Chapter Nine- Activity-Based Costing

Analyze the overhead rates computed prior to and after service departments costs were included.
Initially the rates were $3 per machine hour for Assembly and $4 per direct labor hour for
Finishing. Including service costs increases the rates: $6.84 per machine hour for Assembly and
$5.08 per direct labor hour for Finishing. With Job #62 requiring 400 machine hours in
Assembly and 100 direct labor hours in the Finishing Department the overhead applied, using the
new rates would now be $3,244.
Step Method
Although the direct method is straightforward and easy, it is theoretically less than accurate. The
Kennesaw employees in B & G often eat in the cafeteria and B & G employees sometimes
provide maintenance to the cafeteria. The step (step-down) method partially addresses this
cross-provision of services.
The step method allows for service department provision to other service departments, but only
in one direction. If the cafeteria is considered the primary service department, then the step
method assumes that Building and Grounds (B&G) provides no service to the Cafeteria. In
practical terms, costs are "stepped-down"; once a service department's costs have been
allocated to the other department it does not receive service from other service department.
Under the step method the order of allocation (which service department costs are allocated first,
which second, etc.), affects the overhead rate. Following are calculations which first demonstrate
cost allocation with cafeteria service at the top of the hierarchy. Then, service costs are allocated
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