Using the direct method, Pone Hill Company allocates Janitorial Department costs based on square footage serviced. It allocates Cafeteria Department costs based on the number of employees served. It has the following information about its two service departments and two production departments, Cutting and Assembly: Square Feet Number of Employees Janitorial Department 100 20 Cafeteria Department 10,000 10 Cutting Department 2,000 60 Assembly Department 8,000 20 If the Janitorial Department incurs costs of $200,000, how much of that cost is allocated to the Cutting Department

$95,000

Explanation:

Cost of service department is allocated to other departments based on the cost drivers used by each driver. I this question the Janitorial cost of $200,000 and cost of Cafeteria are being allocated.  

Cutting and Assembly:

Square Feet Number of Employees

Janitorial Department   100           20

Cafeteria Department   10,000      10

Cutting Department      2,000       60

Assembly Department  8,000       20

Janitorial Department incurs costs of $200,000

Departments   Janitorial   Cafeteria   Cutting   Assembly   Total

Janitorial Cost        0        $100,000  $20,000  $80,000    $200,000

Cafeteria                 0                0        $75,000  $25,000    $100,000  

Total Cost Allocated                           $95,000   $105,000

Janitorial Cost (Based on Square feet )

Total Area = 20,000

Cafeteria = $200,000 x 10,000/ 20,000 = $100,000

Cutting = $200,000 x 2,000/ 20,000 = $20,000

Assembly = $200,000 x 8,000/ 20,000 = $80,000

Total Employee = 60 + 20 = 80

Cutting = $100,000 x 60/ 80= $75,000

Assembly = $100,000 x 20/ 80 = $25,000

Janitorial department area will not be included because cost of janitorial will not be allocated to janitorial department.

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