Exam 3 - Practice Problems.pdf

# Cost allocation rate for fm services sq foot exam 3

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Cost allocation rate for F&M services \$ /sq. foot

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Exam 3 – Practice Problems Page 10 SOLUTION: 1. (4 points) Allocate the costs of IT and F&M to the operating departments using the direct method. Enter your answer in the space below. IT: total hours = 44 + 20 = 64 Overhead allocation rate = 120,000 / 64 = \$1,875 / IT hour F&M: total occupied space = 960 + 1,200 = 2,160 Overhead allocation rate = 180,000 / 2,160 = \$ 83.33/ sq. foot Allocated Cost Returns: 1,875 x 44 + 83.33 x 960 = 162,496.8 to 162,500 Collections: 1,875 x 20 + 83.33 x 1,200 = 137,496 to 137,500 2. (6 points) What is the cost allocation rate for F&M using the step-down method? IT gives 16 / (44 + 20 +16) = 20% to F&M F&M gives 240 / (240 + 960 + 1,200) = 10% to IT Allocate IT first IT Overhead allocation rate = 120,000 / 80 = \$1,500 / IT hour IT cost allocated to F&M = 1,500 x 16 = 24,000 F&M cost allocation rate = (180,000 + 24,000) / (2,400 – 240) = 94.44
Exam 3 – Practice Problems Page 11 I-O-U will be indifferent if Total cost of in-house service = Total cost of service after outsourcing Cost of in-house service = 120,000 + 180,000 = 300,000 Cost of service after outsourcing = Total cost of F&M + IT costs allocated to operating departments = CFM + 64 hrs x \$ 1,800/hr = CFM + 115,200 Therefore, 300,000 = CFM + 115,200 CFM = 184,800 Cost allocation rate = 184,800 / ( 960 + 1,200) = 85.56 3. (6 points) What is the total reciprocal cost for each service department? Enter your answer in the space below. RIT = 120,000 + 0.1 RFM RFM = 180,000 + 0.2 RIT Solving for the total reciprocal costs : RIT = 120,000 + 0.1 (180,000 + 0.2 RIT) RIT = 138,000 + 0.02 RIT RIT = 140,816.33 RFM = 180,000 + 0.2 x 140,816.33 4. (8 points) Assume that all of the costs to operate the service departments are variable and that they are linear in the quantity of service provided. What is the cost allocation rate for F&M services that would cause I-O-U to be indifferent between continuing to operate the IT department in-house as compared to outsourcing it at a cost of \$1,800 per hour?

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Exam 3 – Practice Problems Page 12 QUESTION: Ritchie Simmons sells two versions, Deluxe and Premium, of his firm's only product, the GoGoJuicer. The GoGoJuicer uses patented technology to extract the last drop of juice from most fruits. The Premium version can handle larger fruit and has more options relative to the Deluxe version. The table below provides the financial results for the most recent year of operations. Labor costs amount to \$16 per hour, and each product requires one hour of labor. Ritchie currently allocates all fixed manufacturing costs to products, using labor hours as the allocation base. He also allocates all fixed selling and administrative expenses, using revenue as the allocation base. Revenue \$6,300,000 \$900,000 \$7,200,000 Materials 1,080,000 250,000 1,330,000 Labor 1,440,000 160,000 1,600,000 Contribution margin \$3,780,000 \$490,000 \$4,270,000 Allocated fixed manufacturing costs Allocated fixed selling and 3,420,000 380,000 3,800,000 administrative expenses 251,563 35,937 287,500 Net profit \$108,437 \$74,063 \$182,500 Net profit/unit \$1.2048 \$7.4063 Deluxe Total 90,000 100,000 Premium 10,000 Units
Exam 3 – Practice Problems Page 13 Required: 1. (6 points) Although the profit margin per unit for the Deluxe juicer is rather low, Ritchie believes that it is important to keep this model in the product mix. However, Ritchie believes that he can tailor his promotion and sales strategies to improve the sales mix to a 6:4 ratio from the current 9:1 ratio of Deluxe to Premium juicers, with total volume remaining at 100,000 units.

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