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

9.22
Plant-wide versus Department Allocation: Munoz Sporting Equipment.
Baseball
Bats
Tennis
rackets
a. Sales revenue ..................................................... $2,700,000 $1,800,000
Direct Labor ......................................................... 500,000 250,000
Direct Materials ................................................... 1,100,000 550,000
Overhead ............................................................. 1,000,000
a
500,000
b
Profit .................................................................... $100,000 $ 500,000
a
$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.
Baseball
Bats
Tennis
rackets
Sales revenue ..................................................... $2,700,000 $1,800,000
Direct Labor ......................................................... 500,000 250,000
Direct Materials ................................................... 1,100,000 550,000
Overhead ............................................................. 750,000
a
750,000
b
Profit .................................................................... $350,000 $ 250,000
a
$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 for
both types of equipment. While this is the simplest method, it is usually not very
accurate. It assumes that overhead in both departments has the same rate. When
overhead costs are broken down into department cost pools, we see that Department B
is allocated a smaller share of the overhead. Each department should try to assess
what causes its overhead, and use that as its allocation base.
9.23
Plantwide versus Department Allocation: Main Street Ice Cream Company.
Strawberry Vanilla Chocolate
a. Direct Labor (per 1,000 gallons) .......................... $750 $825 $1,125
Raw Materials (per 1,000 gallons) ...................... 800 500 600

Overhead ............................................................. 150
a
165
b
225
c
Total cost (per 1,000 gallons) .............................. $1,700 $1,490 $1,950
a
$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).