Exercise $7-4$

Spivey Company has two service departments and two operating departments. Budgeted costs and budgeted activity in the various departments for the current year are shown below:

Service Departments Operating Departments

A B $12$

Departmental costs $$126,000$ $$70,000$ $$300,000$ $$500,000$

Square feet occupied $1,0002,0008,00010,000$

Number of employees $2030150200$

Machine hours $40,00060,000$

The costs of Service Department A are allocated first on the basis of square feet of space occupied. The costs of Service Department B are then allocated on the basis of number of employees in other departments. Predetermined overhead rates in the operating departments are based on machine hours.

Required:

$($a$)$ Assuming the company uses the direct method to allocate service department costs to operating departments. Prepare a schedule showing the allocation of service department costs to other departments.

$($b$)$ Assuming the company uses the step method to allocate service department costs to operating departments. Prepare a schedule showing the allocation of service department costs to other departments.