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:

During the last year, the services provtded were:

Requirements:

(a) Allocate the costs of service departments to production departments, using each of the following methods

(i) direct (ii) step-down (iii) reciprocal

(b) What is the main problem likely to be encountered 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 you would attempt to overcome this problem?

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

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Employees (number) Personnel and Administration Maintenance Stores Moulding 20 4 3 25 16 Extrusion Finishing Total 10 78 10 10 100 00 Proportion of total maintenance hours worked in each department (%) Proportion of stores floorspace taken up by each department's materials (%) Output levels (per thousand standard equivalent units) 5 10 10 15 20 40 40 10 1 20 30 40 187 149 336 Direct costs (2000): Material 36 Labour 155 Variable overheads Fixed overheads 15 2215 23 330 170 20 18.72 168.75 115.2 81 71.25 151.8 30 17.28 449.3 371.7 67 100 100