question archive Banda is a company specialized in assembling musical instruments
Banda is a company specialized in assembling musical instruments
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Banda is a company specialized in assembling musical instruments. It operates two producing departments, assembly and tuning, and two service departments human resource and cleaning. The 2020 figures include the following: Direct department costs Square footage occupied N. of workers Assembly 205,500 € 5,000 5 Tuning 401,250 € 3,000 3 Human Resource 80,000 € 1,000 3 Cleaning 40,000 € 750 Total 726,750 9,750 15 Q1 Allocate the service departments using the Direct Method (with the most appropriate driver among the data available). Allocate cleaning costs first. Assembly 205,500 € Direct department costs Tuning 401,250 € Human Resource 80,000 € Cleaning 40,000 € Total 726,750 € *$360,000
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Statement of cost allocation
| Service Department | Allocation basis | Assembly | Tunning | Total Cost |
| Cleaning | square foot occupied |
40000×5000/(5000+3000) =25000 |
40000×3000/8000 =15000 |
40000 |
| Human Resource | No of Workers |
80000×5/(5+3) =50000 |
80000×3/8 =30000 |
80000 |
| Total Allocated service department cost | 75000€ | 45000€ | 120000€ |
Statement of total direct cost after allocation
| Assembly | Tunning | Total | |
| Direct department cost | 205,500 | 401,250 | 606,750 |
| Allocated Service department cost | 75000 | 45000 | 120000 |
| Total Cost | 280,500€ | 446,250€ | 726,750€ |
Explanation
ABC activity based costing identified each activity in the organisation and allocate cost on basis of most appropriate activity driver for each department and not on single allocation driver as per traditional cost
Under Direct method cost of each service department will be allocated to the producing department directly on each department share of allocation basis and would not be allocated to each other ie not to service department . Hence in this method cost incurred by service department will nit be allocated to each other and directly allocate to producing or operating department
