management accounting chapter 9 - 9.22 Plant-wide versus...

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9.22Plant-wide versus Department Allocation: Munoz Sporting Equipment.BaseballBatsTennisracketsa.Sales revenue.....................................................$2,700,000$1,800,000Direct Labor.........................................................500,000250,000Direct Materials...................................................1,100,000550,000Overhead.............................................................1,000,000a500,000bProfit....................................................................$100,000$500,000a$1,000,000 = $500,000 direct labor x 200%.b$500,000 = $250,000 direct labor x 200%.b.Maria was wrong; Baseball bats were more profitable.BaseballBatsTennisracketsSales revenue.....................................................$2,700,000$1,800,000Direct Labor.........................................................500,000250,000Direct Materials...................................................1,100,000550,000Overhead.............................................................750,000a750,000bProfit....................................................................$350,000$250,000a$750,000 = $500,000 direct labor x 150%.b$750,000 = $250,000 direct labor x 300%.c.The plant-wide allocation method allocates overhead at 200% of direct labor forboth types of equipment. While this is the simplest method, it is usually not veryaccurate. It assumes that overhead in both departments has the same rate. Whenoverhead costs are broken down into department cost pools, we see that Department Bis allocated a smaller share of the overhead. Each department should try to assesswhat causes its overhead, and use that as its allocation base.9.23Plantwide versus Department Allocation: Main Street Ice Cream Company.StrawberryVanillaChocolatea.Direct Labor (per 1,000 gallons)..........................$750$825$1,125Raw Materials (per 1,000 gallons)......................800500600
Overhead.............................................................150a165b225cTotal cost (per 1,000 gallons)..............................$1,700$1,490$1,950a$150 = 50 labor-hours x $3 per hour.b$165 = 55 labor-hours x $3 per hour.c$225 = 75 labor-hours x $3 per hour.b.Department SV has an overhead allocation rate of $4.20 per machine-hour($105,840 ÷ 25,200 machine hours). Department C has an overhead allocation rate of$1.32 per labor-hour ($23,760 ÷ 18,000 labor-hours).

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