QUESTION 1: Part 1: Rank on percentage of services provided to other service departments. Power generating department provides the 20% of services to material handling department: 150/ (150+375+225) = 150/750 = 20% This 20% of $48,000 Power Generation Department Cost is $9,600. Material handling department provides the 50% of the services to power generation department. 600/ (600+120+480) = 600/1200 = 50% This 50% of $150,000 Power Generation Department Cost is $75,000. Step down method for cost allocation on the basis of ranking as calculated above

225 480 600 QUESTION I (19 Marks) Rose Richard Company has two products. Product I is manufactured entirely in Department X. Product 2 is manufactured in Department Y to produce these two products the Rose Richard Company has two support departments. Material Handling Department and Power Generating Department. An analysis of the work done by Material Handling and Power Generating Department in a typical period follows: Used By Supplied by Material Handling Power Generating Department X Department Y Material Handling 150 375 Power generating 120 The work done by Material Handling Department is measured by the direct labor hours of material handling time. The work done by Power Generating Department is measured by the kilowatt hours per hour. The budgeted costs of the support department for the coming year are as follows: Material Handling Power Generation Variable indirect labor and $105,000 $12.000 indirect material costs Supervision $15.000 $12,000 Depreciation $30,000 $24,000 Total Costs $150.000 548,000 The budgeted costs of the operating departments for the coming year are $2,250,000 for Department X and $1,200,000 for Department Y Part-3 Initially it appears that the cost of power generation is $40 per and add the material handling cost. So the Rose Richard Should accept the offer to supply all the power needed by rose Richard company and to provide all services of present power department. There may be less power requirement when purchases from outside, hence reduction in cost will increase the profit of the company