Question 1: Support Department's Cost Allocation

Nano Limited manufactures two products. The production of Product 1 is entirely carried out in the Green department. The entire production of Product 2 takes place in the Yellow department. Nano Limited is able to produce these two products with the help of two support departments: Brick (a materials-handling

department) and Hebel (a power-generating department).

Supplied By Brick. Hebel. Green. Yellow

Brick. - 100 250 150

Hebel. 500 - 100 400

In the Brick department, the work that is done is measured by the direct labour-hours spent on the handling of materials. In the Hebel department, the work done is measured by the kilowatts of power that are used.

For the coming year, the following budgeted costs have been outlined for the support departments:

Brick Department Hebel Department

(Materials Handling). (Power Generation)

Variable indirect $ 70,000 $10,000

labour and indirect

materials costs

Supervision 10,000 10,000

Depreciation 20,000 20,000

$100,000 $40,000

+Power costs +Materials-handling costs

For the coming year, the budgeted costs of the operating departments are $1,500,000 for the Green

department and $800,000 for the Yellow department.

The cost of supervision is a salary cost. In Hebel department, depreciation is calculated based on straight- line depreciation of power-generation equipment which has reached its 19th year of its estimated 25-year

useful life. This is an old, but well-maintained piece of equipment.

Required

1. What is the allocation of costs of support departments Brick and Hebel to operating departments Green and Yellow? Use the following methods to report your results.

(a) the direct method, (b) the step-down method (allocate department Brick first)

(c) the reciprocal method

There is an outside company that has offered to supply all the power required by the Nano Limited and

to provide all the services that are currently provided by the Nano Limited's power department. There will be a fee of $40 per kilowatt-hour of power that will be charged for this service. Do you think Nano should

accept the offer? Explain and justify your answer.