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Gustavson Corporation uses the direct method to allocate service department costs to operating departments. The company has two service departments, Administrative and Facilities, and two operating departments, Assembly and Wholesaling. Administrative costs are allocated on the basis of employee hours and Facilities costs are allocated on the basis of space occupied. The total Wholesaling Department cost after the allocations of service department costs is closest to which value:

a. $337,530b. $331,090c. $340,240d. $340,426

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Answer:

C) $340,240

Explanation:

                                     Service Department  Operating Department

                                  Administrative Facilities  Assembly Wholesaling

Departmental costs $26,840     $59,400   $183,430   $321,190

Employee time (hours)      4,000       2,000     29,000 15,000

Space occupied - sq ft     2,000       2,000     30,000  6,000

total administrative costs = $26,840

total employee hours = 29,000 + 15,000 = 44,000

administrative cost per employee hour = $26,840 / 44,000 = $0.61

total facilities costs = $59,400

total square feet = 30,000 + 6,000 = 36,000

administrative cost per employee hour = $59,400 / 36,000 = $1.65

total Wholesaling Department cost = $321,190 + ($0.61 x 15,000) + ($1.65 x 6,000) = $321,190 + $9,150 + $9,900 = $340,240

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