Littleton Medical Center (LMC) has three service departments (accounting, human resources, and janitorial/ maintenance) and two patient units: hospital and an outpatient clinic. The following table summarizes the operations of LMC for the last fiscal year.
Service Departments Service Department Cost (000)
Human resources........... $ 1,200
Accounting ........... $ 1,600
Janitorial /Maint. ........... $ 2,400
These department costs are allocated to the two patient units (hospital and clinic). The following table summarizes the allocation bases used to allocate each service department and the utilization of each allocation base.

Required:
a. Allocate the three service departments€™ costs (HR, Accounting, and Janitorial/ Maintenance) to the two patient units (Clinic and Hospital) using the direct allocation method.
b. Allocate the three service departments€™ costs (HR, Accounting, and Janitorial/ Maintenance) to the two patient units (Clinic and Hospital) using the step- down allocation method. The order of the three departments is: first, HR; second, Accounting; and third, Janitorial/ Maintenance.
c. What are the primary advantages of the step- down method compared to the direct allocationmethod?

Transcribed Image Text:

Service Departments Acctg 50 9,000 Patient Units Service Departments Human resources Accounting Janitorial Maint. HR JanMaint 150 100 Hospital Allocation Base 3,000 Employees 400,000 Square feet Clinic 50 8.000 2,000 6,000 150,000 4,000 Transactions(000)