Reference no: EM131786997

Question: Sydney Mira provides two financial services through two separate operating divisions (O1 and O2). These two operating divisions require the services of three internal service departments (S1, S2, and S3). The costs of the three service departments last month and the use of each service department by the two operating divisions are:

	S1	S2	S3
Service Department cost (000s)	$400	$500	$600
Service units used by O1	70	60	80
Service units used by O2	90	80	50

Each service department (S1, S2, and S3) meters the use of its services to other service departments and operating divisions (O1 and O2) in Sydney Mira via "service units." Each of the three service departments has a different method of determining service units it supplies, but collectively all three service departments report service units and these service units are used to allocate the service departments' costs to the users of the service department. For example, service department S1 provided 70 service units to operating division O1 last month.

In addition to providing services to the two operating divisions, O1 and O2, the service departments provide services to the other service departments. The following table summarizes the service units consumed last month by the service departments.

	S1	S2	S3
S1 use		50	60
S2 use	20		40
S3 use	15	25

Last month, S2 used 50 service units supplied by S1, and S1 used 20 service units supplied by S2.

Required: a. Using the direct allocation method, calculate the allocated cost per service unit provided by S1, S2, and S3.

b. Using the direct allocation method, calculate the costs of S1, S2, and S3 that are allocated to O1 and O2.

c. Using the step-down allocation method, calculate the allocated cost per service unit provided by S1, S2, and S3. The order of the departments in the step-down is S1 first, S2 second, and S3 last.

Cost Allocation: Practices 385

d. Using the step-down allocation method, calculate the costs of S1, S2, and S3 that are allocated to O1 and O2. The order of the departments in the step-down is S1 first, S2 second, and S3 last.

e. Using the step-down allocation method, calculate the allocated cost per service unit provided by S1, S2, and S3. The order of the departments in the step-down is S3 first, S2 second, and S1 last.

f. Using the step-down allocation method, calculate the costs of S1, S2, and S3 that are allocated to O1 and O2. The order of the departments in the step-down is S3 first, S2 second, and S1 last.

g. Discuss the advantages and disadvantages for Sydney Mira of using the direct allocation method, the step-down method (S1 first, S2 second, and S3 last), and the step-down method (S3 first, S2 second, and S1 last).