Armstrong Inc. uses the direct method for allocating service department costs from the Physical Plant and Equipment Maintenance support departments to operating departments X and Y. The bases for allocation are as follows: Physical Plant: fixed costs on the basis of square metres occupied and variable costs on the basis of number of employees. Equipment Maintenance: fixed costs on the basis of budgeted machine hours and variable costs on the basis of expected maintenance hours. Costs are as follows: Physical Plant Equipment Maintenance Fixed costs $39,000 $75,000 Variable costs $18,000 $60,000 Allocation bases are as follows: Support Departments Operating Departments Physical Plant Equipment Maintenance Department X Department Y Square metres 1,600 3,900 5,000 8,000 Number of employees 10 12 40 50 Budgeted machine hours 0 100 10,000 15,000 Budgeted maintenance hours 10 20 200 400 REQUIRED:

1. Assign the support department costs to Departments X and Y using the step-down method, with the physical plant costs allocated first.

2. Assign the support department costs to Departments X and Y using the step-down method, with the equipment maintenance costs allocated first.

3. Explain at least two of the problems that arise when allocated costs are used to charge for support services.