Accounting for Decision Making and Control 6th Edition by Jerold Zimmerman

Exercise 22

Janitorial services is one of five service departments in a firm that allocates service department costs using the step-down allocation method. Janitorial services is currently the third service department (S3) in the step-down process. The following table gives the allocation fractions of the five service departments to the other four service departments and the four operating departments.

The costs ($100,000) for each of the service departments before making any cost allocations are:

The next table details the step-down allocated costs to each service department after making cost allocations. (In other words, $1.25 is allocated from S1 to S2 and S3, $2.00 to S4, and $1.00 to S5.)

Service department S3 provides janitorial services (floor care, window cleaning, rest room sanitation) to the other service departments and the operating divisions. The allocation base used to allocate S3 costs is square footage in the service and operating departments. Total square footage of S1, S2, S4, S5, D1, D2, D3, and D4 is 650,000 square feet. (Note: All costs are in terms of $100,000.)
Required:
a. Calculate the cost per square foot that janitorial services (S3) is currently charging its customers.
b. Suppose that janitorial services (S3) is moved from the third service department in the step- down method to the fifth (last) service department in the step-down process. Calculate the total cost of janitorial services including all service department costs allocated to janitorial services.
c. What is the cost per square foot that janitorial services will charge its customers if it becomes the last service department to be allocated in the step-down process
d. Why might senior (corporate) management move janitorial services from the third service department to the last service department in the step-down process