Question

Question 1 The SUSS Manufacturing Inc. produces two products, in departments AC201 and AC 203 respectively. There are also three support departments, Stores, Maintenance and Administration No inventories are held due to the perishable nature of the products Direct costs of the products, which are variable, are identified to each department. SUSS Manufacturing allocates support department costs using the step-down method based on estimates of the usage in percentage of the services provided as shown in table below. These are expressed as percentages and assumed to be reliable over the current capacity range. The general fixed factory overheads of $3,600,000, are apportioned based on floor space occupied. The company establishes costs based on budgeted volume and products are priced using a total cost plus model at a 25% markup from cost. Extracts of the 2018 Budgets are as follows: Annual volume (units) AC201AC203 140.000 70,000 Budgeted production volume AC201AC203 Stores 1,800,000 700,000 100,000 800,000 500,000 100,000 Maintenance Admin 100,000 - 200,000 200,000 Material costs (5) Other variable costs ($) Departmental usage: Maintenance Administration Stores Floor Space (sq.m.) 25% 20% 50% 40% 60% 640 25% 30% 40% 480 10% 240 80 160 Required: (a) Discuss and explain the appropriate sequence of allocations by department without performing any calculations. (5 marks) (6) Imoring your answer to part (a), calculate the total costs for AC201 and AC203 using the step-down method to allocate the support departments' costs, beginning with Administration, followed by Maintenance, and finally Stores (13 marks) (c) Compute the budgeted unit selling price of products of AC201 and AC203 based on 25% of total cost plus markup that the company is currently using (round computations to 2 decimal places) (4 marks) (d) Explain whether the overhead costs would have been different if direct method had been used instead of step-down method (3 marks)

Answer 1

	Suss Manufacturing Inc.
	Question (a)
	When Using step down method, first we have to allocate the cost of the department who does not use any other departments services. Once, the costs are allocated, then again we have to look out for the next department which does not use any other departments services. Following this approach we will have to allocate the costs as follows: 1. Adminstration Department, 2. Maintenance, 3. Stores
	Question (b)
Sr.No.	Particulars	AC201	AC203	Stores	Maintenance	Admin	Total
a	Material Costs	1,800,000.00	700,000.00	100,000.00	100,000.00		2,700,000.00
b	Other Variable Costs	800,000.00	500,000.00	100,000.00	200,000.00	200,000.00	1,800,000.00
c	Floor Space (sq.m.)	640.00	480.00	240.00	80.00	160.00	1,600.00
d	Total Fixed factory Overhead						3,600,000.00
e	Allocation of Fixed Factory Overheads based on floor space	1,440,000.00	1,080,000.00	540,000.00	180,000.00	360,000.00	3,600,000.00
f	Total Department cost (a+b+e)	4,040,000.00	2,280,000.00	740,000.00	480,000.00	560,000.00	8,100,000.00
	Allocation of Administration Department costs:
g	Usage % by other department	40%	30%	20%	10%		100%
h	Allocated costs (f/100*g)	224,000.00	168,000.00	112,000.00	56,000.00	(560,000.00)	-
i	Total cost after administrative department cost allocation (f+h)	4,264,000.00	2,448,000.00	852,000.00	536,000.00	-	8,100,000.00
	Allocation of Maintenance Department costs:
j	Usage % by other department	50%	25%	25%			100%
k	Allocated costs (f/100*g)	268,000.00	134,000.00	134,000.00	(536,000.00)		-
l	Total cost after administrative department cost allocation (i+k)	4,532,000.00	2,582,000.00	986,000.00	-	-	-
	Allocation of Stores Department costs:
m	Usage % by other department	60%	40%	0	0	0	100%
n	Allocated costs (l/100*m)	591600	394400	(986,000.00)			0
o	Total cost after stores department cost allocation (l+n)	5,123,600.00	2,976,400.00	-	-	-	8,100,000.00
	Question (c)
Sr.No.	Particulars	AC201	AC203
a	Total Cost ( taken from part b)	5,123,600.00	2,976,400.00
b	Budgeted Units	140,000.00	70,000.00
c	Cost per unit	36.60	42.52
d	Mark up @ 25% of the cost	9.15	10.63
e	Budgeted Selling price	45.75	53.15
	Question (d)
	Yes, overhead costs would have been definitely different, if the company had followed direct allocation instead of step down allocation method. Reason for the same is : Cascading effect comes into picture when step down method of allocation is followed. For e.g. when a particular production department does not use one of the support department's services. When we use step down method production department is charged even for that department of which it has not used any services. On the other hand when direct allocation is followed, cascading effect is not there.