Steven Parker Owns and Operates Steven's Septic Service and Legal

question 151

Multiple Choice

Steven Parker owns and operates Steven's Septic Service and Legal Advice. Steven's two revenue generating (production) operations are supported by two service departments: Clerical and Janitorial. Costs in the service departments are allocated in the following order using the designated allocation bases:
Clerical:
Variable cost: expected number of work orders processed.
Fixed cost: long-run average number of work orders processed.
Janitorial:
Variable cost: labor hours.
Fixed cost: square footage of space occupied.
Average and expected activity levels for next month (June) are as follows:
$\begin{array}{|l|r|r|r|r|}\hline &\text { No. of Work Orders } & \text {Averge } & \text { Labor Hours } & \text { Square Footage } \\&\text { Expected }\\\hline \text { Septic Service } & 50 & 80 & 560 & 1,800 \\\hline \text { Legal advice } & 25 & 20 & 840 & 2,200 \\\hline \text { Clerical } & 20 & 20 & 400 & 1,600 \\\hline \text { Janitorial } & 5 & 20 & 200 & 1,000 \\\hline\end{array}$
Expected costs in the service departments for June are as follows:
$$\begin{array} { l r r } & \text { Clerical } & \text { Janitorial } \\\text { Variable costs } & \$ 12,000 & \$ 4,200 \\\text { Fixed costs } & \$ 8,400 & \$ 800\end{array}$$
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Under the step method of allocation, how much Clerical Service cost should be allocated to the Septic Service operation for June? (Assume Clerical costs are allocated before Janitorial costs and round all calculations to the nearest whole dollar.)

• A) $12,689.
• B) $13,100.
• C) $13,620.
• D) $15,596.

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Definitions:

Benefits Principle

The idea that people should pay taxes based on the benefits they receive from government services

Taxes

Obligatory charges imposed by authorities on the earnings of employees and the profits of businesses, or applied to the price of various commodities, services, and financial activities.

Total Surplus

The sum of consumer surplus and producer surplus in a market, representing the total benefits to society.

Deadweight Loss

A loss of economic efficiency that can occur when the free market equilibrium for a good or a service is not achieved, often due to market failure, taxes, or subsidies.