Magellan Bank Has Five Service Departments (Telecom, Information Management, Building

Essay

Magellan Bank has five service departments (telecom, information management, building occupancy, training, and human resources). The bank uses a step-down method of allocating service department costs to its three lines of business (retail banking, commercial banking, and credit cards). The following table contains the utilization rates of the five service departments and three lines of business. Also included in this table are the direct operating expenses of the service departments (in millions of dollars). Direct operating expenses of each service department do not contain any allocated service costs from the other service departments. For example, telecom spent $3.5 million dollars and provided services to other units within Magellan Bank. Information management consumed 15 percent of telecom's services. The order in which the service departments are allocated is also indicated in the table. The telecom department costs are allocated first, followed by information management, and the costs of the human resources department are allocated last. Required:
a. Using the step-down method and the order of departments specified in the table, what is the total allocated cost from information management to credit cards, including all the costs allocated to information management?
b. Information management costs are allocated based on terabytes of storage used by the other service departments and lines of business. If, instead of being second in the step-down sequence, information management became fifth in the sequence, would the allocated cost per terabyte increase or decrease? Explain precisely why it increases or decreases.
c. If instead of using the step-down method of allocating service department costs, Magellan uses the direct allocation method, what is the total allocated cost from information management to credit cards, including all the costs allocated to information management? (Note: Information management remains second in the list.)