Yo-Down Inc. produces yogurt. Information related to the company’s yogurt production follows: Production Department 1 Production Department 2 Production Department 3
Support Department 1 cost driver 1,600 100 300
Support Department 1’s costs total $120,000. Using the direct method of support department cost allocation, determine the costs from Support Department 1 that should be allocated to each production department.
Production Department 1 Production Department 2 Production Department 3
Support Department 1 cost allocation $ $ $

Yo.Down Inc.

Determination of Support Department 1 costs to be allocated to each production department:

                                      Production        Production         Production

                                      Department 1    Department 2   Department 3

Support Department 1    $96,000            $6,000           $18,000

Explanation:

a) Cost allocation of Support Department 1:

1) Rate of allocation = Total Support Department 1's costs divided by the total of the cost drivers

= $120,000/2000 = $60 per cost driver

2) Production Department 1 = $60 x 1,600 = $96,000

Production Department 2 = $60 x 100 = $6,000

Production Department 3 = $60 x 300 = $18,000

3) The direct method is one of the three methods for allocating support or service department costs to the production departments in order to ensure the full inclusion of overhead costs in the production costs.  As the name goes, the costs of service departments are allocated to only production departments individually.  This method is not like the step method of cost allocation where the costs of service departments are allocated to other service departments, starting with the department with the highest costs, followed by the next, until all the costs of service departments are allocated to production.  However, no service department whose total costs have been allocated will be allocated any costs.  The last method of cost allocation is the reciprocal method, which is a more complicated method that produces more accurate results, by using equations to establish relationships between the departments.

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