,000                    $110,000       $85,000       $345,000

Info systems (hours)                             400                                 1,100                        600                900            3,000

Facilities (thousand sq. ft.)     200                                                  400                          600                800            2,000

Allocated on the basis of hours of computer usage.

Allocated on the basis of floor space.

Required:

Allocate the service department costs to the user departments using the step method.

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Cost Accounting: Allocating the service department costs by step method
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