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answer%20of%20sh15.doc[1] - 15-31(45 min Allocating costs...

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Unformatted text preview: 15-31} (45 min.) Allocating costs of support departments; step-doom and direct methods. Genera] Cafeteria Bu lldlng & Plant 0 perallng G rounds Person nel Admln. Loin Sionernom Marhlnlng Assemblx 1. Step-do“ M00100: 3 10,000 $1.000 $ 26,090 $ 1.640 $ 2,670 $34,300 $48300 (111301101033: grounds nt$0.1l1:'sq.ft. [$10,000 + 100.000} m 200 300 400 31!] 3.000 5.000 (2) Personnel at Sfifemployee [$1,200 + 200} M 210 60 30 300 600 (3) General plant administration at $lflnhor-1100r ($23,000 + 23.000} mm 1,000 1,111] 3.000 13.000 (4) Cafeteria 01$20£empoluyee [$3,100+155) m [[I] 1.000 2.000 (3)51ororoorn at $1.50'reqnisilinn [$4,500 + 3.100) m 3,000 1,500 (6] Costs 011000100 10 operating depln $50,000 $35.000 (T) Divide(6}hydir. manuf. labor-111's. 1 5,000 415,000 (0} Whom r010 pol dire-01 manuf. labor-110m _$_111 $_5 2. Direct mama: $10000 $1.000 $26,090 $1.640 $2,670 $34300 $48.90!) (111303111310ch grounds, 30.000180000‘. 30,0011I'EDM [10.000] 3.350 6.250 (2) Personnel. 501130; 100.1150 [1.000) 333 66? (3) Gama] plant administration, 8.000050%; l'i.[l)m‘25,[l]] {26,090} 8349 13.141 (4) Cafeteria, 30:050. [W150 [1.640) 54? 1.093 (3) Stateroom: 200013.000”, 1.0003000 (2,530) 1.3110 890 (6} Costs 011000100 10 operating depln $49,459 $35.54] (3} Divide (5} by direct nmnufmnring labor-hours + 5,000 015,000 (310105110111 r010 pol fire-01 manlflacturing labor-hour 9.892 5.036 3. Comparison of Methods: Step-down method: Job 88: 18 x $10 $180 2 x 35 5 10 $190.00 Job 89: 3x$10 $ 30 1? x 35 5 85 115.00 Direct method: Job 88: 18 x $9.892 $1?8.06 2 x $5.036 10.07 $188.13 Job 89: 3 x $9.892 $ 29.68 1? x $5.036 85.61 115.29 4. The manager of Machining Department would prefer the direct method. The direct method results in a lower amount of support departments‘ costs being allocated to the Machining Department than the step-down method. This is clear from a comparison of the overhead rate. per direct manufacturing labor-hour. for the Machining Department under the two methods. 15-23 (20—30 min.) Allocation of common costs. 1. Three methods of allocating the $75 are: Mark Carl Stand-alone $50 $25 Incremental (Carl primary) 45 30 Incremental (Mark primary) 60 15 Shapley value 52.50 22.50 a. Stand-alone cost allocation method. Mark: fl x $75 = E x $75 = $50 $40+$20 3 Carl: fl x $75 = l x $75 = $25 $40+$20 3 b. Incremental cost allocation method. Assume Carl (the owner) is the primary user and Mark is the incremental user: Costs Cumulative Costs User Allocated Allocated Carl $30 $30 Mark £($757 $30) $75 Total m This method may generate some dispute over the ranking. Notice that Mark pays only $45 despite his prime interest in the more expensive Internet access package. Carl could make the argument that if Mark were ranked first he would have to pay $60 since he is the major Internet user. Then, Carl would only have to pay $15! Assume Mark is the primary user and Carl is the incremental user: Costs Cumulative Costs User Allocated Allocated Mark $60 $60 Carl 15 ($75 — $60) $5 Total SQ c. Shapley value (average over costs allocated as the primary and incremental user). Costs User Allocated Mark ($60 + $45) e 2 = $52.5 Carl ($30 + $15) + 2 = $22.5 I would recommend the Shapley value. It is fairer than the incremental method because it avoids considering one user as the primary user and allocating more of the common costs to that user. It also avoids disputes about who is the primary user. It allocates costs in a manner that is close to the costs allocated under the stand-alone method but takes a more comprehensive view of the common cost allocation problem by considering primary and incremental users that the stand-alone method ignores. More generally. other criteria to guide common cost allocations include the following: a. Cause and effect. It is not possible to trace individual causes (either Intemet access g phone services) to individual effects (uses by Mark or Carl). The $15 total package is a bundled product. b. Benefits received. There are various ways of operationalizing the benefits received: (i) Monthly service charge for their prime interest—Internet access for Mark ($60). and phone services for Carl ($30). This measure captures the services available to each person. (ii) Actual usage by each person. This would involve keeping a record of usage by each person and then allocating the {ST-"5 on a percent usage time basis. This measure captures the services actually used by each person, but it may prove burdensome and it would be subject to honest reporting by Carl and Mark. c. Ability to pay. This criterion requires that Mark and Carl agree upon their relative ability to pay. d. Fairness or equity. This criterion is relatively nebulous. A straightforward approach would be to split the $75 equally among the two users. 15-31 (40—60 min.) Support-department cost allocations; single-department cost pools; direct, step-down, and reciprocal methods. All the following computations are in dollars. Direct method: To X To Y A 500l800 >< $120,003 = $75,003 3008(1) >< $120,030 = $45,000 B 2001' 1,000 x $60,000 = 12,003 80011000 x $60,0(13 = 48,030 Total m m Step-down method, allocating A first: A B X Y Costs to be allocated $120,(130 $60013 — — Allocate A: (200; 5113:3113 + l,(130) (1201113) 24013 $60030 $36,0(13 Allocate B: (2(1); 800 + 11130] — (84 C130) 16 800 67 2(1) Total :5 0 3—0 $16,801) steam Step-down method, allocating B first: A B X Y Costs to be allocated $ 1 201130 $ 60013 — — Allocate B: (1,030; 200; 8C13 :— 2.000) 301130 (60013) $ 6,[130 $241113 Allocate A: (5C131'BE13, 3031800) (150 C03] — 93 750 56 250 Total $ 0 $ 0 $99 750 $80 250 Note that these methods produce significantly different results, so the choice of method may frequently make a difference in the budgeted department overhead rates. Reciprocal method: Stage 1: Let A total costs of materials-handling department B = total costs of power-generating department (1) A = $120,0(13+0.5B (2) B = $ 60,0(13 + 0.2A Stage 2: Substituting in (l): A $120,000 + 0.5($60,000 + 0.2A) A = $120,000 + $30,000 + 0.1A 0.9A = $150,000 A = $166,667 Substituting in (2): B = $60,C130 + 0.2($166,667) B = $93,333 Stage 3: A B X Y Original amounts $1 20,0(13 $60,000 — — Allocation ofA (166,667) 33,333(20%) $83,334(50%) $50,000(30%) Allocation of B 46 6676096) [93 333) 9 333(10%) 37 333(40%) Totals accounted for $ 0 $ 0 $92,667 $37 333 Comparison of methods: Method of Allocation X Y Direct method $8?,000 $93,000 Step-down: A first 76,800 103,200 Step-down: B first 99,?50 80,250 Reciprocal method 92,666 87,333 Note that in this case the direct method produces answers that are the closest to the “correct“ answers (that is, those from the reciprocal method), step-down allocating B first is next, and step- down allocating A first is least accurate. 2. At first glance, it appears that the cost of power is $50 per unit plus the material handling costs. If so, Kanes would be better off by purchasing from the power company. However, the decision should be influenced by the effects of the interdependencies and the fixed costs. Note that the power needs would be less (students frequently miss this) if they were purchased from the outside: Outside Power Units Needed X 200 Y 800 A (1,000 units minus 20% of 1,000 units, because there is no need to service the nonexistent power department) E Total units 1,801) Total costs, 1,800 x $50 = $90,000 In contrast, the total costs that would be saved by not producing the power inside would depend on the effects of the decision on various costs: Avoidable Costs of 2,0“) Units of Power Produced Inside Variable indirect labor and indirect material costs $20,000 Supervision in power department 15,000 Materials handling, 20% of $80,000* 16,000 Probable minimum cost savings $51,000 Possible additional savings: a. Can any supervision in materials handling be saved because of overseeing less volume? ? Minimum savings is probably zero: the maximum is probably 20% of $15,000 or $3,000. b. Is any depreciation a truly variable, wear-and-tear type of ? cost? Total savings by not producing 2,000 units of power $51,000 + ‘P * Materials handling costs are higher because the power department uses 20% of materials handling. Therefore, [materials-handling costs will decrease by 20%. In the short run (at least until a capital investment in equipment is necessary). the data suggest continuing to produce internally because the costs eliminated would probably be less than the comparable purchase costs. 15-28 (20 min.) Revenue allocation 1. a. Stand-alone method for the BegM + RCC package Separate Joint DVD Revenue Percentage Revenue Allocation BegM $ 60 601:Ir l 00:.6 $90 $54 RCC LO 401:Ir l 00=.4 90 E $100 $90 1. b. Incremental method i) Allocated Revenue Revenue Remaining (BegM first; To Allocate BegM $60 $30 ($90-60) RCC 30 ii) Allocated Revenue Revenue Remaining gRCC first; To Allocate RCC $40 $50 ($90-40) BegM 50 1. c. Shapley method. (assuming each DVD is demanded in equal proportion) i) BegM (60+50).f2 = 55 ii) RCC (30+40).f2 = 35 2. a. Stand-alone method for the ConM + RCC package Separate Joint DVD Revenue Percentage Revenue Allocation ConM $ 50 50190:.556 $72 $40 RCC fl 40f90=.444 72 2 $ 90 $72 2. b. Incremental method i) Allocated Revenue Revenue Remaining {ConM first; To Allocate ConM $50 $22 ($72-50) RCC 22 ii) Allocated Revenue Revenue Remaining LRCC first) To Allocate RCC $40 $32 ($72-40) ConM 32 2. c. Shapley method. (assuming each DVD is demanded in equal proportion) i) BegM (50+32)/2 = 41 ii) RCC (22+40)f2 = 31 3. For each DVD package. the stand-alone method and the Shapley method give approximately the same allocation to each DVD. These methods are fair if the demand for the DVDs are approximately equal. The stand-alone method might be slightly preferable here since it is simpler and easier to explain. The incremental method would be appropriate if one DVD has a higher level of demand than the other DVD. In this situation. the dominant DVD would be sold anyway so it should receive its stand-alone revenue. and the other DVD should receive the remainder. 15-21 (40 min.) Direct and step-down allocation. 1. Support Departments Operating Departments Info. HR Systems Corporate Consumer Total Costs Incurred $72,700 $234,400 $ 998,270 $489,860 $1,795,230 Alloc. of HR costs (42770, 28770) (72.700) 43,620 29,080 Alloc. of Info. Syst. costs (192018520, 1611773520) (234 400) 127 855 106 545 35—0 32—0 W $625M $1195.22!) 2. Rank on percentage of services rendered to other support departments. Step 1: HR provides 23.077% of its services to information systems: 21 _ g 42 + 28 + 21 91 This 23.077% of $72,700 HR department costs is $16,777. 23.07791: Step 2: Information systems provides 8.333% of its services to HR: 320 320 — = = 8.333% 1,920 + 1,600 + 320 3,840 This 8.333% of $234,400 information systems department costs is $19,533. Support Departments Operating Departments HR Info. Systems Corporate Consumer Total Costs Incurred $72,700 $234,400 $ 998,270 $489,860 $1,795,230 Alloc. of HR costs (2191, 42791, 28191) [72,7001 16,777 33,554 22,369 3 0 251,177 Alloc. of Info. Syst. costs (132013520, 1,6034'3520) (251,177) 137,036 114,171 $_Q W 3.626.400 $1195.23) 3. An altemative ranking is based on the dollar amount of services rendered to other support departments. Using numbers from requirement 2, this approach would use the following sequence: Step 1: Allocate Information Systems first ($19,533 provided to HR). Step 2: Allocate HR second ($16,777 provided to Information Systems). 15-22 (30 min.) Reciprocal cost allocation (continuation of 15-21). 1. The reciprocal allocation method explicitly includes the mutual services provided among all support departments. Interdepartmental relationships are fully incorporated into the support department cost allocations. 2. HR = $72,700 + .08333IS IS = $234,400 + .23077HR HR = $72,700 + [.08333($234,400 + .23077HR)] = $72,700 + [$19,532.55 + 0.01923HR] 0.98077HR = $92,232.55 HR = $92,232.55 + 0.98077 : $94,041 IS = $234,400 + (0.23077 >< $94,041) = $256,102 Support Depts. Operating Dept; HR Info. Systems Corporate Constuner Total Costs Incurred $72,700 $234,400 $ 998,270 $489,860 $1,795,230 Alloc. of HR costs [21791, 427'9 l . 287'9 1) (94,041) 21,702 43,404 28,935 Alloc. of Info. Syst. costs (3205,8140, l,920!3,840, 16003340) 21.341 (256.102) 128.051 106.710 $ 0 $ 0 $1 169 725 $625 505 $1 795 230 3. The reciprocal method is more accurate than the direct and step-down methods when there are reciprocal relationships among support departments. A summary of the altematives is: Corporate Sales Consumer Sales Direct method $1,169,745 $625,485 Step-down method (HR first) 1,168,830 626,400 Reciprocal method 1,169,725 625,505 The reciprocal method is the preferred method, although for September 2009 the numbers do not appear materially different across the altematives. ...
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