Required information Skip to question The following information applies to the questions displayed below Tennessee Company manufactures a specialized fitting for industrial machinery at the Stephens Street Facility The facility has five departments Two departments (Casting and Finishing) are production departments The other three departments (Purchasing, Human Resources, and Information Technology) are considered service departments The accumulated costs in the three service departments in the most recent period were $100,000, $160,000, and $80,000, respectively The corporate management at Tennessee as been concerned that the costs of the service departments are getting too high As a result, the plant manager has been told that the bonus payments to plant management (the plant manager and the five department managers) will not be paid if the cost of the allocated service departments is above $9 75 per unit in either production department The product costing system at the plant currently uses the step method of service department cost allocation, although that is a decision choice of the plant controller Information Technology (IT) costs are allocated first, followed by Human Resources (HR), and then Purchasing IT costs are allocated on the basis of IT calls (requests for service) HR costs are allocated on the basis of employees Purchasing costs are allocated on the basis of purchase orders (POs) The use of each base by all departments during the most recent period follows Used by Allocation Base Purchasing Human Resources Information Technology Casting Finishing Purchase orders 500 760 1,140 6,080 1,520 Employees 90 100 180 315 315 IT calls 9,600 4,800 30,000 39,600 66,000 Direct costs of the Casting Department (including department overhead, but before allocation of any service department costs) were $450,000 in the most recent period Direct costs in the Finishing Department (again including department overhead, but before allocation of any service department costs) were $525,000 Required Using the current system for allocating service department costs, determine the allocated costs and the total costs in each of the two producing departments (Casting and Finishing) ( Hint Ignore any of its own services by a service department ) Assume that 20,000 units were processed through these two departments in the most recent period What is the per unit allocated service department cost for each of the two production departments Based on your analysis, will the bonus be paid if the most recent period's costs and activity are repeated Explain Repeat the analysis in requirement (a) assuming the Stephens Street facility uses the direct method to allocate service department costs Based on your analysis, will the bonus be paid if the most recent period's costs and activity are repeated and the direct method is used to allocate service department costs Explain Prepare a short report to corporate managers on your assessment of the effectiveness of the bonus plan as a means to control service department costs Use any visualizations that illustrate your points

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Required information Skip to question [The following information applies to the questions displayed below.] Tennessee Company manufactures a specialized fitting for industrial machinery at the

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[The following information applies to the questions displayed below.]

Tennessee Company manufactures a specialized fitting for industrial machinery at the Stephens Street Facility. The facility has five departments. Two departments (Casting and Finishing) are production departments. The other three departments (Purchasing, Human Resources, and Information Technology) are considered service departments. The accumulated costs in the three service departments in the most recent period were $100,000, $160,000, and $80,000, respectively. The corporate management at Tennessee as been concerned that the costs of the service departments are getting too high. As a result, the plant manager has been told that the bonus payments to plant management (the plant manager and the five department managers) will not be paid if the cost of the allocated service departments is above $9.75 per unit in either production department.

The product costing system at the plant currently uses the step method of service department cost allocation, although that is a decision choice of the plant controller. Information Technology (IT) costs are allocated first, followed by Human Resources (HR), and then Purchasing. IT costs are allocated on the basis of "IT calls" (requests for service). HR costs are allocated on the basis of employees. Purchasing costs are allocated on the basis of purchase orders (POs). The use of each base by all departments during the most recent period follows:

	Used by
Allocation Base	Purchasing	Human Resources	Information Technology	Casting	Finishing
Purchase orders	500	760	1,140	6,080	1,520
Employees	90	100	180	315	315
IT calls	9,600	4,800	30,000	39,600	66,000

Direct costs of the Casting Department (including department overhead, but before allocation of any service department costs) were $450,000 in the most recent period. Direct costs in the Finishing Department (again including department overhead, but before allocation of any service department costs) were $525,000.

Required:

Using the current system for allocating service department costs, determine the allocated costs and the total costs in each of the two producing departments (Casting and Finishing). (Hint: Ignore any of its own services by a service department.)
Assume that 20,000 units were processed through these two departments in the most recent period. What is the per-unit allocated service department cost for each of the two production departments?
Based on your analysis, will the bonus be paid if the most recent period's costs and activity are repeated? Explain.
Repeat the analysis in requirement (a) assuming the Stephens Street facility uses the direct method to allocate service department costs.
Based on your analysis, will the bonus be paid if the most recent period's costs and activity are repeated and the direct method is used to allocate service department costs? Explain.
Prepare a short report to corporate managers on your assessment of the effectiveness of the bonus plan as a means to control service department costs. Use any visualizations that illustrate your points.