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# sol15 - CHAPTER 15 ALLOCATION OF SUPPORT-DEPARTMENT COSTS...

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CHAPTER 15 ALLOCATION OF SUPPORT-DEPARTMENT COSTS, COMMON COSTS, AND REVENUES 15-16 (20 min.) Single-rate versus dual-rate methods, support department. Bases available (kilowatt hours): Rockford Peoria Hammond Kankakee Total Practical capacity Expected monthly usage 10,000 8,000 20,000 9,000 12,000 7,000 8,000 6,000 50,000 30,000 1a. Single-rate method based on practical capacity: Total costs in pool = \$6,000 + \$9,000 = \$15,000 Practical capacity = 50,000 kilowatt hours Allocation rate = \$15,000 ÷ 50,000 = \$0.30 per hour of capacity Rockford Peoria Hammond Kankakee Total Practical capacity in hours Costs allocated at \$0.30 per hour 10,000 \$3,000 20,000 \$6,000 12,000 \$3,600 8,000 \$2,400 50,000 \$15,000 1b. Single-rate method based on expected monthly usage: Total costs in pool = \$6,000 + \$9,000 = \$15,000 Expected usage = 30,000 kilowatt hours Allocation rate = \$15,000 ÷ 30,000 = \$0.50 per hour of expected usage Rockford Peoria Hammond Kankakee Total Expected monthly usage in hours Costs allocated at \$0.50 per hour 8,000 \$4,000 9,000 \$4,500 7,000 \$3,500 6,000 \$3,000 30,000 \$15,000 2. Variable-Cost Pool: Total costs in pool = \$6,000 Expected usage = 30,000 kilowatt hours Allocation rate = \$6,000 ÷ 30,000 = \$0.20 per hour of expected usage Fixed-Cost Pool: Total costs in pool = \$9,000 Practical capacity = 50,000 kilowatt hours Allocation rate = \$9,000 ÷ 50,000 = \$0.18 per hour of capacity Rockford Peoria Hammond Kankakee Total Variable-cost pool \$0.20 × 8,000; 9,000; 7,000, 6,000 Fixed-cost pool \$0.18 × 10,000; 20,000; 12,000, 8,000 Total \$1,600 1,800 \$3,400 \$1,800 3,600 \$5,400 \$1,400 2,160 \$3,560 \$1,200 1,440 \$2,640 \$ 6,000 9,000 \$15,000 The dual-rate method permits a more refined allocation of the power department costs; it permits the use of different allocation bases for different cost pools. The fixed costs result from decisions most likely associated with the scale of the facility, or the practical capacity level. The variable costs result from decisions most likely associated with monthly usage. 15-1

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15-21 (40 min.) Direct and step-down allocation. 1. 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 (42/70, 28/70) (72,700) 43,620 29,080 Alloc. of Info. Syst. costs (1,920/3,520, 1,600/3,520) ______ (234,400 ) 127,855 106,545 ________ \$ 0 \$ 0 \$1,169,745 \$625,485 \$1,795,230 2. Rank on percentage of services rendered to other support departments. Step 1: HR provides 23.077% of its services to information systems: 21 28 42 21 + + = 91 21 = 23.077% This 23.077% of \$72,700 HR department costs is \$16,777. Step 2: Information systems provides 8.333% of its services to HR: 320 600 , 1 920 , 1 320 + + = 840 , 3 320 = 8.333% 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 \$1,795,23 0 Alloc. of HR costs (21/91, 42/91, 28/91) (72,700 ) 16,777 33,554 22,369 \$ 0 251,177 Alloc. of Info. Syst. costs (1,920/3,520, 1,600/3,520) (251,177 ) 137,006 114,171 \$ 0 \$1,168,830 \$626,400 \$1,795,23 0 3. An alternative 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). 15-2
15-23 (20 - 25 min.) Allocation of common costs. 1. Three methods of allocating the \$55 are: Ben Gary Stand-alone Incremental (Gary primary) Incremental (Ben primary) Shapley value \$52 15 60 55 \$13 50 5 10 a. Stand-alone cost allocation method.

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sol15 - CHAPTER 15 ALLOCATION OF SUPPORT-DEPARTMENT COSTS...

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