C06_Ch_14_Discussion_Qn

C06_Ch_14_Discussion_Qn - Units of GS used 400-— 600...

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Unformatted text preview: Units of GS used 400 ---— 600 1 ,000 ALL CATI N Mtce. $600 GS $2,000 STEP—DOWN or SEQUENflaL MEIE 01) (closing Maintenance first) ISLQS. 1532mm My Mtce $600 GS [$2,000 + 1 IPR A r O ATION ME ' RV EMS; W GS 4. Consider Almighty’s announcement. How much must Bubba charge the remaining to _ panies per square metre to break even? How much will Clean Shop lose if Bubba does hat change the rate per square metre as calculated in requirement 2? B I how much wOuld Bubha have to reduce capacity at Clean Shep to make the business competitive mad break even? (Assume that any reduction in capacity will bring about a proportional reducubn in fixed costs.) 5. Why was 2007 capacity at Clean Shop more than double Diversified’s needs? Was Bub},T1 operating in the best interests of Diversified? Explain how surplus capacity at Clean shop may have affected Diversified’s bottom line. What were the underlying accounting pram tices that allowed such negligence to occur? 14—35 Allocation of central corporate costs to divisions. Dusty Rhodes, the corporate controller of the Richfield Oil Company, is about to make a presentation to the senior Corporate exam- tives and the top managers of its four divisions. These divisions are a. Oil and Gas Upstream (the exploration, production, and transportation of oil and gas) b. Oil and Gas Downstream (the refining and marketing of oil and gas) c. Chemical Products d. Copper Mining Under the existing internal accounting system, costs incurred at central corporate headquarters are collected in a single pool and allocated to each division on the basis of the actual revenues of each division. The central corporate costs {in millions) for the most recent year are as follows: Interest on debt $2,300 Corporate salaries 100 Accounting and control 100 General marketing . 100 Legal 100 RSCD 200 Public affairs 208 Human resources and payroll 192 $3,300 “Public affairs” includes the public relations staff, the lobbyists, and the sizable donations Richfield makes to numerous charities and notwfor—profit institutions. Summary data (in millions) related to die four divisions for the most recent year are as follows: Oil and Gas Oil and Gas Chemical Copper Upstream Downstream Products Mining Total Revenue $ 7,000 $16,000 $4,000 $3,000 $30,000 Operating costs $ 3,000 $15,000 $3,800 $3,200 $25,000 Operating income $ 4,000 $ 1,000 $ 200 $ (200) S 5,000 Identifiable assets $14,000 $ 6,000 $3,000 $2,000 $25,000 Number of employees 9,000 12,000 6,000 3,000 30,000 The top managers of each division share in a divisional income bonus pool. Divisional income 15 defined as operating income less allocated central corporate costs. Rhodes is about to propose a change in the method used to allocate central corporilt'B costs. He favours collecting these costs in four separate pools: 0 Cost pool 1 . Allocated using identifiable assets of division Cart Item: Interest on debt 9 Cost pool 2. Allocated using revenue of division Cart Items: Corporate salaries, accounting and control, general marketing, legal, 0 Cost pool 3. Allocated using operating income (if positive) of division, With only diVISIODS with positive operating income included in the allocation base Cost Item: Public affairs 0 Cost pool 4. Allocated using number of employees in division Cart Item: Human resources and payroll REQUIRED 1. What purposes might be served by the allocation of central corporate costs to each dim-51°“ at Richfield Oil? 2. Compute the divisional income of each of the four divisions when central corporate COSts are CHAPTER 14 allocated using revenue of each division. 3. Compute the divisional income of each of the four divisions when central corporate costs are allocated through the four cost pools. 4. What are the strengths and weaknesses of Rhodes’s proposal relative to the existing single- pool method? Division managers’ reactions to the allocation of central corporate costs to divisions (continuation of 14—3 5). Dusty Rhodes presents his proposal for the use of four separate cost pools to allocate central corporate costs to the divisions. The comments of the top managers of each of the four divisions include the following: a. By the top manager of the Oil and Gas Upstream Division: “The multiple-pool method of Rhodes’s is absurd. We are the only division generating a substantial positive cash flow, and this is ignored in the proposed (and indeed the existing) system. We could pay off any debt very quickly if we were not a cash cow for the rest of the dog divisions in Richfield Oil.” ' b. By the top manager of the Oil and Gas Downstream Division: “Rhodes’s proposal is the first sign that the money we spend in the accounting and control function at corporate headquarters is justified. The proposal is fair and equitable.” c. By the top manager of the Chemical Products Division: “I oppose any costeallocation method. Last year I was the only major player in the chemical industry to show a positive operating income. We are operating at the bare—bones level. Last year I saved $3 00,000 by making everyone travel economy class. This policy created a lot of dissatisfaction, but we finally managed to get it accepted. Then at the end of the year we get a charge of $400 million for corporate central costs. What’s the point of our division economy drives when they get swamped by allocations of corporate fat?” :1. By the top manager of Cupper Moing Division: “I should probably get concerned, but frankly I view it all as bookkeeping entries. If we were in the black, certain aspects would really infiiriate me. For instance, why should corporate R&D costs be allocated to the Copper Division? The only research corporate does for us is how to best prepare our division for divestiture.” REQUIRED How should Rhodes respond to these comments? 14—37 Cost allocation, monthly reports (CMA, revised). Bulldog Inc. is a large manufacturing company that runs its own electrical power plant from the excess steam produced in its mane ufacturing process. Power is provided to two production departments—Department A and Department B. The capacity of the power plant was originally determined by the expected peak demands of the two production departments. The expected average usage and peak demands are, respectively, 60 percent and 66,000,000 kilowatt hours (irwh) for Department A onanons 81‘ are as Tom and 40 percent and 44,000,000 kWh for Department B. The budgeted monthly costs of producing power, based on normal usage of $3030” 100,000,000 kwh, are $30,500,000 in fixed costs and $8,000,000 in variable costs. For $251000 November, the actual kwh used was 60,000,000 by Department A and 20,000,000 by 3 5.000 Department B. Actual fixed costs were $30,500,000, and actual variable costs were $25,000 - . $8,000,000. 30,000 - Terry Lamb, the controller, prepared the follOng monthly report: ncome 15 Bulldog Inc. Monthly Allocation Report Orporate November 2007 Power plant usage 80,000,000 kWh Actual costs: Fixed $30,500,000 R8,}; Variable 8,000,000 divisions Total $38,500,000 Rate per kwh ($38,500,000 + 80,000,000 mm :5 0.48125 i , Allocations: To DepartmentA (60,000,000 kWh >< $048125) $28,875,000 '3 To Department B (20,000,000 kwh >< $048125) 9,625,000 . Total allocated $38,500,000 h divisiofl - '. Lamb fully allocated all power plant costs on the basis of actual kwh used by each pro— duction department. This report will be submitted to the two production department operating managers. COSTALLUCATIUN computer programming, information systems consulting, and software training. Carol Birch, a pricing analyst in the Accounting Department, must develop total costs for the functional areas. These costs will guide pricing for new contracts. In computing these com, Birch is considering two different methods of allocating support department costsiwthe direct method and the stepedown method. Birch assembled the following data on budgeted costs from its two support departments, the Information Systems Department and the Facilities Department. Support Departments Operating Departments Information Computer Software Systems Facilities Programming Consulfing Training Total Budgeted costs $51,000 $2 6,000 $76,000 $111,000 $86,000 $3 50,000 Information Systems (hours) w 300 1,200 600 900 3,000 Facilities (thousands of square metres) 200 — 400 600 800 2,000 REQUIRED I. Allocate the support deparunent costs in Information Systems and Facilities using (a) the direct method and (b) the stepedOWn method (Information Systems first). 2. Explain to Birch any differences between the methods. Which method should she use? PROBLEMS 14—29 Allocating costs of support departments; dual rates; direct, stepmdown, and reciprocal methods. Magnum TA, Inc., specializes in the assembly and installation of high~quality security systems for the home and business segments of the market. The four departments at its highly automated State-ofntheeart assembly plant are as follows: Service Departments Assembly Departments Engineering Support Home Security Systems Information Systems Support Business Security Systems The budgeted level of service relationships at the start of the year was Used by Information Home Business Engineering Systems Security Securityr Supplied by Support Support Systems System5 Engineering Support *- 0.10 0.40 0.50 Information Systems Support 0.2 0 —— 0. 3 0 0.50 The actual level of service relationships for the year was Used by Information Home Business Engineering Systems S ecurity Security Supplied by Support Support Systems Systems Engineering Support — 0.15 0.30 0-55 Information Systems Support 0.25 — 0.15 0-60 Magnum collects fixed costs and variable costs of each department in separate cost pools. The actual costs (in thousands) in each pool for the year Were Fixed—Cost Pool Variable—Cost Pool Engineering Support $2,800 $8,500 Information Systems Support 8,100 3,750 534 CHAPTER 14 7' 14-30 i )tal 0,000 3,000 7 :'. rocal uality 11125 at - siness :urity items 1.50 LSO Fixed costs are allocated on the basis of the budgeted level of service. Variable costs are allow cated on the basis of the actual level of service. The support department costs allocated to each assembly department are allocated to products on the basis of units assembled. The units assembled in each department during the year were Home Security Systems 7,950 units Business Security Systems 3,750 units REQUIRED 1. Allocate the support department costs to the assembly departments using a dualurate system and (a) the direct method, (b) the stepedown method (allocate Information Systems Support first), (c) the step—down method (allocate Engineering Support first), and (d) the reciprocal method. Present results in a format similar to that of Exhibit 14—10 (p. 576). 2. Compare the support department costs allocated to each Home Semirity Systems unit assembled and each Business Security Systems unit assembled under (a), (b), (c), and (d) in requirement l. 3. What factors might explain the very limited adoption of the reciprocal method by many organizations? Support department cost allocations; single—department cost pools; direct, step—down, and reciprocal methods. The Manes Company has two products. Product 1 is manufactured entirely in Department X. Product 2 is manufactured entirely in Department Y. To produce these two products, the Manes Company has two support departments: A (a materials— handling department) and B (a powersgenerating department). An analysis of the work done by Departments A and B in a typical period is as follows: Used by Supplied by A B X Y A g 100 2 5 0 150 B 500 —— 100 400 The work done in Department A is measured by the direct labour~hours of materials—handlin g time. The work done in Department B is measured by the kilowattahours of power. The budgeted costs of the support departments for the coming year are Department A Department B Variable indirect labour and indirect materials costs $ 72,000 $12,000 Supervision 10,000 10,000 Amortizanon 20,000 20,000 $102,000 $42,000 The budgeted costs of the operating departments for the coming year are $1 ,3 00,000 for Department X and $800,000 for Department Y. Supervisory costs are salary costs. Amortization in B is the sn'aight—line amortization of power—generation equipment in its nineteenth year of an estimated 2 5—year useful life; it is old but well—maintained equipment. REQUIRED 1. What are the allocations of costs of support Departments A and B to Operating Departments X and Yusing the direct method, two different sequences of the step—down method, and the reciprocal method of reallocation? 2. The power company has offered to supply all the power needed by the Manes Company and to provide all the services of the present P0wer Department. The cost of this service will be $42 per kilowatt—hour of power. Should Manes accept? Explain. E cusr ALLDCATIUN E 585 ...
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This note was uploaded on 05/31/2011 for the course MGT C06 taught by Professor A.stawinoga during the Fall '10 term at University of Toronto.

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C06_Ch_14_Discussion_Qn - Units of GS used 400-— 600...

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