Star Products, Inc

Essay

Star Products, Inc., produces safety equipment for first responders in both police and fire departments. The company has two operating departments: one specializing in equipment for police and the other in equipment for firefighters. The company also has two service departments. The product-testing department subjects the products of both operating divisions to exhaustive testing since external product failures are totally unacceptable. The janitorial department performs general cleaning for the other departments. The work in product testing is highly automated and, as a result, its cost is allocated based on machine hours. The costs of janitorial support are allocated based on the square footage occupied by the consuming departments. Budgeted costs for the coming year are $840,000 for the product-testing department and $420,000 for the janitorial services department. The table below contains data regarding budgeted measures of support to be provided by the service departments in the coming year.
Required:
a) Determine the amount of product testing and janitorial services costs that would be charged to the two operating departments using direct allocation.
b) Determine the amount of product testing and janitorial services costs that would be charged to the two operating departments using sequential allocation.
c) Which method of allocating the service department costs should be used? Why?