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Unformatted text preview: Chapter 6 Homework Assignment Answer/Review Sheet EXERCISES 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. E8. LO 3 P1 has 150 375 = 40% of production department employees. P2 has 225 375 = 60% of production department employees. Service Service dept. Cost Allocated to Department Costs P1 P2 S1 $3,000,000 $1,200,000 $1,800,000 S2 2,000,000 800,000 1,200,000 S3 1,000,000 400,000 600,000 Total cost $6,000,000 $2,400,000 $3,600,000 E12. LO 4 a. The use of a single cost pool causes A1 to be undercosted and B1 to be overcosted. With a single cost pool, both products receive the same allocation of cost per labor hour. However, A1 uses relatively more time in P1 where overhead costs are high while B1 uses relatively more time in P2 where overhead costs are low. The one-cost pool overhead rate is: $3,000,000 400,000 DLH = $7.50 /DLH Each product requires 5 direct labor hours in total. Therefore, each will be allocated $37.50 in overhead costs ($7.50 5) Now lets calculate the amount of overhead allocated to each product if Mott used a separate overhead cost pool for each production department....
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