D is corrent. This response allocates the information service’s costs first using the total hours (200 + 1,200 + 600 = 2,000). The second allocation of the building operation’s cost is really the direct method: only the square feet in just the two production departments (16,000 + 24,000 = 40,000) are employed and the costs of the building operations ($550,000) and the information service’s costs allocated to it ($120,000) are allocated using this base. Therefore the allocation is equal to $762,000 = Information costs $360,000 [(600/2,000) × $1,200,000] + Building costs $402,000 [(24,000/40,000) × $670,000].
A is incorrect. because building operations is allocated first rather than information services as indicated in the problem. The procedures for allocating building operation’s costs was correct using the square feet occupied by information services and the two production departments (10,000 + 16,000 + 24,000 = 50,000). However, the information service’s costs were allocated using total computer hours (200 + 1,200 + 600 + = 2,000) rather than just the hours in the two production departments; this would not be appropriate for this stage in the step method.
B is incorrect. This response does the first calculation of the step method correctly, but has an error in the second step. Information service’s costs are allocated correctly using the total computer hours (200 + 1,200 + 600 = 2,000). However, in the second step, the square feet occupied by building operations and the two production departments (10,000 + 16,000 + 24,000 = 50,000) is used rather than the square feet in just the two production departments (16,000 + 24,000 = 40,000); the second calculation in the step method is really the same type of calculation that would be done with the direct method.
C is incorrect. This response allocates the cost of both service departments according to the direct method rather than the step method. The calculations for the direct method are all correct.
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