Reference no: EM133179244

Question - LabAid Ltd provides radiological services. Despite the variety of patients seen at LabAid, the radiological services involve only two operating departments (Daily Patient and Radiology) and two service departments (Administrative Services and Maintenance Services). For the first quarter of 2022, LabAid incurs the following costs in its four departments:

Department Overhead costs Daily Patient £350,000 Radiology £300,000 Administrative Services £50,000 Maintenance Services £55,000

The actual level of support relationships among the four departments for the first quarter of 2022 was: . Used by . Administrative Services Maintenance Services Daily Patient Radiology Supplied Administrative Services 0% 25% 40% 35% by Maintenance Services 10% 0% 30% 60%

The Administrative Services support percentages are based on number of employees. The Maintenance Services support percentages are based on total labour hours.

Required -

a) Allocate the service department costs to the two operating departments using the direct method.

b) Allocate the service department costs to the two operating departments using (i) the step-down method (Allocate Administrative Services first) (ii) the step-down method (Allocate Maintenance Services first.

c) Assume that you are the manager of the Daily Patient department. Discuss which method of cost allocation would you prefer. Justify your decision.

d) Mr. Smith, the financial controller of LabAid, is convinced that the step-down method allocates more costs to the operating departments than does the direct method. Do you agree with Mr. Smith? Explain.

e) Discuss two different criteria Mr. Smith can use to determine the sequence for allocating support department costs using the step-down method.