PROBLEM

JCG Company has two service departments and three producing departments
each producing a separate product. For a number of years, the company has
allocated the overhead costs of the service departments to the producing
departments on the basis of annual sales pesos which lead serious inequities.
The auditor recommended that maintenance and engineering service hours
be used as a better service cost allocation basis.
The following data are available:
Service Departments Producing Departments
Maintenance Engineering Dept A Dept B
Maintenanance hours 400 800 200
Enginieering hours 400 800 400
Overhead costs ₱ 12,000 ₱ 54,000 ₱ 80,000 ₱ 90,000

Questions:
1) Using reciprocal method, what would be the total Engineering Department cost after allocation of
interservice department costs, but before allocation to the Maintenance and Production depts.?
a) P12,000 b) P54,000 c) P57,000 d) P60,000

2) Assume that the Engineering Dept's total costs to be allocated is P60,000, how much of this costs
is allocated to Department A, B and C under the reciprocal method?
a) P48,000 b) P54,000 c) P60,000 d) P66,000

3) Using the reciprocal method, what would be the total Maintenance Dept cost after allocation of
interservice department costs, but before allocation to the Engineering and Production Depts
a) P24,000 b) P22,500 c) P12,000 d) P28,000

4) If the Maintenance Dept's total costs to be allocated is P24,000, what portion of the Maintenance
Dept's costs is allocated Department A under the reciprocal method?
a) 800/1,600 b) 800/1,200 c) 200/1,200 d) 200/1,600

5) Using the direct method of cost allocation, how much maintenance cost would be allocated to the
Engineering Department?
a) P3,000 b) P1,500 c) P6,000 d) P 0

6) Using the direct method of cost allocation, how much amount of maintenance costs would be
allocated to Department C?
a) P3,000 b) P2,000 c) P8,000 d) P 0

7) Under the direct method of cost allocation, what amount of Engineering Dept's cost would be
allocated to Department A?
a) P20,800 b) P27,000 c) P54,000 d) P 0

8) Under the step down method cost of allocation, what amount of Maintenane Dept's cost is
 allocated to Engineering Dept?
a) P1,500 b) P6,000 c) P3,000 d) P 0

9) Under the step method of cost allocation, assuming that the cost of Maintenance Dept's
cost is allocated first, what amount of maintenance cost would be allocated to Dept B?
a) P3,000 b) P1,500 c) P8,000 d) P 0

10) If the Maintenance Dept cost is allocated first, what amount of Engineering Dept's
cost would be allocated to Dept C?
a) P9,000 b) P14,250 c) P9,500 d) P6,000

11) Unde the setp method of cost allocation, what is the total amount of Service Dept's
cost is allocated to Dept A?
a) P38,000 b) P37,500 c) P40,000 d) P34,500
 SOLUTIONS
1) Maintenance Engineering
A Maintenance ₱ 12,000 25%
B Engineering ₱ 54,000 20%

A = P12,000 + 20% B
B = P54,000 + 25% A
ng Departments Total
Dept C Hours A = P12,000 + 20% (P54,000 + 25% A) B = P54,000 + 25% (P24,000)
200 1,600 A = P12,000 + P10,800 + 5%A B = P54,000 + P6,000
400 2,000 A - 5%A = P22,800 B =
₱ 50,000 95% A = P22,800
A = ₱ 24,000

fter allocation of 2) Cost to be allocated ₱ 60,000

duction depts.? Dept A 40% ₱ 24,000
Dept B 20% 12,000
Dept C 20% 12,000
uch of this costs ₱ 48,000

3) A = P12,000 + 20% (P54,000 + 25% A)

er allocation of A = P12,000 + P10,800 + 5%A
uction Depts A - 5%A = P22,800
95% A = P22,800
A = ₱ 24,000
he Maintenance

4) 800 / 1,600

e allocated to the
5) P0 None. Under direct allocation method, all the service dept's overhead
costs are allocated ONLY to producing departments

osts would be 6) Maintenance Dept costs ₱ 12,000

Dept A 800 ₱ 8,000
Dept B 200 2,000
Dept C 200 2,000
ost would be 1,200 ₱ 12,000

7) Engineering Dept costs ₱ 54,000

Dept A 800 ₱ 27,000
 Dept B 400 13,500
Dept C 400 13,500
1,600 ₱ 54,000

8) None. Under the step down method, the rule is to allocate first the service dept with
highest cost. Engineering has the highest cost, thus it will be allocated first, and will no
longer get allocated with the Maintenance costs.

9) Engineering Dept A
Maintenance ₱ 12,000 3,000 ₱ 6,000

Engineering 400
Dept A 800
Dept B 200
Dept C 200
1,600

10 and 11) Engineering Dept A

Maintenance ₱ 12,000 3,000 ₱ 6,000
Engineering 54,000 54,000
57,000 28,500
(No 11) ₱ 34,500
Engineering 400
Dept A 800 Dept A 800
Dept B 200 Dept B 400
Dept C 200 Dept C 400
1,600 1,600
 Dept A Dept B Dept C
50% 12.50% 12.50%
40% 20% 20%

= P54,000 + 25% (P24,000)

= P54,000 + P6,000
₱ 60,000

thod, all the service dept's overhead

cing departments
allocate first the service dept with the
it will be allocated first, and will no

Dept B Dept C
1,500 1,500

Dept B Dept C
1,500 1,500

14,250 14,250 (No 10)

₱ 15,750 ₱ 15,750