JJ06 - Chapter 6 Cost Allocation and Activity-Based Costing...

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Chapter 6 Cost Allocation and Activity-Based Costing E6. LO 2 Total fixed costs to be allocated = $90,000 + 15,000 + 15,000 + 6,000 = $126,000. Fixed costs allocated to Sales ($126,000 × .6) $ 75,600 Variable costs allocated to Sales (3,000,000 copies × $.02) 60,000 Total costs allocated to Sales $ 135,600 Fixed costs allocated to Admin. ($126,000 × .4) $ 50,400 Variable costs allocated to Admin (2,800,000 copies × $.02) 56,000 Total costs allocated to Sales $106,400 E7. LO 2 Allocation Base Prod. Dept.1 Prod. Dept.2 Square footage $1,200,000 $1,800,000 ($60* x 20,000) ($60 x 30,000) Direct labor hrs. $1,800,000 $1,200,000 ($60 X 30,000) ($60 x 20,000) * $3,000,000 ÷ 50,000 = $60 (1) As indicated, the choice of the allocation base greatly affects the allocations of cost. Use of square footage as the allocation base assigns 60% of the cost to department 2 and 40% to department 1. However, use of direct labor hours allocates 60% of the cost to department 1 and only 40% to department 2. Department 1 would prefer to be allocated cost based on square footage and department 2 would prefer direct labor hours as the base. (2) An allocation base that results in a cause and effect allocation is preferred. If maintenance costs are mostly related to building maintenance, then square footage is more likely to result in a cause and effect allocation. However, if maintenance costs are mostly made up of labor hours, then labor hours might be a better allocation base.
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Jiambalvo Managerial Accounting E8. LO 3 P1 has 150 ÷ 375 = 40% of production department employees. P2 has 225 ÷ 375 = 60% of production department employees. Service
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JJ06 - Chapter 6 Cost Allocation and Activity-Based Costing...

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