Cost allocation is often the centerpiece of conflict that isresolved in court cases. The litigation usually involves thedispute over how costs are allocated to a product or product linethat is of interest to the plaintiff. This is particularly an issuewhen a company produces some products or services for aprice-competitive market while other products or services areproduced for a governmental unit on a cost-plus or reimbursementbasis.

Nursing Care Inc., or NCI, operates both a small nursing homeand retirement home. There is a single kitchen used to providemeals to both the nursing home and retirement home, meaning laborcosts and utilities costs of the kitchen are shared by the twohomes. There is also a centralized cleaning department thatprovides the cleaning services for both homes as well as thekitchen. The nursing home serves only indigent patients who are onMedicaid. The state Department of Health and Family Services (DHFS)reimburses NCI at Medicaid-approved cost reimbursement rates. TheMedicaid reimbursement rates are based on cost information suppliedby NCI. The relevant cost and allocation data for the most recentyear appear in the following table.

	Annual Operating Cost
Cleaning department	$	135,000
Central kitchen	$	187,500

Allocation Base	Kitchen	Nursing Home	Retirement Home
Square feet of space	1,000	2,000	3,000
Number of residents	—	6	4

Required:

1. Management of NCI currently allocates the kitchen andcleaning department costs based on the number of residents in eachhome. Determine the amount of service department costs assigned toeach of the homes using this allocation base. (Roundpercentages to two decimal places in yourcalculations.)

2. DHFS auditors believe the step method of allocation should beused by first assigning cleaning costs based on square feet andthen kitchen costs based on number of residents. Determine theamount of service department costs assigned to each of the homesusing this allocation method. (Do not round percentageanswers.)