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Session 13 Solutions

Session 13 Solutions - Computed Hourly Cost Allocation...

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Computed Hourly Cost Allocation Rates for Support Dept. Costs Initially, you likely would have guessed the cost allocation rate for each of the support departments to be Sup2 Sup1 \$15/10 hrs = \$1.50 \$9/11 hrs = \$ .82 But those rates ignore the fact that the cost to operate S1 includes indirect costs from S2 and that the cost to operate S2 includes indirect costs from S1. As we have now learned, those cost allocation rates will vary, depending upon how the “indirect” costs are taken into account Reciprocal Step-Down Direct Sup2 Sup1 \$15/10 hr = \$1.500 \$15/9 hr = \$1.667 \$9/9 hr = \$1.000 \$15/6 hr = \$2.500 \$16.176/11 hr = \$1.471 \$17.941/10 hr = \$1.794

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Use of Cost Allocation Rates for Decision-Making Suppose you are using the step-down method to allocate costs, and you receive a bid from an outside supplier to provide Sup1's service at a price of \$1.60 per hour. Do you accept the offer? Let’s examine this issue more carefully. Cost of Outsourcing = 1.60/hr > 1.667/hr = Step-down cost of Sup 1 Outsource ?
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