Advanced: Reapportionment of service department costs and a discussion of how fully allocated costs can be useful Megalith Manufacturing divides its plant into two main production departments, Processing and Assembly. It also has three main service-providing

departments. Heat, Maintenance and Steam, which provide services to the production departments and to each other. The costs of providing these services are allocated to departments on the bases indicated below:

Requirements:

(a) Allocate the costs of service departments to production departments, using each of the following methods:
(i) direct (3 marks)
(ii) step-down (4 marks)
(iii) reciprocal (6 marks)

(b) What is the main problem likely to be encoun¬
tered in using the information generated by any of the above systems of allocation, given that a substantial proportion of the costs incurred in each service department are fixed for the year? How would you attempt to overcome this problem? (5 marks)

(c) Given that cost allocation is an essentially arbitrary process, explain how total costs which include substantial amounts of allo¬ cated costs can be useful.

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Employees (number) Proportion of total maintenance hours worked in each department (%) Proportion of store's floorspace taken up by each department's materials (%) Output levels (per thousand standard equivalent units) Data relating to Question 3.28 Personnel and Administration Maintenance Stores Moulding Extrusion Finishing Total 20 4 3 25 16 10 78 5 10 15 20 10 10 20 20 40 10 100 440 40 - 30 40 187 149 336 100 Direct costs (000): Material Labour Variable overheads - Fixed overheads 15 15 36 23 - 330 170 20 155 25 18.72 168.75 115.2 81 - 71.25 151.8 30 17.28 449.3 371.7 67