Allocating Service Department Costs: Allocation Basis Alternatives Chapter 7 | Additional Topics in Product Costing

(LO2)

Boston Fabricators has two producing departments, P| and P2, and one service department, S1. Estimated direct overhead costs per month are as follows:

te ces. $125,000 ASO 200,000 Signer 66,000 Other data follow:

Number of employees ..............

Production capacity (units)...........

Space occupied (square feet)

Five-year average percent of S1’s service output used Required P1 Ths)

50,000 2,500 65%

P2 25 30,000 7,500 35%

a. For each of the following allocation bases, determine the total estimated overhead cost for Pl and P2 after allocating S1 cost to the producing departments.

1. Number of employees 2. Production capacity in units 3. Space occupied 4. Five-year average percentage of S1 services used De Estimated direct overhead costs. (Round your answer to the nearest dollar.)

b. For each of the five allocation bases, explain the circumstances (including examples) under which each allocation base might be most appropriately used to allocate service department cost in a manufacturing plant such as Boston Fabricators. Also, discuss the advantages and disadvantages that might result from using each of the allocation bases.