Question
Kirby Industries has two service departments (S1 and S2) and three production departments (P1, P2, and P3). The following table shows the costs incurred at
Kirby Industries has two service departments (S1 and S2) and three production departments (P1, P2, and P3). The following table shows the costs incurred at the two service departments, as well as the proportion of services provided by the two service departments to the other departments.
Costs Incurred | Service Department | Percent Allocable to | ||||
S1 | S2 | P1 | P2 | P3 | ||
$1,000,000 | S1 | 20% | 30% | 40% | 10% | |
260,000 | S2 | 40% | 20% | 15% | 25% |
For example, service department S1 incurred $1,000,000 while providing 20 percent of its services to service department S2, 30 percent to production department P1, 40 percent to production department P2, and 10 percent to production department P3.
For simplicity, the direct costs incurred by the production departments are ignored.
The general manager of Kirby Industries wanted to know how the service department costs can be allocated to the production departments in order to facilitate performance evaluation.
Required:
Allocate the service department costs to the production departments using the direct method.
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