Fabricating and finishing are the two production departments of a manufacturing company.  Building operations and information services are service departments that provide support to the two production departments as well as to each other.  The company employs departmental overhead rates in the two production departments to allocate the service department costs to the production departments.  Square footage is used to allocate building operations, and computer time is used to allocate information services.  The costs of the service departments and relevant operating data for the departments are as follows:

If the company employs the step method to allocate the costs of the service departments and if information services are allocated first, then the total amount of service department costs (information services and building operations) allocated to finishing would be

Answer D is correct.  This response allocates the information services’ costs first using the total hours (200 + 1,200 + 600 = 2,000).  The second allocation of the building operations’ cost is really the direct method:  only the square feet in just the two production departments (16,000 + 24,000 = 40,000) are employed and the costs of the building operations ($550,000) and the information services’ costs allocated to it ($120,000) are allocated using this base. 

Therefore the allocation is equal to $762,000 = Information costs $360,000 [(600/2,000) x $1,200,000] + Building costs $402,000 [(24,000/40,000) x $670,000].