ACCOUNTING-Cost Allocation: Step Method with Analysis and Decision Making

QUESTION

Cost Allocation: Step Method with Analysis and Decision MakingSteamco Corporation is reviewing its operations to see what additional energy-saving projects it might adopt. The company’s manufacturing plant generates its own electricity using a process capturing steam from its production processes. A summary of the use of service departments by other service departments as well as by the two producing departments at the plant follows:Services Used byService DepartmentSteam GenerationFixed CostsVariable CostsEquipment MaintenanceAlphaBetaSteam Generation-0–0-0.40-0-0.100.50Electric GeneratingFixed costs0.10-0–0-0.100.300.50Variable costs0.10-0–0-0.050.550.30Equipment Maintenance0.200.100.05-0-0.500.15Direct costs (in thousands) in the various departments follow:DepartmentDirect CostSteam Generation (S1)$ 210Electric Generating:Fixed costs (S2)90Variable costs (S3)240Equipment Maintenance (S4)144ProductionAlpha (P1)1,800Beta (P2)1,320Steamco currently allocates costs of service departments to production departments using the step method. The local power company indicates that it would charge $480,000 per year for the electricity that Steamco now generates internally. Management rejected switching to the power company on the grounds that its rates would cost more than the $330,000 ($90,000 + $240,000) cost of the present, company-owned, system.RequiredWhat costs of electric service did management use to prepare the basis for its decision to continue generating power internally?Prepare for management an analysis of the costs of the company’s own electric generating operations. (Use the step method.) The rank order of allocation is (1) S1, (2) S4, (3) S2, and (4) S3.Add a section to your analysis to management that you prepared for requirement (b) to indicate whether your answer there would change if the company could realize $174,000 per year from the sale of the steam now used for electric generating. (Assume no selling costs.)

ANSWER:

REQUEST HELP FROM A TUTOR