Page 247 "Required Use 4 or more decimal places (e.g., 33.3333%) in your calculations. 1. What are the costs allocated to the two production departments using (a) the direct method, (b) the step method (with the sourcing department going first), and (c) the reciprocal method? 2. What are the total costs in the production departments after allocation? 7-36 Departmental Cost Allocation; Outsourcing; Outside Price Mckeoun Enterprises is a large machine tool company [LO 7-3, 7-4] now experiencing alarming increases in maintenance expense in each of its four production departments. Maintenance costs are currently allocated to the production departments on the basis of labor hours incurred in the production department. To provide pressure for the production departments to use less maintenance, and to provide an incentive for the maintenance department to become more efficient, McKeoun has decided to investigate new methods of allocating maintenance costs. One suggestion now being evaluated is a form of outsourcing. The producing departments could purchase maintenance service from an outside supplier. That is, they could choose either to use an outside supplier of maintenance or to be charged an amount based on their use of labor hours. The following table shows the labor hours in each department, the allocation of maintenance cost based on labor hours, and the cost to purchase the equivalent level of maintenance service from an outside maintenance provider. Direct Labor Hours Direct Labor Production Allocation Base Hours Department (Percent) Allocation Cost Outside Price A 20% $ 90,000 $115,000 B 30 135,000 92,000 C 10 45,000 69,000 D 40 180.000 184,000 Total 100% $450,000 $460,000 Required Use 4 or more decimal places (e.g., 33.3333%) in your calculations. 1. As a first step in moving to the outsourcing approach, McKeoun is considering an allocation based on the price of the outside maintenance supplier for each department. Calculate the cost allocation on this basis and compare it to the current labor hours basis. 2. If McKeoun follows the proposed plan, what is likely to happen to the overall use of maintenance? How will each department manager be motivated to increase or decrease the use of maintenance? What will be the overall effect of going to the new plan? 7-37