Production departments using the direct method

Question

Problem:

The Greater Insurance Company has two service departments — actuarial (S1) and premium rating (S2), and two production departments — marketing and sales.  The distribution of each service department's efforts to the other departments is shown below:

FROM                                                           TO                              

                                     Actuarial         Premium     Marketing      Sales

S1                                    0%                  40%            25%             35%

S2                                    50%                 0%             10%             40%

The direct operating costs of the departments (including both variable and fixed costs) were as follows:

Actuarial              $80,000
Premium Rating    $30,000
Marketing             $50,000
Sales                    $60,000

Required:

Question 1: Allocate the service department costs to the production departments using the direct method.

Question 2: Allocate the service department costs to the production departments using the step method.

Question 3: Why do organizations use budgeted rates instead of actual rates to allocate the costs of support departments to each other and to user departments and divisions? Explain.