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University Publishing Limited has two operating departments-Book sales and Video sales-and two service departments-HRO and IT. The company uses the number of employees to allocate HRO costs and the IT department uses processing time to allocate IT costs. The following data are provided:
Budgeted costs incurred before any cost allocations
Book sales 751,200
Video sales 382,100
HRO 55,600
IT 1 84,700
Budgeted number of employees
Book sales 36
Video sales 18
IT 15
Budgeted processing time (in minutes)
Book sales 1,750
Video sales 1,450
Question a. Allocate the service departments' costs to the operating departments using the direct method.
Question b. Rank the support departments based on the percentage of their services provided to other support departments. Use this ranking to allocate the support departments' costs to the operating departments based on the step-down method.
Question c. Briefly discuss reasons why service department costs are allocated.
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