Yong Seng (YS) is a manufacturing firm. It has three support departments: A, B and C, and three operating departments: P, Q and R. Its support departments provide services to both other support and operating departments. Their usage is captured below:

Usage By

Support Depts Operating Depts

A B C P Q R

Departmental OH Costs $114,000 $179,000 $130,000

Support Department

A - 20% 20% 20% 20% 20%

B 20% - - 20% 30% 30%

C 20% 20% - 20% 20% 20%

YS uses the step down method to allocate support department costs to operating departments, and a plant wide method based on machine hours to allocate manufacturing overheads to products. Each operating department manufactures a line of products. YS prices its products on a cost plus mark-up basis.

Required:

(a)(i) Ryan, a new cost accountant, believes department B should be allocated first as it has the highest support department costs. Without performing any calculations, explain if Ryan is correct. (5m)

(ii) Ignoring your answer in part (i), calculate the support department costs allocated to each of the operating departments P, Q and R; by using the Step Down method beginning with department C, followed by department A, and finally B. Provide your final answer to the nearest dollar. (14m)

(b) Without performing any calculations, briefly explain if the overall profit of YS will change if YS uses the direct method to allocate support department costs instead. (4m)