Discuss two different criteria Mr. Smith can use to determine the sequence for allocating support department costs using the step-down method. LabAid Ltd provides radiological services. Despite the variety of patients seen at LabAid, theradiological services involve only two operating departments (Daily Patient and Radiology) and twoservice departments (Administrative Services and Maintenance Services). For the first quarter of2022, LabAid incurs the following costs in its four departments:DepartmentOverhead costsDaily Patient£350,000Radiology£300,000Administrative Services£50,000Maintenance Services£55,000The actual level of support relationships among the four departments for the first quarter of 2022was:Used byAdministrative MaintenanceDailyServicesServicesPatientRadiologySuppliedAdministrative25%40%35%ServicesbyMaintenance Services10%30%60%The Administrative Services support percentages are based on number of employees. TheMaintenance Services support percentages are based on total labour hours.

Cost allocation is a process of assigning or allocating indirect cost to each and every unit using a…

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Discuss two different criteria Mr. Smith can use to determine the sequence for allocating support department costs using the step-down method

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Concept explainers

Overheads

In cost accounting, overhead refers to those expenses which occur during the operating of a business. Overhead includes the fixed, variable, or semi-variable which is not directly involved with a company product or service. It is very important to analyze overhead expense as it helps the company in determining how much a company must charge for its products and services so that they can generate profit. Overhead expenses depend upon the nature of the business operations.

Question

Discuss two different criteria Mr. Smith can use to determine the sequence for allocating support department costs using the step-down method.

LabAid Ltd provides radiological services. Despite the variety of patients seen at LabAid, the
radiological services involve only two operating departments (Daily Patient and Radiology) and two
service departments (Administrative Services and Maintenance Services). For the first quarter of
2022, LabAid incurs the following costs in its four departments:
Department
Overhead costs
Daily Patient
£350,000
Radiology
£300,000
Administrative Services
£50,000
Maintenance Services
£55,000
The actual level of support relationships among the four departments for the first quarter of 2022
was:
Used by
Administrative Maintenance
Daily
Services
Services
Patient
Radiology
Supplied
Administrative
25%
40%
35%
Services
by
Maintenance Services
10%
30%
60%
The Administrative Services support percentages are based on number of employees. The
Maintenance Services support percentages are based on total labour hours.

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