Prestwich Corporation has two service departments and two operating departments. Costs of the Building and Grounds service department are allocated to other departments on the basis of square feet of space occupied. The departments in the company and the amount of space occupied by each are presented below:

Building and Grounds 2,000 square feet

Cafeteria 8,000 square feet Operating Department A 20,000 square feet

Operating Department B 30,000 square feet

Budgeted costs in the Building and Grounds department total $34,800 for the year.

The amount of Building and Grounds department cost allocated to Operating Department A under the direct method would be:

$20,880

Explanation:

Under the direct method we ignore services that are provided to the other service departments.

In order to allocate the building operation costs to Operating department A, we need to determine what percentage of the building space taken up by Operating departments is used by Operation Department A.

There is a total of 50000 square feet and Operating Department A occupies 60%(30000/50000 of that.

So Operating Department A will get 60% of the building costs

  i.e., 60% × 34800 = 20,880

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