Advanced: Comparison of methods of reapportioning service department costs Puerile Plastics Ltd consists of six departments: persomiel and administration, maintenance, stores, moulding, extrusion and finishing. The accountant has collected data for the 12 months to 30 Septem¬ ber relating to the six departments, which is given below.

The accountant wishes to use the data to derive the selling prices of the firm’s products, based on their full costs. The selling price of each product will be equal to 250% of the product’s full cost. The market for the products is supplied by five large companies, of which Puerile Plastics Ltd is one, and ten small companies. Puerile Plastics Ltd has approximately a 20% market share. The stan¬ dard production quantities can be converted into standard equivalent units of output for each of the three production departments. The accountant is considering different ways of allocating the costs of the three service departments in order to obtain the full cost per standard equivalent unit, and hence the sales price of each product.

Required:

(a)Calculate the total cost for each of the three production departments using the direct method of allocation of the service departments’ costs. (4 marks)

(b) Calculate the total cost of each of the three production departments using the step-down (sometimes called step or sequential) method of allocation of the service departments’ costs. State any assumptions which you make.

(5 marks)

(c) Formulate the equations which will provide the total cost of each of the three production

. departments using the reciprocal or cross¬ allocation method of allocation of costs.

(4 marks)

(d) Compare and contrast the three methods of service cost allocation, using the results obtained in

(a) and

(b) above as examples.

(7 marks)

(e) Comment on the approach the accountant is considering for the derivation of the selling price of the products.