Could devon ltd use the cost of purchasing outside

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3.21 Direct method using estimated costs, benchmarking

Devon Ltd allocates support department costs using the direct method and estimated costs. The support department costs are budgeted at $88 000 for department A, $63 000 for department B and $40 000 for department C. These costs are allocated using the proportion of total cost the fi rm would pay to an outside service provider.

Required

(a) Allocate budgeted support department costs using the direct method, first using labour hours and then with the outside cost proportions as the allocation bases.

(b) Could Devon Ltd use the cost of purchasing outside as an efficiency benchmark for the cost of both the support departments and the operating departments? List several advantages and disadvantages of this approach.

Reference no: EM132369664

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