Chapter 15 Questions - operating department(p 593 $22131...

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Unformatted text preview: operating department (p. 593) $22131: CHAPTER 15 ALLOCATION OF SUPPORT—DEPARTMENT COSTS, COl\/ll\/|ON COSTS, AND R-V“NUl-S dualmrate method ta. 50141) production department lp. $03) stand—alone cost—allocation method incremental cost-allocation method reciprocal method ()3. 600) (p. 012) lp. 012) revenue allocation (p. 014) stand-alone revenue—allocation method incremental revenue—allocation method revenue objectfp. 614) (p. 515) (p. 617) service department (p. 593) step-down method ()3. 005) matrix method (p.608) single—rate method ()1). 500) support departmentlp. 593) sequential allocation method (p. 605) Distinguish between the single-rate and the dual-rate methods. Describe how the dual—rate method is useful to division managers in decision making. How do budgeted cost rates motivate the support—department manager to improve efficiency? Give examples of allocation bases used to allocate support—department cost pools to operating departments. Why might a manager prefer that budgeted rather than actual cost—allocation rates be used for costs being allocated to his or her department from another department? “To ensure unbiased cost allocations, fixed costs should be allocated on the basis of estimated long-run use by user-department managers." Do you agree? Why? Distinguish among the three methods of allocating the costs of support departments to operating departments. What is conceptually the most defensible method for allocating support-department costs? Why? Distinguish between two methods of allocating common costs. What role does the Cost Accounting Standards Board play when companies contract with the US. government? What is one key way to reduce cost—allocation disputes that arise with government contracts? Describe how companies are increasingly facing revenue-allocation decisions. Distinguish between the stand-alone and the incremental revenue-allocation methods. ldentify and discuss arguments that individual product managers may put forward to support their preferred revenue—allocation method- How might a dispute overthe allocation of revenues of a bundled product be resolved? 15-18 all manufacturing departments of lVlidWest Engineering has a budget forthe coming year. This budget has been expressed in the following monthly terms: Single-rate versus dual-rate methods, support department. The Detroit power plant that services Manufacturing Needed at Practical Capacity Average Expected Monthly Department Production Level (Kilowatt-Hours) Usage (Kilowatt-Hours) Livonia 16,000 12,000 Warren 22,000 ' 10,000 Dearborn 23,000 8,000 Westland 19,000 10,000 Total 57066 @ The expected monthly costs for operating the power plant during the budget year are $21,600: $4,000 vari- able and $17,600 fixed. 1. Assume that a single cost pool is used for the power plant costs. What budgeted amounts will be allocated to each manufacturing department if (a) the rate is calculated based on practical capacity and costs are allocated based on practical capacity and (b) the rate is calculated based on expected monthly usage and costs are allocated based on expected monthly usage? 2. Assume the dual-ratemethod is used with separate cost pools for the variable and fixed costs. Variable costs are allocated on the basis of expected monthly usage. Fixed costs are allocated on the r t t 5 ASSlGNh/l basis of practical capacity. What budgeted amounts will be allocated to each manufacturing depart ment? Why might you prefer the dual—rate method? "if :1 i Single-rate method, budgeted versus actuat costs and quantities. Chocolat Inc. is a producer of premium chocolate based in Palo Alto. The company has a separate division for each of its two products: dark chocolate and milk chocolate. Chocolat purchases ingredients from Wisconsin for its dark chocolate division and from Louisiana for its milk chocolate division. Both locations are the same distance from Chocolat’s Palo Alto plant. Chocolat Inc. operates a fleet of trucks as a cost center that charges the divisions for variable costs (drivers and fuel) and fixed costs (vehicle depreciation, insurance, and registration fees) of operating the fleet. Each division is evaluated on the basis of its operating income. For 2013, the trucking fleet had a prac~ tical capacity of 50 round—trips between the Palo Alto plant and the two suppliers. It recorded the following information: Home Insert Page Layout Formutas Data Review View A “—I B Budgeted Costs of truck fleet $115,000 Number of round-trips for dark chocolate division (Palo Alto plant—Wisconsin) 30 Number of round-trips for milk chocolate division (Palo Alto plant—Louisiana) t. Using the single-rate method, allocate costs to the dark chocolate division and the milk chocolate divi— sion in these three ways. 20 a. Calculate the budgeted rate per round—trip and allocate costs based on round-trips budgeted for each division. b. Calculate the budgeted rate per round—trip and allocate costs based on actual round-trips used by each division. c. Calculate the actual rate per round—trip and allocate costs based on actual round-trips used by each division. 2. Describe the advantages and disadvantages of using each of the three methods in requirement 1. Would you encourage Chocolat Inc. to use one of these methods? Explain and indicate any assump- tions you made. €548 Dual-rate method, budgeted versus actual costs and quantities (continuation of 15-17). Chocolat lnc. decides to examine the effect of using the dual-rate method for allocating truck costs to each round- trip. Atthe start of 2013, the budgeted costs were as follows: Variable cost per round-trip Fixed costs Assume all other information to be the same as in Exercise 15-17. rate per round-trip and round-trips budgeted for each division? rather than the single-rate method? The actual results forthe 45 round—trips made in 2013 were as follows: $ 1,350. $47,500 Variable. costs $58,500 Fixed costs 38,250 $96,750 1. Using the dual-rate method, what are the costs allocated to the dark chocolate division and the milk chocolate division when (a) variable costs are allocated using the budgeted rate per round-trip‘and actual round-trips used by each division and when (b) fixed costs are allocated based on the budgeted 2. From the viewpoint of the dark chocolate division, what are the effects of using the dual-rate method 15—19 Support-department cost allocation; direct and step—down methods. Phoenix Partners provides management consulting services to government and corporate clients. Phoenix has two support ENT IVIAT 5:242: CHAPTER 15 ALLOCATION Of: SUPPORT—DEPARTMENT COSTS, COMMON COS I 8, AND H— t—NU-S departmentswadministrative services (AS) and information systems (ISIwand two operating departmentsx government consulting (GOVT) and corporate consulting (CORP). For the first quarter of 2013, Phoenix’s cos-r records indicate the following: , Ho m «3 insert Page Layout Formulas Date Review View | A B C D E F Q SUPPORT OPERATING 2 ( AS is GOVT CORP 3 Budgeted overhead costs before any 4 Interdepartment cost allocations $600,000 $2,400,000 $8,756,000 $12,452,000 Support work supplied by AS $24,208,000 i 5 (budgeted head count) — 25% 40% 35% 100% ;. Support work supplied by IS 6 (budgeted computer time) 10% —— 30% 60% 100% 1 1. Allocate the two support departments’ costs to the two operating departments using the fol owing methods: 3 a. Direct method . I). Step-down method (allocate AS first) c. Step-down method (allocate IS first) 2. Compare and explain differences in the support—department costs allocated to each operating department. 3. What approaches might be used to decide the sequence in which to allocate support departments when using the step-down method? "tfiQt? Support—department cost allocation, reciprocal method (continuation of15-19). Refer to the data given in Exercise 15-19. 1. Allocate the two support departments' costs to the two operating departments using the reciprocal method. Use (a) linear equations and (b) repeated iterations. ' 2. Compare and explain differences in requirement 1 with those in requirement 1 of Exercise 15—19. ‘ Which method do you prefer? Why? ”3559:? Direct and step-down allocation. E-books, an online book retailer, has two operating departments~ corporate sales and consumer sales—and two support departments—human resources and information systems. Each sales department conducts merchandising and marketing operations independently. E-books uses number of employees to allocate humanresomces costs and processing time to allocate information systems costs. The following data are available for September 2013: . as“; ', :msgyr so: a 7 Home Insert Page Layout Formulas ' Data REVIEW View A c El E p SUPPORT OPERATING DEPARTMENTS DEPARTMENTS Human Information Corporate Consumer Resources L Systems Sales Sales we: . in? w « interdepartment cost allocations $72,700 $234,400 $998,270 Support work supplied by human resources department 6 Budgeted number of employees — 21 42 Support work supplied by information 7 systems department 8 Budgeted processing time (in minutes) 320 — 1,920 $489,860 Budgeted costs incurred before any 1. Allocate the support departments’ costs to the operating departments using the direct method. 2. Bank the support departments based on the percentage of their services provided to other support departments. Use this ranking to allocate the support departments' costs to the operating departments based on the step—down method. 3. How could you have ranked the support departments differently? t. . nmwwm» ASSIGNM Beciprocat cost aliooatioa ioootinaation of ‘lE—Zi) Consider E—books again. The controller of E~books reads a widely used textbook that states that ”the reciprocal method is conceptually the most defensible.” He seeks your assistance. ‘5. Describe the key features of the reciprocal method. 2. Allocate the support departments’ costs (human resources and information systems) to the two oper- ating departments using the reciprocal method. 3. In the case presented in this exercise, which method (direct, step-down, or reciprocal) would you recommend? Why? “3 EVMZB Allocation of common costs. Evan and Brett are students at Berkeley College. They share an apartment that is owned by Brett. Brett is considering subscribing to an Internet provider that has the following packages available: Package Per Month A. lnternetaccess $75 B. Phone services 25 C. lnternetaccess + phone services 90 Evan spends most of his time on the lnternet (“everything can be found online now"). Brett prefers to spend his time talking on the phone rather than using the lnternet (“going online is a waste of time"). They agree that the purchase of the $90 total package is a “win—win" situation. “i. Allocate the $90 between Evan and Brett using (a) the standalone cost—allocation method, (b) the incremental cost—allocation method, and (c) the Shapley value method. 2. Which method would you recommend they use and why? §5~2fi Allocation of common costs. Barbara Richardson, a self—employed consultant near Sacramento, received an invitation to visit a prospective client in Baltimore. A few days later, she received an invitation to make a presentation to a prospective client in Chicago. She decided to combine her visits, traveling from Sacramento to Baltimore, Baltimore to Chicago, and Chicago to Sacramento. . Richardson received offers for her consulting services from both companies. Upon her return, she decided to accept the engagement in Chicago. She is puzzled over how to allocate hertravel costs between the two clients. She has collected the following data for regular round—trip fares with no stopovers: Sacramento to Baltimore $900 Sacramento to Chicago $600 Richardson paid $1,200 for her three—leg flight (Sacramento—Baltimore, Baltimore—Chicago, Chicago— Sacramento). In addition, she paid $30 each way for limousines from her home to Sacramento Airport and back when she returned. 1. How should Richardson allocate the $1,600 airfare between the clients in Baltimore and Chicago using (a) the stand—alone cost-allocation method, (b) the incremental cost-allocation method, and (c) the Shapley value method? 2. Which method would you recommend Richardson use and why? 3. How should Richardson allocate the $60 limousine charges between the clients in Baltimore and Chicago? 15—25 Rovenue allocation, bundled products. Essence Company blends and sells designer fragrances. It has a Men’s Fragrances Division and a Women's Fragrances Division, each with different sales strategies, distribution channels, and product offerings. Essence is now considering the sale of a bundled product called Sync consisting of one bottle of Him, a men’s cologne, and one bottle of Her, 3 women's perfume. For the most recent year, Essence reported the following: ‘, Formulas: B Retail Price ' Insert , >Page Layout, Sync (Him and Her) ENT MATERlAL iffy Ni (rt @326 CHAPTER 15 ALLOCATlON OF SUPPORT-DEPARTMENT COSTS, COMMON COSTS, AND Fi-V—NUl—S t. Allocate revenue from the sale of each unit of Sync to Him and Her using the following: a. The stand—alone revenue~allocation method based on selling price of each product 0. The incremental revenue—allocation method, with Him ranked as the primary product c. The incremental revenue—allocation method, with Her ranked as the primary product d. The Shapley value method, assuming equal unit sales of Him and Her ‘2. Of the four methods in requirement 1, which one would you recommend for allocating Sync's revenues to Him and Her? Explain. r. Segre Allocation ct common costs. Doug Dandy Auto Sales uses all types of media to advertise its products (television, radio, newspaper, and so on). At the end of 2013, the company president, Doug Davenport, decided that all advertising costs would be incurred by corporate headquarters and allocated to each of the company’s four sales locations based on number of vehicles sold. Doug was confident that his corporate purchasing manager could negotiate better advertising contracts on a corporate—wide basis than each of the sales managers could on their own. Davenport budgeted total advertising cost for 2014to be $1.7 million. He introduced the new plan to his sales managers just before the New Year. The manager of the east sales location, Mike Samson, was not happy. He complained that the new allocation method was unfair and would increase his advertising costs significantly overthe prior year. The east location sold high volumes of low—priced used cars and most of the corporate advertising budget was related to new car sales. Following Mike's complaint, Doug decided to take another hard look at what each of the divisions was paying for advertising before the new allocation plan. The results were as follows: Actual Number of Cars Actual Advertising Sales Location Sold in 2013 Cost incurred in 2013 East 4,620 $ 261,600 West 1,120 302,400 North 3,220 697,600 South 5,040 828,400 @ _ $2,130,000 1. Using 2013 data as the cost bases, show the amount of the 2014 advertising cost ($1,700,000) that would be allocated to each of the divisions underthe following criteria: a. Davenport's allocation method based on number of cars sold h. The stand—alone method c. The incremental—allocation method, with divisions ranked on the basis of dollars spent on advertis— ing in 2013 2. Which method do you think is most equitable to the divisional sales managers? What other options might President Doug Davenport have for allocating the advertising costs? Q , r». r awfl, F». Lab tr’ttitti‘rtrjr itrzs tritir'Accoua/tin a? $52? Single—rate, dual-rate, and practical capacity allocation. Preston Department Store has a new promotional program that offers a free gift—wrapping service for its customers. Preston’s customer-service department has practical capacity to wrap 5,000 gifts at a budgeted fixed cost of $4,950 each month. The budgeted variable cost to gift-wrap an item is $0.35. During the most recent month, the department budgeted to wrap 4,500 gifts. Although the service is free to customers, a gift—wrapping service cost allocation is made to the department where the item was purchased. The customer—service department reported the following forthe most recent month: Home .‘r Insert Page'LayoLrt- 'Form‘utas, I Data 7 A ' ‘ 'B ' l ' rc Budgeted Actual Items Department Items Wrapped Wrapped Giftware 1,000 1,200 Women's Apparel 850 650 Fragrances 1,000 900 Men‘s Apparel 750 450 Domestics fl gm Total fl 3400.0 ASSIGNMENT MATERIAL £313? 3 Using the single-rate method, allocate gift~wrapping costs to different departments in these three ways: a. Calculate the budgeted rate based on the budgeted number of gifts to be wrapped and allocate costs based on the budgeted use (of gift-wrapping services). b. Calculate the budgeted rate based on the budgeted number of gifts to be wrapped and allocate costs based on actual usage. c. Calculate the budgeted rate based on the practical gift-wrapping capacity available and allocate costs based on actual usage. 2. Using the dual—rate method, compute the amount allocated to each department when (a) the fixed- cost rate is calculated using budgeted costs and the practical gift-wrapping capacity, (b) fixed costs are allocated based on budgeted usage of gift—wrapping services, and (c) variable costs are allocated using the budgeted variable-cost rate and actual usage. 3. Comment on your results in requirements 1 and 2. Discuss the advantages of the dual-rate method. “EE-Qfi Revenue allocation. Yang Inc. produces and sells DVDs to business people and students who are planning extended stays in China. It has been very successful with two DVDs: Beginning Mandarin and Conversational Mandarin. It is introducing a third DVD, Reading Chinese Characters. It has decided to market its new DVD in two different packages grouping the Reading Chinese Characters DVD with each of the othertwo language DVDs. Information about the separate DVDs and the packages follow. DVD Selling Price Beginning Mandarin (BegM) $ 72 Conversational Mandarin (ConM) $112 Reading Chinese Characters (RCC) $ 48 BegM + RCC $100 ConM + RCC $140 1. Using the selling prices, allocate revenues from the BegM + RCC package to each DVD in that pack— age using (a) the stand—alone method; (b) the incremental method, in either order; and (c) the Shapley value method. 2. Using the selling prices, allocate revenues from the ConM + RCC package to each DVD in that pack— age using (a) the stand-alone method; (b) the incremental method, in either order; and (c) the Shapley value method. 3. Which method is most appropriate for allocating revenues among the DVDs? Why? 25—2723 Fixed-cost allocation. Baker University completed construction of, its newest administrative building at the end of 2013. The University's first employees moved into the building on January 1, 2014. The building consists of office space, common meeting rooms (including a conference center), a cafeteria, and even a workout room for its exercise enthusiasts. The total 2014 building space of 250,000 square feet was utilized as follows: Usage of Space °/o of Total Building Space Office space (occupied) 52% Vacant office space 8% Common meeting space 25% Workout room 5% Cafeteria 10% The new building cost the university $60 million and was depreciated using the straight-line method over 20 years. Atthe end of 2014three departments occupied the building: executive offices of the president, account- ing, and human resources. Each department's usage of its assigned space was as follows: Actual Office Planned Office Practical Capacity Department Space Used (sq. ft.) Space Used (sq. ft.) Office Space (sq. ft.) Executive 32,500 24,800 36,000 Accounting _ 52,000 52,080 . 66,000 Human resources 45,500 47,120 48,000 CHAPTER ‘15 ALLOCAI |ON Ol— SUlJPOHT—D~PAR | l\/l*l\lT COS l 8, COMMON COSTS, AND REVENUES '3. How much of the total building cost will be allocated in 2014 to each ofthe departments, if the We! cost is allocated to ...
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