When service department provides services to only production department then it is called as?

Exercises and Problems
12-1: The Bola Tie Company has two service departments (Departments A and B) and
three production departments (Departments X, Y and Z). Service Department A provides
services to all three production departments as well as to Service Department B.
However, Service Department B only provides services to the other service department
(Department A). In other words, Service Department B provides no services directly to
the production departments. Which of the following methods for allocating service
department costs makes the most sense in this situation?
(A) The direct method.
(B) The step-down method, beginning with Service Department A.
(C) The step-down method, beginning with Service Department B.
(D) We would want to know the costs incurred by each service department
before determining which allocation method makes the most sense.

12-2: The “Big One” accounting firm has three divisions: audit, tax and consulting; two
support departments: administration and human resources. The following table shows the
utilization of support department services by the user departments:
Administration
Human
Resources
Audit
Tax
Consulting
Administration 10% 30% 25% 35%
Human Resources 10% 30% 35% 25%
Which of the following allocation methods will result in the smallest allocation of
support department costs to the Consulting Division?
(A) The direct method.
(B) The step-down method, beginning with Administration.
(C) The step-down method, beginning with Human Resources.
(D) Cannot be determined from the information given.
12-3: One advantage of the step-down method of allocating service department costs to
production departments, over the direct method, is the following:
(A) Some interaction among service departments (i.e., service departments
providing services to other service departments) is accounted for.
(B) The step-down method is easier to apply (i.e., it is less complicated).
(C) All service department costs are eventually allocated to production
departments.
(D) All interaction among service departments (i.e., service departments
providing services to other service departments) is accounted for.
12-4: The MIS department of Coldwater Industries provides services to two other service
departments (Accounting and Personnel) and two factories. The cost of operating the
MIS department is $100,000 annually. The volume of services provided to Accounting,
Personnel, and the factories is measured by the number of computer terminals in each
area.
Factory X Factory Y Accounting Personnel
Number of terminals 30 10 40 20
Using the direct method of service department allocation, calculate the allocation of MIS
costs to Factory X.

12-5: Amber Industries has two service departments: Human Resources (H.R.) and
Accounting. These two service departments provide services to each other, and to three
factories, as shown in the following table:
Service
Department
Service Dept
Operating
Costs
Percentage of services provided by the service
department indicated in the far left column to each of the
factories and service departments
H.R. Accounting Factory
A
Factory
B
Factory
C
H.R. $350,000 15% 35% 40% 10%
Accounting $880,000 25% 25% 15% 35%
Required: Calculate the amount of service department costs that will be allocated to each
of the factories, using the Direct Method of service department cost allocation.
12-6: Global-Mega-Corp allocates the costs of three service departments to its three
production departments. The following table shows the percentage of services that each
service department provides to each production department and to the other two service
departments:
Human
Resources
Data
Processing
Legal
Department
Production
Dept 1
Production
Dept 2
Production
Dept 3
Human
Resources
15% 15% 35% 15% 20%
Data
Processing
15% 10% 25% 30% 20%
Legal
Department
15% 25% 25% 20% 15%
The following table shows the costs incurred by each service department, prior to the
allocation of any service department costs to the other service departments:
Human Resources
Data Processing
Legal Department
$101,000
$324,000
$253,000
Required: Using the Direct Method of service department cost allocation, calculate the
total service department costs that are allocated to each production department.

12-7: Xancar Corporation has three factories, and allocates the costs of two service
departments to these factories using the Direct Method of service department cost
allocation. The table below shows the costs incurred by these two service departments for
the most recent year, the allocation base used to allocate the costs of each department,
and the amount of the allocation base incurred by the factories and service departments.
Costs
incurred
Allocation
base
Accounting
&
Computing
Human
Resources
Factory
in Zancobar
Factory
in
Yebasta
Factory
in Quinzotet
Accounting
&
Computing
$850,000 Operating
costs
$850,000 $930,000 $1,200,000 $1,100,000 $1,700,000
Human
Resources
$930,000 Number of
employees
45 33 110 75 145
Required: Calculate service department costs allocated to each factory.
12-8: A company has three service departments that provide services to each other and to
four production departments. Details for 2005 are shown below:
Human
Resources Accounting
Data
Processing
Costs incurred to run the department: $700,000 $1,200,000 $1,400,000
Allocation base used to allocate costs of the
service department to the four production
departments:
FTE’s (fulltime
employee
equivalents)
Invoices
processed
# of
computers
Amount of services provided by the service
department to itself and to each of the
recipient departments, as measured by the
quantity of the allocation base incurred in
each department:
Human Resources 9 467 13
Accounting 23 117 25
Data Processing 32 83 40
Production Department A 101 223 32
Production Department B 157 319 44
Production Department C 33 444 37
Production Department D 69 190 17
Total quantity of the allocation base
424 1,843 208
Required: Using the Direct Method of service department cost allocation, what are the
total service department costs from the three service departments that will be allocated to
production department B?

12-9: The Franklin Corporation allocates the costs of three service departments to its
three production departments. The following table shows the percentage of services that
each service department provides to each production department and to the other two
service departments:
Service
Dept A
Service
Dept B
Service
Dept C
Production
Dept 1
Production
Dept 2
Production
Dept 3
Service Dept A 20% 20% 30% 10% 20%
Service Dept B 15% 10% 25% 30% 20%
Service Dept C 15% 25% 30% 20% 10%
The following table shows the costs incurred by each service department, prior to the
allocation of any service department costs to the other service departments:
Service Dept A
Service Dept B
Service Dept C
$ 80,000
$124,000
$153,000
Required:
A) Using the Direct Method of service department cost allocation, calculate the total
service department costs that are allocated to each production department.
B) Use the Step-Down Method of service department cost allocation, and calculate
the total service department costs allocated to Production Department 1. Assume
that Service Department A is allocated first, then Service Department C, and
finally Service Department B.
12-10: State Farmers Insurance Company has three revenue-generating divisions:
Property Insurance, Life Insurance, and Automobile Insurance. The Legal Department is
a service department that provides services to these three revenue-generating divisions,
and not to any other department. To allocate legal department costs to the user
departments, the lawyers in the Legal Department track the hours they spend providing
services to each department. (These hours are called “lawyer-billed” hours.) Relevant
information about lawyer-billed hours is as follows:
Peak
Demand
Average
Demand
Actual May
Usage
Property Insurance Division
Life Insurance Division
Automobile Insurance Division
600 hours
200 hours
200 hours
300 hours
180 hours
180 hours
420 hours
170 hours
180 hours
The Legal Department budgets fixed costs at $100,000 monthly, and variable costs at $16
per lawyer-billed hour. During May, actual costs incurred were as follows: $70,000 in
fixed costs, and $7,000 in variable costs.

Required:
A) What is the actual cost per lawyer-billed hour, using actual costs (fixed and
variable) and the actual level of activity for the month?
B) Allocate May legal costs to the Auto Division, using the rate calculated in Part
(A), based on actual usage.
C) What amount of legal costs for May will be allocated to the Life Division if a dual
allocation rate is used, in which budgeted fixed costs are allocated based on peak
usage requirements, and budgeted variable costs are allocated based on actual
usage?