The Hsu Manufacturing Company has two service departments: Maintenance and Accounting. The Maintenance Department's costs of $867,300 are allocated on the basis of machine hours. The Accounting Department's costs of $135,600 are allocated on the basis of the number of employees within a specific department. The direct departmental costs for A and B are $270,000 and $470,000, respectively.

Maint Acctg A B
Machine hours 655 110 3,750 380
Number of employees 2 2 8 4

What is the Maintenance Department's cost allocated to Department A using the direct method?

$741,500.

$787,500.

$603,500.

$897,900.

b) =$787,500

Explanation:

The direct method of allocating  service centre overheads uses only the sum of the allocation basis of the production cost centers to allocate overheads. Overheads are charged directly only to production cost centres.  It ignores the possibility of reciprocal servicing arrangement between service cost centres.

The Allocated overhead to maintenance department

=  A/(A+B)×$867,300

A- Machine hours for Dept A

B - Machine hours for department B

Allocated maintenance cost to Dept A

= 3.570/(3750+380)× $867,300

=$787,500

Explanation:

What is the Maintenance Department's cost allocated to Department A using the direct method?

$787,500.

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