7
ALLOCATING CHAPTER COSTS OF SUPPORT DEPARTMENTS
AND JOINT PRODUCTS
DISCUSSION QUESTIONS
producing department cannot control. Allocating budgeted costs avoids this problem.
1. Stage one assigns service costs to producing departments. Costs are assigned using
factors that reflect the consumption of the
services by each producing department.
Stage two allocates the costs assigned to
the producing departments (including service costs and direct costs) to the products
passing through the producing departments.
8. Variable costs should be allocated according to usage, whereas fixed costs should be
allocated according to capacity. Variable
costs are based on usage because, as a
departments usage of a service increases,
the variable costs of the service department
increase. A service departments capacity
and the associated fixed costs were originally set by the user departments capacities
to use the service. Thus, each department
should receive its share of fixed costs as
originally conceived (to do otherwise allows
one departments performance to affect the
amount of cost assigned to another department).
2. GAAP requires that all manufacturing costs
be assigned to products for inventory valuation.
3. Allocation of service costs aids in planning
because it makes users pay attention to the
level of service activity being consumed and
also provides an incentive for them to monitor the efficiency of the service departments.
It aids in pricing because support department costs are part of the cost of producing
a product. Knowing the individual product
costs is helpful for developing bids and costplus prices.
9. Normal or peak capacity measures the original capacity requirements of each producing
department. It is used when one departments spike in usage affects the amount of
capacity needed.
4. Without any allocation of service costs, users may view services as a free good and
consume more of the service than is optimal. Allocating service costs would encourage managers to use the service until such
time as the marginal cost of the service is
equal to the marginal benefit.
10.
11.
6. The identification and use of causal factors
ensures that service costs are accurately
assigned to users. This increases the legitimacy of the control function and enhances
product costing accuracy.
7. Allocating actual costs passes on the efficiencies or inefficiencies of the service department, something that the manager of the
The dual-rate method separates the fixed
and variable costs of providing services and
charges them separately. In effect, a single
rate treats all service costs as variable. This
can give faulty signals regarding the marginal cost of the service. If all costs of the
service department were variable, there
would be no need for a dual rate. In addition, if original capacity equaled actual usage, the dual-rate method and the singlerate method would give the same allocation.
12.
5. Since the user departments are charged for
the services provided, they will monitor the
performance of the service department. If
the service can be obtained more cheaply
externally, then the user departments will be
likely to point this out to management.
Knowing this, a manager of a service department will exert effort to maintain a competitive level of service.
Using variable bases to allocate fixed costs
allows one departments performance to affect the costs allocated to other departments. Variable bases also fail to reflect the
original consumption levels that essentially
caused the level of fixed costs.
The direct method allocates the direct costs
of each service department directly to the
producing departments. No consideration is
given to the fact that other service centers
may use services. The sequential method
7-1
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in part.
allocates service costs sequentially. First,
the costs of the center providing the greatest
service are allocated to all user departments, including other service departments.
Next, the costs of the second greatest provider of services are allocated to all user
departments, excluding any department(s)
that have already allocated costs. This continues until all service center costs have
been allocated. The principal difference in
the two methods is the fact that the sequential method considers some interactions
among service centers and the direct
method ignores interactions.
14. A joint cost is a cost incurred in the simultaneous production of two or more products.
At least one of these joint products must be
a main product. It is possible for the joint
production process to produce a product of
relatively little sales value relative to the
main product(s); this product is known as a
by-product.
15.
Joint costs occur only in cases of joint production. A joint cost is a common cost, but a
common cost is not necessarily a joint cost.
Many overhead costs are common to the
products manufactured in a factory but do
not signify a joint production process.
13. The reciprocal method is more accurate because it fully considers interactions among
service centers.
7-2
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in part.
CORNERSTONE EXERCISES
Cornerstone Exercise 71
1. Total expected costs of the Maintenance Department:
Fixed costs ......................................................................................
Variable costs ($0.75 22,000 maintenance hrs.)........................
Total costs...................................................................................
$57,200
16,500
$73,700
Single charging rate = $73,700/22,000 = $3.35 per maintenance hour
2. Charge based on actual usage = Charging rate Actual maintenance hours
Assembly Department charge = $3.35 3,960 = $13,266
Fabricating Department charge = $3.35 6,800 = $22,780
Packaging Department charge = $3.35 10,000 = $33,500
Total amount charged = $13,266 + $22,780 + $33,500 = $69,546
3. Assembly Department charge = $3.35 4,000 = $13,400
Fabricating Department charge = $3.35 6,800 = $22,780
Packaging Department charge = $3.35 10,000 = $33,500
Total amount charged = $13,400 + $22,780 + $33,500 = $69,680
Cornerstone Exercise 72
1. Variable rate = $0.75 per maintenance hours
The fixed allocation is calculated for each department based on budgeted
peak month usage:
Department
Assembly....................
Fabricating .................
Packaging ...................
Total ............................
Peak Number
of Hours
Percent*
390
1,300
910
2,600
15%
50
35
100%
Budgeted
Fixed Cost
Allocated
Fixed Cost
$57,200
57,200
57,200
$ 8,580
28,600
20,020
$ 57,200
*Percent for Assembly = 390/2,600 = 0.15, or 15%
Percent for Fabricating = 1,300/2,600 = 0.50, or 50%
Percent for Packaging = 910/2,600 = 0.35, or 35%
7-3
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in part.
Cornerstone Exercise 72
2.
(Concluded)
Actual Number
of Hours
Variable
Rate
Variable
Amount
Fixed
Amount
Total
Charge
Assembly......
Fabricating ...
Packaging .....
Total ..........
3,960
6,800
10,000
20,760
$0.75
0.75
0.75
$ 2,970
5,100
7,500
$15,570
$ 8,580
28,600
20,020
$57,200
$11,550
33,700
27,520
$72,770
Department
Actual Number
of Hours
Variable
Rate
Variable
Amount
Fixed
Amount
Total
Charge
Assembly......
Fabricating ...
Packaging .....
Total ..........
4,000
6,800
10,000
20,800
$0.75
0.75
0.75
$ 3,000
5,100
7,500
$15,600
$ 8,580
28,600
20,020
$57,200
$11,580
33,700
27,520
$72,800
Department
3.
Cornerstone Exercise 73
1. Allocation ratios:
Proportion of Driver Used by
Human
General
Resources
Factory
Fabricating
Human Resources
0.361
General Factory
0.303
Assembly
0.642
0.704
1
Proportion of employees in Fabricating = 45/(45 + 80) = 0.36
Proportion of employees in Assembly = 80/(45 + 80) = 0.64
3
Proportion of square feet in Fabricating = 6,000/(6,000 + 14,000) = 0.30
4
Proportion of square feet in Assembly = 14,000/(6,000 + 14,000) = 0.70
2
2.
Direct costs
Allocate:
Human Resources1
General Factory2
Total after allocation
1
2
Support Departments
Human
General
Resources
Factory
$ 150,000
$ 360,000
(150,000)
$
0
(360,000)
$
0
Producing Departments
Fabricating
$125,000
Assembly
$ 80,000
54,000
108,000
$287,000
96,000
252,000
$428,000
Fabricating = 0.36 $150,000 = $54,000; Assembly = 0.64 $150,000 = $96,000
Fabricating = 0.30 $360,000 = $108,000; Assembly = 0.70 $360,000 = $252,000
3. Since none of the Human Resources cost is allocated to General Factory, it
does not matter how many employees work in General Factory.
7-4
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in part.
Cornerstone Exercise 74
1. Allocation ratios with General Factory ranked first:
Proportion of Driver Used by
Human
General
Resources
Factory
Fabricating
Human Resources
0.36001
3
0.27914
General Factory
0.0698
Assembly
0.64002
0.65125
1
Proportion of employees in Fabricating = 45/(45 + 80) = 0.36
Proportion of employees in Assembly = 80/(45 + 80) = 0.64
3
Proportion of sq. ft. in Human Resources = 1,500/(1,500 + 6,000 + 14,000)
= 0.0698
4
Proportion of sq. ft. in Fabricating = 6,000/(1,500 + 6,000 + 14,000) = 0.2791
5
Proportion of sq. ft. in Assembly = 14,000/(1,500 + 6,000 + 14,000) = 0.6512
2
2.
Direct costs
Allocate:
General Factory1
Human Resources2
Total after allocation
Support Departments
Human
General
Resources
Factory
$ 150,000
$ 360,000
25,128
(175,128)
$
0
(360,036)
$
(36)*
Producing Departments
Fabricating
$125,000
Assembly
$ 80,000
100,476
63,046
$288,522
234,432
112,082
$426,514
1
Human Resources = 0.0698 $360,000 = $25,128; Fabricating = 0.2791
$360,000 = $100,476; Assembly = 0.6512 $360,000 = $234,432
2
Fabricating = 0.36 $175,128 = $63,046; Assembly = 0.64 $175,128 = $112,082
*Difference due to rounding.
3. Rounding the allocation ratios to six significant digits would produce a more
precise allocation of costs and would reduce rounding error. We can see that
there is a $36 rounding error in General Factory in Requirement 2. This is due
to the rounding of the allocation ratios. Taking those ratios out further will reduce the error. In fact, six significant digits will result in no rounding error in
this example.
7-5
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in part.
Cornerstone Exercise 75
1. Allocation ratios:
Proportion of Driver Used by
Human
General
Resources
Factory
Fabricating
1
Human Resources
0.3243
0.24322
4
0.27915
General Factory
0.0698
Assembly
0.43243
0.65126
1
Proportion of employees in General Factory = 60/(60 + 45 + 80) = 0.3243
Proportion of employees in Fabricating = 45/(60 + 45 + 80) = 0.2432
3
Proportion of employees in Assembly = 80/(60 + 45 + 80) = 0.4324
4
Proportion of sq. ft. in Human Resources = 1,500/(1,500 + 6,000 + 14,000)
= 0.0698
5
Proportion of sq. ft. in Fabricating = 6,000/(1,500 + 6,000 + 14,000) = 0.2791
6
Proportion of sq. ft. in Assembly = 14,000/(1,500 + 6,000 + 14,000) = 0.6512
2
2. Let HR = Human Resources and GF = General Factory.
HR = $150,000 + 0.0698GF
GF = $360,000 + 0.3243HR
Solving for Human Resources:
HR = $150,000 + 0.0698GF
= $150,000 + 0.0698($360,000 + 0.3243HR)
= $150,000 + $25,128 + 0.0226HR
0.9774 HR = $175,128
HR = $179,177
Solving for General Factory:
GF = $360,000 + 0.3243HR
= $360,000 + 0.3243($179,177)
= $418,107
3.
Direct costs
Allocate:
Human Resources1
General Factory2
Total after allocation
Support Departments
Human
General
Resources
Factory
$ 150,000
$ 360,000
(179,177)
29,184
$
7*
58,107
(418,107)
$
0
Producing Departments
Fabricating
$125,000
Assembly
$ 80,000
43,576
116,694
$285,270
77,476
272,271
$429,747
1
General Factory = 0.3243 $179,177 = $58,107; Fabricating = 0.2432
$179,177 = $43,576; Assembly = 0.4324 $179,177 = $77,476
2
Human Resources = 0.0698 $418,107 = $29,184; Fabricating = 0.2791
$418,107 = $116,694; Assembly = 0.6512 $418,107 = $272,271
*Difference due to rounding.
7-6
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in part.
Cornerstone Exercise 75
(Concluded)
4. Rounding the allocation ratios to six significant digits would produce a more
precise allocation of costs and would reduce rounding error. We can see that
there is a $7 rounding error in Human Resources in Requirement 3. This is due
to the rounding of the allocation ratios. Taking those ratios out further will reduce the error.
Cornerstone Exercise 76
1. Fabricating Dept. overhead rate = $287,000*/82,000 = $3.50 per mach. hr.
Assembly Dept. overhead rate = $428,000*/160,000 = $2.68 per DLH (rounded)
*From Cornerstone Exercise 7-3 solution.
2. Cost of Job 316:
Direct materials ...............................................................................
Direct labor cost..............................................................................
Applied overhead:
Fabricating (6 $3.50)...............................................................
Assembly (4 $2.68) .................................................................
Total cost.........................................................................................
3. New Cost of Job 316:
Direct materials ...............................................................................
Direct labor cost..............................................................................
Applied overhead:
Fabricating (1 $3.50)...............................................................
Assembly (4 $2.68) .................................................................
Total cost.........................................................................................
$ 175.00
200.00
21.00
10.72
$ 406.72
$ 175.00
200.00
3.50
10.72
$ 389.22
7-7
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in part.
Cornerstone Exercise 77
1.
Grades
Pounds
(2)
Percent
of Units*
(3)
Grade A............................
Grade B............................
Slices ...............................
Applesauce......................
Total .............................
1,500
5,000
8,000
5,500
20,000
Joint Cost
Allocation
(3) $6,000
7.50%
25.00
40.00
27.50
100.00%
$ 450
1,500
2,400
1,650
$6,000
*Percent for Grade A = 1,500/20,000 = 0.075, or 7.5%
Percent for Grade B = 5,000/20,000 = 0.25, or 25%
Percent for Slices = 8,000/20,000 = 0.40, or 40%
Percent for Applesauce = 5,500/20,000 = 0.275, or 27.5%
2. Average joint cost = $6,000/20,000 pounds = $0.30 per pound
Grade A joint cost allocation = $0.30 1,500 = $450
Grade B joint cost allocation = $0.30 5,000 = $1,500
Slices joint cost allocation = $0.30 8,000 = $2,400
Applesauce joint cost allocation = $0.30 5,500 = $1,650
(Note: Either method gives the same allocation results.)
3. If Grade A had 2,000 pounds and Grade B had 4,500 pounds, then Grade A
would receive 10 percent (2,000/20,000) of the joint cost, or $600 (10%
$6,000), and Grade B would receive 22.5 percent (4,500/20,000) of the joint
cost, or $1,350 (22.5% $6,000). There would be no impact on the allocation to
Slices and Applesauce since their proportion of total pounds did not change.
7-8
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in part.
Cornerstone Exercise 78
1.
Grades
Grade A
Grade B
Slices
Applesauce
Total
Number
of Pounds
Weight
Factor
1,500
5,000
8,000
5,500
Weighted Number
of Pounds
Percent
3.0
2.0
0.5
1.0
4,500
10,000
4,000
5,500
24,000
0.1875
0.4167
0.1667
0.2292
Allocated
Joint Cost
$1,125
2,500
1,000
1,375
$6,000
2. If the Grade A weight factor is decreased to 2.0, then the weighted number of
pounds would decrease by one-third and the Grade A apples would receive a
relatively smaller amount of joint cost. However, the allocation of cost to all
other grades will increase since the decreased weighted pounds for Grade A
apples will impact all percentages. The following table shows what would
happen:
Grades
Grade A
Grade B
Slices
Applesauce
Total
Number
of Pounds
Weight
Factor
1,500
5,000
8,000
5,500
Weighted Number
of Pounds
Percent
2.0
2.0
0.5
1.0
3,000
10,000
4,000
5,500
22,500
0.1333
0.4444
0.1778
0.2444
Allocated
Joint Cost
$ 800
2,666
1,067
1,467
$6,000
(Note: The joint cost allocation does not equal $6,000 due to rounding.)
7-9
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in part.
Cornerstone Exercise 79
1.
Grades
Grade A
Grade B
Slices
Applesauce
Total
Price at
Total Market
Percent
Allocated
Pounds
Split-Off
Value at
of Total
Joint
Produced (per pound)
Split-Off
Market Value
Cost
1,500
$4.00
$ 6,000
0.3859
$2,315
5,000
1.00
5,000
0.3215
1,929
8,000
0.50
4,000
0.2572
1,543
5,500
0.10
550
0.0354
212
20,000
$ 15,550
$5,999
Market value at split-off for Grade A = 1,500 $4.00= $6,000
Market value at split-off for Grade B = 5,000 $1.00 = $5,000
Market value at split-off for Slices = 8,000 $0.50 = $4,000
Market value at split-off for Applesauce = 5,500 $0.10 = $550
Percent for Grade A = $6,000/$15,550 = 0.3859, or 38.59%
Percent for Grade B = $5,000/$15,550 = 0.3215, or 32.15%
Percent for Slices = $4,000/$15,550 = 0.2572, or 25.72%
Percent for Applesauce = $550/$15,550 = 0.0354, or 3.54%
Grade A joint cost allocation = 0.3859 $6,000 = $2,315
Grade B joint cost allocation = 0.3215 $6,000 = $1,929
Slices joint cost allocation = 0.2572 $6,000 = $1,543
Applesauce joint cost allocation = 0.0354 $6,000 = $212
(Note: The total joint cost allocation does not equal $6,000 due to rounding.)
2. If the price of Grade B apples increases to $1.20 per pound, then Grade B
would have a higher market value and would receive a higher percentage of
joint cost. The other three grades would have somewhat lower joint cost allocations. Results of this change follow:
Grades
Grade A
Grade B
Slices
Applesauce
Total
Price at
Total Market
Percent
Allocated
Pounds
Split-Off
Value at
of Total
Joint
Produced (per pound)
Split-Off
Market Value
Cost
1,500
$4.00
$ 6,000
0.3625
$2,175
5,000
1.20
6,000
0.3625
2,175
8,000
0.50
4,000
0.2417
1,450
0.10
550
0.0332
199
5,500
20,000
$16,550
$5,999
(Note: The total joint cost allocation does not equal $6,000 due to rounding.)
7-10
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in part.
Cornerstone Exercise 710
1.
Further
Hypothetical
Hypothetical
Allocated
Market Processing
Market
Number
Market
Joint
Product Price
Cost
Price
of Gallons
Value
Percent* Cost**
(1)
(2)
=
(3)
(4)
=
(5)
L-Ten
Triol
Pioze
Total
$2.00
5.00
6.00
$0.50
1.00
1.50
$1.50
4.00
4.50
3,500
4,000
2,500
$ 5,250
16,000
11,250
$ 32,500
0.1615
0.4923
0.3462
$ 2,083
6,351
4,466
$ 12,900
*Percent for L-Ten = $5,250/$32,500 = 0.1615, or 16.15%
Percent for Triol = $16,000/$32,500 = 0.4923, or 49.23%
Percent for Pioze = $11,250/$32,500 = 0.3462, or 34.62%
**L-Ten joint cost allocation = 0.1615 $12,900 = $2,083
Triol joint cost allocation = 0.4923 $12,900 = $6,351
Pioze joint cost allocation = 0.3462 $12,900 = $4,466
2. If it cost $2 to process each gallon of Triol, the hypothetical market price
would be less, the hypothetical market value would be less, and Triol would
receive a smaller allocation of joint cost. The following table shows the results:
Further
Hypothetical
Hypothetical
Allocated
Market Processing
Market
Number
Market
Joint
Product Price
Cost
Price
of Gallons
Value
Percent* Cost**
(1)
(2)
=
(3)
(4)
=
(5)
L-Ten
$2.00
Triol
5.00
Pioze
6.00
Total
$0.50
2.00
1.50
$1.50
3.00
4.50
3,500
4,000
2,500
$ 5,250
12,000
11,250
$ 28,500
0.1842
0.4211
0.3947
$ 2,376
5,432
5,092
$ 12,900
*Percent for L-Ten = $5,250/$28,500 = 0.1842, or 18.42%
Percent for Triol = $12,000/$28,500 = 0.4211, or 42.11%
Percent for Pioze = $11,250/$28,500 = 0.3947, or 39.47%
**L-Ten joint cost allocation = 0.1842 $12,900 = $2,376
Triol joint cost allocation = 0.4211 $12,900 = $5,432
Pioze joint cost allocation = 0.3947 $12,900 = $5,092
7-11
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in part.
Cornerstone Exercise 711
1. Total revenue:
L-Ten ($2 3,500)...................................................
Triol ($5 4,000).....................................................
Pioze ($6 2,500) ...................................................
Further processing costs:
L-Ten ($0.50 3,500)..............................................
Triol ($1.00 4,000)................................................
Pioze ($1.50 2,500) ..............................................
Joint processing costs..........................................
Total gross margin.....................................................
$ 7,000
20,000
15,000
$ 1,750
4,000
3,750
$ 42,000
(9,500)
(12,900)
$ 19,600
2. Gross margin percentage = Gross margin/Total revenue
= $19,600/$42,000 = 0.4667, or 46.67% (rounded)
L-Ten
Eventual market value ......................
Less: Gross margin at 46.67% .........
Cost of goods sold .......................
Less separable costs........................
Allocated joint cost.......................
Triol
Pioze
$7,000
3,267
$3,733
1,750
$1,983
$ 20,000
9,334
$ 10,666
4,000
$ 6,666
$ 15,000
7,001
$ 7,999
3,750
$ 4,249
(Note: Allocated costs are rounded to the nearest dollar, so the allocated total
is $12,898.)
3. An increase in the further processing cost of Triol will reduce the gross margin percentage and will decrease the joint cost allocated to Triol.
Total revenue...................................................................................
Further processing costs...............................................................
Joint processing costs...................................................................
Total gross margin..........................................................................
$ 42,000
(13,500)
(12,900)
$ 15,600
Gross margin percentage = $15,600/$42,000 = 0.3714, or 37.14% (rounded)
Eventual market value ......................
Less: Gross margin at 37.14% .........
Cost of goods sold .......................
Less separable costs........................
Allocated joint cost.......................
L-Ten
$7,000
2,600
$4,400
1,750
$2,650
Triol
$ 20,000
7,428
$ 12,572
8,000
$ 4,572
Pioze
$ 15,000
5,571
$ 9,429
3,750
$ 5,679
(Note: Allocated costs are rounded to the nearest dollar, so the allocated total
is $12,901.)
7-12
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in part.
EXERCISES
Exercise 712
a.
support
f.
support
k.
support
b.
producing
g.
support
l.
support
c.
support
h.
producing
m.
support
d.
producing
i.
producing
n.
support
e.
support
j.
producing
o.
support
Exercise 713
a.
support
e.
producing
i.
producing
b.
support
f.
support
j.
support
c.
producing
g.
support
d.
producing
h.
producing
Exercise 714
a.
Number of employees
b.
Square footage
c.
Pounds of laundry
d.
Orders processed
e.
Maintenance hours worked
f.
Number of employees
g.
Number of transactions processed
h.
Machine hours
i.
Square footage
7-13
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in part.
Exercise 715
1.
Dr. Poston may want to cost the cleanser for several reasons: to value inventory, to determine profitability, and to plan sales and costs for the coming
year. As long as he sells relatively few bottles of cleanser, it is not necessary
to allocate any indirect costs to the cleanser. The medical assistant is paid
the same amount whether she mixes the cleanser or not. The space used to
store the cleanser materials is small, and the incremental cost is zero.
2.
The situation has changed dramatically. Now, the cleanser should be allocated some of the office rent as well as all of the new assistants salary. The
office rent could be apportioned 75 percent to the three doctors and 25 percent to the cleanser bottling operation given that the cleanser operation takes
an office and an examining room. It could be argued that this overstates the
allocation to the cleanser, since the waiting room area does not serve the
cleanser. However, the receptionist probably takes calls and opens mail for
this project, so overstating the rent may be an easy way to adjust for this.
The cost per bottle would then be:
Materials ........................................
Labor ($12,000/40,000)..................
Office rent*.....................................
Total cost ................................
$0.50
0.30
0.38
$1.18
*Office rent allocation = [($5,000 12)/4]/40,000 bottles (rounded).
Exercise 716
1.
The incremental method of allocating the cost of the trip would result in a
cost to Courtney of $250 ($20 times five nights for the rollaway and $150 for
her food).
2.
The benefits-received approach could result in the following cost allocation
to Courtney:
Motel ($725/3) ................................ $241.67
Food ...............................................
150.00
Gas ($120/3) ...................................
40.00
Total ........................................ $431.67
The treatment of the motel cost is problematic. This computation adds the
rollaway cost for five nights to the cost of the double room for five nights.
However, if Courtney spends the entire time on a (less comfortable) rollaway,
she may be less than pleased. Perhaps the vacationers could trade off sleeping on the rollaway.
7-14
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in part.
Exercise 717
1.
Single charging rate = [($1,800 + $1,500)/1,000*] + $1.20
= $4.50 per gift
*175 + 400 + 100 + 75 + 20 + 130 + 100 = 1,000
Store
The Stationery Station ..................
Arts & Collectibles ........................
Kid-Sports......................................
Java Jims......................................
Designer Shoes .............................
Cristinas Closet............................
Alans and Drug Sundries ............
Total ........................................
Number
of Gifts
160
420
240
10
50
200
450
1,530
Store
The Stationery Station ..................
Arts & Collectibles ........................
Kid-Sports......................................
Java Jims......................................
Designer Shoes .............................
Cristinas Closet............................
Alans Drug and Sundries ............
Total ........................................
Number
of Gifts
175
400
100
75
20
130
100
1,000
2.
Charging
Rate
$4.50
4.50
4.50
4.50
4.50
4.50
4.50
Percent
17.50%
40.00
10.00
7.50
2.00
13.00
10.00
100.00%
=
Total
$ 720
1,890
1,080
45
225
900
2,025
$6,885
Allocated
Fixed Amount*
$ 577.50
1,320.00
330.00
247.50
66.00
429.00
330.00
$3,300.00
*Allocated fixed amount = Percent $3,300.
Variable rate = $1.20 per gift
Store
The Stationery Station .........
Arts & Collectibles ...............
Kid-Sports.............................
Java Jims.............................
Designer Shoes ....................
Cristinas Closet...................
Alans Drug and Sundries ...
Total ...............................
Number
of Gifts
160
420
240
10
50
200
450
1,530
Variable
Fixed
Total
Amount + Amount = Charge
$ 192
$ 577.50
$ 769.50
504
1,320.00
1,824.00
288
330.00
618.00
12
247.50
259.50
60
66.00
126.00
240
429.00
669.00
540
330.00
870.00
$1,836
$3,300.00
$5,136.00
7-15
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or
in part.
Exercise 717
3.
(Concluded)
The shops that actually use the gift-wrapping service less than anticipated
would like the single charging rate. The single charging rate assigns less of
the fixed cost to the shops using less of the service. Java Jims originally anticipated having 75 gifts wrapped per month but actually had only 10 gifts
wrapped. Under the single charging rate, Java Jims pays $45; under the dual
charging rate, it pays $259.50.
The dual charging rate method is preferred by shops that use the service as
much as or more than anticipated. Alans Drug and Sundries had a much
greater use for the service and would be charged $870 under the dual rate but
$2,025 under the single rate.
4.
Despite the charging rate method, Jeff may be overcharging by overestimating his fixed costs. The space used by the gift-wrapping service is one of
three vacant spaces. The opportunity cost of using it to wrap gifts is zero.
Until the ninth space is rented and there is an occupant for the tenth, perhaps
the fixed cost should include only the wages paid to the gift wrappers.
Exercise 718
1.
Allocation ratios:
Department A .........
Department B .........
Year 1
0.4
0.6
Year 2
0.5
0.5
$48,000
72,000
$60,000
60,000
Allocation:
Department A .........
Department B .........
2.
The manager of Department B is not controlling human resource costs better
than the manager of Department A. The only reason that Department As allocation of human resource cost increased is because Department Bs usage
decreased.
3.
First, variable and fixed costs should be allocated separately. Second, budgeted (not actual) costs should be allocated. Variable costs should be assigned to the two user departments by multiplying the budgeted variable cost
per hour by the actual hours or budgeted hours used, depending on whether
the purpose is performance evaluation or product costing. Fixed costs would
be assigned in proportion to the practical or normal activities of each user
department.
7-16
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in part.
Exercise 719
1.
Product costing (Year 1 and Year 2 are identical):
Department A
Variable costs:
($0.25 20,000) ...
($0.25 20,000) ...
Fixed costs:
(0.5 $100,000) ...
(0.5 $100,000) ...
Total cost ....................
2.
Department B
$ 5,000
$ 5,000
50,000
50,000
$55,000
$55,000
Performance evaluation:
Year 1
Department A
Department B
Variable costs:
($0.25 24,000) ...
($0.25 36,000) ...
Fixed costs:
(0.5 $100,000) ...
(0.5 $100,000) ...
Total cost ....................
$ 6,000
$ 9,000
50,000
50,000
$59,000
$56,000
Year 2
Department B
Department A
Variable costs:
($0.25 25,000) ...
($0.25 25,000) ...
Fixed costs:
(0.5 $100,000) ...
(0.5 $100,000) ...
Total cost ....................
$ 6,250
$ 6,250
50,000
50,000
$56,250
$56,250
7-17
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in part.
Exercise 720
1.
Allocation ratios:
Square feet ...................
Machine hours..............
Purchase orders...........
Toothpaste
0.5333
0.2500
0.3333
Tooth Whitener
0.4667
0.7500
0.6667
Cost assignment:
Toothpaste
Direct costs
Power:
(0.2500 $90,000) ...........
(0.7500 $90,000) ...........
General Factory:
(0.5333 $420,000) .........
(0.4667 $420,000) .........
Purchasing:
(0.3333 $180,000) .........
(0.6667 $180,000) .........
Total ........................................
2.
Tooth Whitener
$141,600
$175,000
22,500
67,500
223,986
196,014
59,994
$448,080
120,006
$558,520
Departmental overhead rates:
Toothpaste:
$448,080/8,000 = $56.01 per machine hour
Tooth Whitener: $558,520/24,000 = $23.27 per machine hour
7-18
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in part.
Exercise 721
1.
Assume the support department costs are allocated in order of highest to
lowest cost: General Factory, Purchasing, and Power.
Square feet.................
Machine hours ...........
Purchase orders ........
Power
0.1250
0.1000
Power
Direct costs................ $ 90,000
General Factory:
(0.1250 $420,000)
52,500
(0.1250 $420,000)
(0.4000 $420,000)
(0.3500 $420,000)
Purchasing:
(0.1000 $232,500)
23,250
(0.3000 $232,500)
(0.6000 $232,500)
Power:
(0.2500 $165,750) (41,438)
(0.7500 $165,750) (124,313)
Total............................ $
(1)*
General
Factory
Purchasing Toothpaste
0.1250
0.4000
0.2500
0.3000
Tooth
Whitener
0.3500
0.7500
0.6000
General
Factory Purchasing Toothpaste
$ 420,000 $ 180,000
$141,600
Tooth
Whitener
$175,000
(52,500)
(52,500)
(168,000)
(147,000)
52,500
168,000
147,000
(23,250)
(69,750)
(139,500)
69,750
139,500
41,438
$
0
$
0
$420,788
124,313
$585,813
*Difference due to rounding.
2.
Toothpaste:
$420,788/8,000 = $52.60 per machine hour (rounded)
Tooth Whitener: $585,813/24,000 = $24.41 per machine hour (rounded)
7-19
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in part.
Exercise 722
1.
General Factory
Square footage ..............
Number of receiving
orders .........................
0.10
Receiving
0.20
Assembly
0.40
Finishing
0.40
0.56
0.34
R = 160,000 + 0.2GF
R = 160,000 + 0.2(400,000 + 0.1R)
R = 160,000 + 80,000 + 0.02R
0.98R = 240,000
R = 244,898
Direct overhead cost .....
Allocate:
General Factorya .........
Receivingb ...................
Total................................
GF = 400,000 + 0.1R
GF = 400,000 + 0.1(244,898)
GF = 400,000 + 24,490
GF = 424,490
General
Factory
$ 400,000
Receiving
$ 160,000
Assembly
$ 43,000
Finishing
$ 74,000
(424,490)
24,490
$
0
84,898
(244,898)
$
0
169,796
137,143
$349,939
169,796
83,265
$327,061
a
Receiving = 0.20 $424,490 = $84,898; Assembly = 0.40 $424,490 =
$169,796; Finishing = 0.40 $424,490 = $169,796
b
General Factory = 0.10 $244,898 = $24,490; Assembly = 0.56 $244,898 =
$137,143; Finishing = 0.34 $244,898 = $83,265
2.
Departmental rates:
Assembly: $349,939/25,000 = $14.00 per direct labor hour
Finishing: $327,061/40,000 = $8.18 per direct labor hour
Exercise 723
1.
Square footage ......................
Number of receiving orders
General Factory:
(0.5000 $400,000).........
(0.5000 $400,000).........
Receiving:
(0.6222 $160,000).........
(0.3778 $160,000).........
Direct costs ...........................
2.
Assembly
0.5000
0.6222
Finishing
0.5000
0.3778
$200,000
$200,000
99,552
43,000
$342,552
60,448
74,000
$334,448
Assembly: $342,552/25,000 = $13.70 per direct labor hour
Finishing: $334,448/40,000 = $8.36 per direct labor hour
7-20
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or
in part.
Exercise 724
1.
Receiving
0.2000
Square footage .................................
Number of receiving orders ............
Assembly
0.4000
0.6222
Finishing
0.4000
0.3778
General
Factory
Direct overhead cost .....
Allocate:
General Factorya .........
Receivingb ...................
Total................................
Receiving
Assembly
Finishing
$ 400,000
$ 160,000
$ 43,000
$ 74,000
(400,000)
0
$
0
80,000
(240,000)
$
0
160,000
149,328
$352,328
160,000
90,672
$324,672
a
Receiving = 0.2 $400,000 = $80,000; Assembly = 0.4 $400,000 = $160,000;
Finishing = 0.4 $400,000 = $160,000
b
Assembly = 0.6222 $240,000 = $149,328; Finishing = 0.3778 $240,000 =
$90,672
2.
Assembly: $352,328/25,000 = $14.09 per direct labor hour
Finishing: $324,672/40,000 = $8.12 per direct labor hour
Exercise 725
1.
Colgene .............
Delgene..............
Prosone .............
Freol...................
Total .............
Units
1,200
1,800
3,000
3,600
9,600
2.
Colgene .......
Delgene........
Prosone .......
Freol.............
Total .......
Units
1,200
1,800
3,000
3,600
Percent
0.1250
0.1875
0.3125
0.3750
Joint Cost
$150,000
150,000
150,000
150,000
Weight Weighted
Factor = Units
3.0
3,600
4.0
7,200
0.5
1,500
1.0
3,600
15,900
=
Allocated Joint Cost
$ 18,750
28,125
46,875
56,250
$150,000
Joint
Allocated
Percent
Cost = Joint Cost
0.2264
$150,000 $ 33,960
0.4528
150,000
67,920
0.0943
150,000
14,145
0.2264
150,000
33,960
$149,985*
*Does not equal $150,000 due to rounding of percents.
7-21
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or
in part.
Exercise 726
Colgene ....
Delgene ....
Prosone....
Freol .........
Total ....
Units
1,200
1,800
3,000
3,600
9,600
Price at
Split-Off
$60.00
75.00
20.00
28.50
Market Value
at Split-Off
$ 72,000
135,000
60,000
102,600
$ 369,600
Joint
Allocated
Percent
Cost
Cost
0.1948 $ 150,000 $ 29,220
0.3653
150,000
54,795
0.1623
150,000
24,345
0.2776
150,000
41,640
$150,000
Exercise 727
1.
Units
Overs ...... 14,000
Unders .... 36,000
Total.....
Eventual
Price Market Value
$2.00
$ 28,000
3.14
113,040
Separable
Costs
$18,000
23,040
Joint cost...........................................................
Percent of hypothetical market value ..........
Allocated joint cost ..........................................
2.
Hypothetical
Market Value
$ 10,000
90,000
$100,000
Overs
$ 50,000
0.10
$ 5,000
Value of overs at split-off (14,000 $1.80) .....
Unders
$50,000
0.90
$ 45,000
$25,200
Value of overs when processed further .........
Less: Further processing cost ........................
Incremental value of further processing ...
Percent
0.10
0.90
$28,000
18,000
$10,000
Overs should not be processed further as there will be $15,200 more profit if
sold at split-off.
7-22
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in part.
PROBLEMS
Problem 728
1.
Ratio for fixed costs* ..........
Fixed costs ..........................
Variable costs** ...................
Taos
0.68
Angel Fire
0.32
$ 81,600
68,000
$ 149,600
$ 38,400
32,000
$ 70,400
*Taos = 1,700/2,500 = 0.68; Angel Fire = 800/2,500 = 0.32
**Taos = $40 1,700; Angel Fire = $40 800
2.
Costing out services serves the same purposes as costing out tangible products (e.g., pricing, profitability analysis, and performance evaluation). Once
the costs are allocated to each revenue-producing center, then the costs
must be assigned to individual services through the use of an overhead rate
or rates.
3.
If the purpose is to cost out individual services, then the allocation is identical to that given in Requirement 1.
If the purpose is for performance evaluation, then variable costs equal the
predetermined rate multiplied by the actual usage. The fixed costs are allocated the same way as before.
Taos
Variable costs:
$40 1,650....................
$40 1,100....................
Fixed costs ..........................
4.
Angel Fire
$ 66,000
81,600
$147,600
$ 44,000
38,400
$ 82,400
The allocated costs of $230,000 were $1,000 lower than the actual costs of
$231,000, because the producing departments are charged an allocation
based on budgeted costs rather than actual costs. Budgeted costs are allocated so that the efficiencies or inefficiencies of the service center are not
assigned to the user departments.
7-23
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or
in part.
Problem 729
1.
Allocation ratios for fixed costs (uses normal levels):
SLC
Hours of flight time ............. 0.2500
Number of passengers ....... 0.3333
Reno
0.5000
0.5000
Portland
0.2500
0.1667
Variable rates:
Maintenance: $30,000/8,000 = $3.75 per flight hour
Baggage:
$64,000/30,000 = $2.1333 per passenger
SLC
Maintenancefixed:
(0.2500 $240,000)...............
(0.5000 $240,000)...............
(0.2500 $240,000)...............
Maintenancevariable:
($3.75 2,000) ......................
($3.75 4,000) ......................
($3.75 2,000) ......................
Baggagefixed:
(0.3333 $150,000)...............
(0.5000 $150,000)...............
(0.1667 $150,000)...............
Baggagevariable:
($2.1333 10,000).................
($2.1333 15,000).................
($2.1333 5,000) ..................
Reno
Portland
$ 60,000
$120,000
$ 60,000
7,500
15,000
7,500
49,995
75,000
25,005
21,333
32,000
$138,828
$242,000
10,667
$ 103,172
7-24
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or
in part.
Problem 729
2.
(Concluded)
The allocations are the same as in Requirement 1, except variable costs are
assigned using actual instead of budgeted activity.
Maintenancefixed ....................
Maintenancevariable:
($3.75 1,800) ......................
($3.75 4,200) ......................
($3.75 2,500) ......................
Baggagefixed ...........................
Baggagevariable:
($2.1333 8,000) ..................
($2.1333 16,000).................
($2.1333 6,000) ..................
SLC
$ 60,000
Reno
$120,000
Portland
$ 60,000
6,750
15,750
49,995
75,000
9,375
25,005
17,066
34,133
$133,811
$244,883
12,800
$107,180
Yes, maintenance actually cost $315,000, but only $271,875 was allocated.
Baggage actually cost $189,000, but $213,999 was allocated. Actual costs are
not allocated so that inefficiencies or efficiencies will not be passed on.
Problem 730
1.
Proportion of:
Machine hours ....................................................
Number of employees ........................................
Power:
(0.4000 $150,000) .............................................
(0.6000 $150,000) .............................................
Human Resources:
(0.4286 $160,000) .............................................
(0.5714 $160,000) .............................................
Direct costs ..............................................................
Pottery
0.4000
0.4286
Retail
0.6000
0.5714
$ 60,000
$ 90,000
68,576
83,600
$212,176
91,424
47,800
$229,224
7-25
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or
in part.
Problem 730
(Concluded)
2.
Machine hours
Number of employees
Direct costs ....................
Human Resources:
(0.125 $160,000) .....
(0.375 $160,000) .....
(0.500 $160,000) .....
Power:
(0.40 $170,000) .......
(0.60 $170,000) .......
Cost after allocation.......
Power
0.1250
Human
Resources
$ 150,000
$160,000
20,000
(68,000)
(102,000)
$
0
(20,000)
(60,000)
(80,000)
Pottery
0.4000
0.3750
$ 83,600
Retail
0.6000
0.5000
$ 47,800
60,000
80,000
68,000
$
0
$211,600
102,000
$229,800
Pottery
0.3600
0.3750
Retail
0.5400
0.5000
3.
Machine hours..................
Number of employees......
HR
HR
HR
0.9875 HR
HR
Human
Resources
0.1000
Power
0.1250
= $160,000 + 0.1000P
= $160,000 + 0.10($150,000 + 0.1250HR)
= $160,000 + $15,000 + 0.0125HR
= $175,000
= $177,215
P = $150,000 + 0.1250HR
P = $150,000 + 0.125($177,215)
P = $150,000 + $22,152
P = $172,152
Pottery
Human Resources:
(0.3750 $177,215) .....................
(0.5000 $177,215) .....................
Power:
(0.3600 $172,152) .....................
(0.5400 $172,152) .....................
Direct costs ......................................
Cost after allocation.........................
Retail
$ 66,456
$ 88,608
61,975
83,600
$212,031
92,962
47,800
$229,370
7-26
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or
in part.
Problem 731
1.
General
Engineering Factory
Department costs................. $ 216,000 $ 370,000
Allocation of:
Engineering (0.2, 0.8) .........
(216,000)
0
Gen. Factory (0.875, 0.125)
0
(370,000)
Total overhead cost ............. $
0
$
0
Direct labor hours ................
Overhead rate per DLH ........
Molding
$190,000
Assembly
$ 80,000
43,200
323,750
$556,950
40,000
$ 13.92
172,800
46,250
$299,050
160,000
$
1.87
2.
Engineering
Engineering hours ...
Square feet ...............
0.2000
General Factory
0.1667
Molding
0.1667
0.7000
Assembly
0.6667
0.1000
Algebraic equations for relationship between service departments
(E = Engineering Department; GF = General Factory Department):
E = $216,000 + 0.2000GF
GF = $370,000 + 0.1667E
E=
E=
0.9667E =
E=
$216,000 + 0.2000($370,000 + 0.1667E)
$216,000 + $74,000 + 0.0333E
$290,000
$299,990
GF = $370,000 + 0.1667($299,990)
GF = $420,008
Engineering
Direct overhead costs......
Allocation of:
Engineering ....................
General Factory..............
Total overhead cost .........
Direct labor hours ............
Overhead rate per DLH ....
General
Factory
Molding
Assembly
$ 216,000
$ 370,000
$190,000
$ 80,000
(299,990)
84,002
$
12
50,008
(420,008)
$
0
50,008
294,006
$534,014
40,000
$ 13.35
200,003
42,001
$322,004
160,000
$
2.01
7-27
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or
in part.
Problem 731
3.
(Concluded)
The direct allocation method ignores any service rendered by one support
department to another. Allocation of each support departments total cost is
made directly to the production departments. The reciprocal allocation
method recognizes all support department support to one another through
the use of simultaneous equations or linear algebra. This allocation procedure is more accurate and should lead to better results, which would be of
greater value to management. However, the method is infrequently used in
actual practice because of the problems associated with developing a more
complex or difficult model to recognize the interrelationships between support departments.
Problem 732
1.
Two Oil............
Six Oil..............
Distillates........
Total ............
Barrels
300,000
170,000
80,000
550,000
Percent Joint Cost = Allocated Joint Cost
0.5455
$10,000,000
$ 5,455,000
0.3091
10,000,000
3,091,000
0.1455
10,000,000
1,455,000
$ 10,001,000*
*Difference due to rounding.
2.
Price at Market Value
Barrels Split-Off at Split-Off
Two Oil..... 300,000
$25
$ 7,500,000
Six Oil....... 170,000
30
5,100,000
Distillates
80,000
16
1,280,000
Total .....
$13,880,000
Joint
Allocated
Percent
Cost
Cost
0.5403 $10,000,000 $ 5,403,000
0.3674 10,000,000 3,674,000
0.0922 10,000,000
922,000
$ 9,999,000*
*Difference due to rounding.
7-28
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or
in part.
Problem 733
1.
Ruidoso
Roswell
Santa Rosa
El Paso
Albuquerque
($420,000/$2,800,000 $223,000)
($588,000/$2,800,000 $223,000)
($364,000/$2,800,000 $223,000)
($728,000/$2,800,000 $223,000)
($700,000/$2,800,000 $223,000)
2.
Share of Accounting Department fixed costs based on 2009 sales:
Ruidoso
Roswell
Santa Rosa
El Paso
Albuquerque
Ruidoso
Roswell
Santa Rosa
El Paso
Albuquerque
3.
($405,000/$2,700,000 $135,000)
($540,000/$2,700,000 $135,000)
($432,000/$2,700,000 $135,000)
($648,000/$2,700,000 $135,000)
($675,000/$2,700,000 $135,000)
Variable Cost
($20 1,475) = $29,500
($20 410) =
8,200
($20 620) = 12,400
($20 890) = 17,800
($20 450) =
9,000
+
+
+
+
+
+
= $33,450
= 46,830
= 28,990
= 57,980
= 55,750
= $20,250
= 27,000
= 21,600
= 32,400
= 33,750
Fixed Cost
$20,250
27,000
21,600
32,400
33,750
=
=
=
=
=
=
Total
$49,750
35,200
34,000
50,200
42,750
The method in Requirement 2 is better because it ties cost allocated to the
driver that causes the cost. Thus, managers would be more likely to use Accounting Department time efficiently. The method in Requirement 1 assigns
accounting costs on the basis of a variable (sales), which may not be causally related. Also, a motel with stable sales from year to year may still experience wild fluctuations in allocated cost due to changing sales patterns of
other motels.
7-29
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or
in part.
Problem 734
1.
a. Relative sales-value-at-split-off method:
Monthly
Unit
Output
Studs ...................... 75,000
Decorative pieces..
5,000
Posts ...................... 20,000
Total ...................
Sales
Relative
Price
Sales Value
per Unit at Split-Off
$8
$ 600,000
60
300,000
20
400,000
$1,300,000
Percent Allocated
of
Joint
Sales
Costs
46.15% $ 461,500
23.08
230,800
30.77
307,700
100.00% $1,000,000
b. Physical units (volume) method at split-off:
Studs ......................
Decorative pieces..
Posts ......................
Total ...................
Units
75,000
5,000
20,000
100,000
Percent
0.750
0.050
0.200
Joint Cost =
$1,000,000
1,000,000
1,000,000
Allocated
Joint Costs
$ 750,000
50,000
200,000
$1,000,000
c. Estimated net realizable value method:
Studs ........................
Decorative pieces....
Posts ........................
Total .....................
Fully
Processed
Monthly
Unit
Output
75,000
4,500*
20,000
Sales
Price
Estimated
Net
Percent
Allocated
per Realizable
of
Joint
Unit
Value
Value
Costs
$ 8 $ 600,000
44.44% $ 444,400
100
350,000** 25.93
259,300
20
400,000
29.63
296,300
$1,350,000 100.00% $ 1,000,000
*5,000 monthly units of output 10% normal spoilage = 4,500 good units
**4,500 good units $100 = $450,000 Further processing cost of $100,000 =
$350,000
7-30
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or
in part.
Problem 734
2.
(Concluded)
5,000
500
4,500
Final sales value (4,500 units @ $100 per unit)...........
Less: Sales value at split-off ........................................
Differential revenue..................................................
Less: Further processing costs ...................................
Additional contribution from further processing ..
3.
Monthly unit output .......................................................
Less: Normal further processing shrinkage ...............
Units available for sale ............................................
$ 450,000
300,000
$ 150,000
100,000
$ 50,000
Assuming Sonimad Sawmill, Inc., announces that in six months it will sell the
rough-cut product at split-off, due to increasing competitive pressure, at least
three types of likely behavior that will be demonstrated by the skilled labor in
the planing and sizing process include the following:
Poorer quality
Reduced motivation and morale
Job insecurity, leading to nonproductive employee time spent looking for
jobs elsewhere
Management actions that could improve this behavior include the following:
The company could improve communication by giving the workers a more
comprehensive explanation for why the order was changed and by outlining a plan for future operation of the rest of the plant.
The company can offer incentive bonuses to maintain quality and production and align rewards with goals.
The company could provide job relocation and internal job transfers.
7-31
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or
in part.
Problem 735
1.
Clearly, some expenses pertain to women living in the house, while others
pertain to all members. In-house members use the second floor, most of the
food, and most of the variable expenses. All members use the first floor facilities, food for Monday night dinners, and cereal and milk for snacks. HCB
must determine a fair method of allocating the costs since the sorority is a
nonprofit entity and house bills in total must equal house costs. It is difficult
to allocate the costs precisely to the two types of members given the sketchy
nature of the data.
2.
Using a benefits-received approach, the following charging rates might be
applied.
In-house members:
Use of second floor ($240,000 $40,000)/2............
Use of first floor [($240,000 $40,000)/2]0.6 ..........
Food* ($1.01)(60)(20)(32)..........................................
Variable expenses ....................................................
Total....................................................................
$ 100,000
60,000
38,784
34,800
$233,584
Charging rate per in-house member per year: $233,584/60 = $3,893
*Cost per meal: $40,000/{[40 + (60 20)] 32} = $1.01
Out-of-house members:
Use of first floor [($240,000 $40,000)/2]0.4 ..........
Food ($1.01)(32)(40) .................................................
Total....................................................................
$ 40,000
1,293
$ 41,293
Charging rate per out-of-house member per year: $41,293/40 = $1,032
CYBER RESEARCH CASE
736
Answers will vary.
The Collaborative Learning Exercises can be found on the product
support site at
www.cengage.com/accounting/hansen.
7-32
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or
in part.