MA43 Problem: Department Cost Allocation – Danny Ltd.

MA43 Problem: Department Cost Allocation – Danny Ltd.

Danny Ltd. has three service departments, Corporate Wide Advertising, Legal, and HumanResources that are respectively allocated based on revenue, usage and number of employees.Allocation information regarding all of the departments is as follows:

Service Depts. Operating Depts.AdvertisingHumanResources Legal A B C TotalRevenue - - - $3,766,000 $4,635,000 $3,970,000 $12,371,000Usage of legal services 5% 10% - 10% 30% 45% 100%Employees 16 22 12 140 175 35 400Costs, before allocation $1,450,000 $1,885,000 $950,000 $2,690,000 $3,434,000 $2,835,000

Required:1. Using the direct method, compute the costs allocated to the operating departments, A, B,and C.2. Using the step down method, compute the costs allocated to each operating department.Assume that Human Resource costs are allocated to the advertising and legaldepartments, along with departments A, B and C and that subsequently legal costs areallocated to advertising and departments A, B, and C. Advertising is not allocated to anyother service department.