CHAPTER 6
SUPPORT DEPARTMENT COST ALLOCATION
QUESTIONS FOR WRITING AND DISCUSSION
1. Stage one assigns service costs to producing departments. Costs are assigned using
factors that reflect the consumption of the
services by each producing department.
Stage two allocates the costs assigned to
the producing departments (including service costs and direct costs) to the products
passing through the producing departments.
2. Service costs are part of the cost of producing a product. Knowing the individual product
costs is helpful for developing bids and costplus prices.
3. GAAP requires that all manufacturing costs
be assigned to products for inventory valuation.
4. Allocation of service costs makes users pay
attention to the level of service activity being
consumed and also provides an incentive for
them to monitor the efficiency of the service
departments.
5. Without any allocation of service costs, users may view services as a free good and
consume more of the service than is optimal. Allocating service costs would encourage managers to use the service until such
time as the marginal cost of the service is
equal to the marginal benefit.
9. Variable costs should be allocated according
to usage, whereas fixed costs should be allocated according to capacity. Variable costs
are based on usage because, as a department’s usage of a service increases, the variable costs of the service department increase. A service department’s capacity and
the associated fixed costs were originally set
by the user departments’ capacities to use
the service. Thus, each department should
receive its share of fixed costs as originally
conceived (to do otherwise allows one department’s performance to affect the amount
of cost assigned to another department).
10.
Normal or peak capacity measures the original capacity requirements of each producing
department. It is used when one department’s spike in usage affects the amount of
capacity needed.
11.
Using variable bases to allocate fixed costs
allows one department’s performance to affect the costs allocated to other departments. Variable bases also fail to reflect the
original consumption levels that essentially
caused the level of fixed costs.
12.
The dual-rate method separates the fixed
and variable costs of providing services and
charges them separately. In effect, a single
rate treats all service costs as variable. This
can give faulty signals regarding the marginal cost of the service. If all costs of the service department were variable, there would
be no need for a dual rate. In addition, if
original capacity equaled actual usage, the
dual-rate method and the single-rate method
would give the same allocation.
13.
The direct method allocates the direct costs
of each service department directly to the
producing departments. No consideration is
given to the fact that other service centers
may use services. The sequential method allocates service costs sequentially. First, the
costs of the center providing the greatest
service are allocated to all user departments, including other service departments.
Next, the costs of the second greatest pro-
6. Since the user departments are charged for
the services provided, they will monitor the
performance of the service department. If
the service can be obtained more cheaply
externally, then the user departments will be
likely to point this out to management. Knowing this, a manager of a service department
will exert effort to maintain a competitive level of service.
7. The identification and use of causal factors
ensures that service costs are accurately
assigned to users. This increases the legitimacy of the control function and enhances
product-costing accuracy.
8. Allocating actual costs passes on the efficiencies or inefficiencies of the service department, something which the manager of
the producing department cannot control. Allocating budgeted costs avoids this problem.
181
vider of services are allocated to all user departments, excluding any department(s) that
have already allocated costs. This continues
until all service center costs have been allocated. The principal difference in the two
methods is the fact that the sequential
method considers some interactions among
182
service centers, and the direct method ignores interactions.
14.
Agree. The reciprocal method is more accurate because it fully considers interactions
among service centers.
EXERCISES
6–1
a. producing
f.
producing
k. support
b. support
g. producing/support
l.
c. support
h. producing
m. producing
d. support
i.
producing
n. producing
e. support
j.
support
o. support
support
6–2
a. support
e. producing
i.
producing
b. support
f.
j.
support
c. producing
g. support
d. producing
h. producing
support
6–3
a. Number of employees
b. Square footage
c. Pounds of laundry
d. Orders processed
e. Maintenance hours worked
f.
Number of employees
g. Number of transactions processed
h. Machine hours
i.
Square footage
183
6–4
1.
Dr. Poston may want to cost the cleanser for several reasons: to value inventory; to determine profitability; and to plan sales and costs for the coming
year. As long as he sells relatively few bottles of cleanser, it is not necessary
to allocate any indirect costs to the cleanser. The medical assistant is paid
the same amount whether she mixes the cleanser or not. The space used to
store the cleanser materials is small, and the incremental cost is zero.
2.
The situation has changed dramatically. Now, the cleanser should be allocated some of the office rent as well as all of the new assistant’s salary. The office rent could be apportioned 75 percent to the three doctors and 25 percent
to the cleanser bottling operation given that the cleanser operation takes an
office and an examining room. It could be argued that this overstates the allocation to the cleanser, since the waiting room area does not serve the
cleanser. However, the receptionist probably takes calls and opens mail for
this project, so overstating the rent may be an easy way to adjust for this. The
cost per bottle would then be:
Materials
Labor ($12,000/40,000)
Office rent*
Total cost
$0.50
0.30
0.38
$1.18
*Office rent allocation = [($5,000  12)/4]/40,000 bottles
6–5
1.
The incremental method of allocating the cost of the trip would result in a
cost to LaTisha of $125 ($10 times five nights for the rollaway and $75 for her
food).
2.
The benefits-received approach could result in the following cost allocation
to LaTisha:
Motel ($425/3)
Food
Gas ($50/3)
Total
$141.67
75.00
16.67
$233.34
The treatment of the motel cost is problematical. This computation adds the
rollaway cost for five nights to the cost of the double room for five nights.
However, if LaTisha spends the entire time on a (less comfortable) rollaway,
she may be less than pleased. Perhaps the vacationers could trade off sleeping on the rollaway.
184
6–6
1.
Single charging rate = ($2,500/1,000) + $0.50
= $3 per gift
Store
Candles, Etc.
Dream Weaver Gift Shoppe
Back-in-the-Saddle Westernwear
Cuppa Java Gourmet Coffees
Shoe You
Dana’s Sportswear
Penelope’s Secret
Total
2.
Store
Candles, Etc.
Dream Weaver Gift Shoppe
Back-in-the-Saddle Westernwear
Cuppa Java Gourmet Coffees
Shoe You
Dana’s Sportswear
Penelope’s Secret
Total
Number
of Gifts
170
310
240
10
50
200
450
1,430
Number
of Gifts
200
300
100
70
50
130
150
1,000

Charging
Rate
$3
3
3
3
3
3
3
Percent
20
30
10
7
5
13
15
100
=
Total
$ 510
930
720
30
150
600
1,350
$4,290
Allocated
Fixed Amount*
$ 500
750
250
175
125
325
375
$2,500
*Allocated fixed amount = Percent  $2,500
Variable rate = $0.50 per gift
Store
Candles, Etc.
Dream Weaver Gift Shoppe
Westernwear Back-in-the-Saddle
Cuppa Java Gourmet Coffees
Shoe You
Dana’s Sportswear
Penelope’s Secret
Total
185
Number
of Gifts
170
310
240
10
50
200
450
1,430
Variable
Fixed
Total
Amount + Amount = Charge
$ 85
$ 500
$ 585
155
750
905
120
250
370
5
175
180
25
125
150
100
325
425
225
375
600
$715
$2,500
$3,215
6–6
3.
Concluded
The shops which actually use the gift-wrapping service less than anticipated
would like the single charging rate. The single charging rate assigns less of
the fixed cost to the shops using less of the service. Cuppa Java Gourmet
Coffees originally anticipated having 70 gifts wrapped per month but actually
had only 10 gifts wrapped. Under the single charging rate, Cuppa Java pays
only $30; under the dual charging rate, Cuppa Java pays $180.
The dual charging rate method is preferred by shops which use the service
as much as or more than anticipated. Penelope’s Secret had a much greater
use for the service and would be charged $600 under the dual rate but $1,350
under the single rate.
4.
Irrespective of the charging rate method, James may be overcharging by
overestimating his fixed costs. The space used by the gift-wrapping service is
one of five vacant spaces. The opportunity cost of using it to wrap gifts is zero. Until the eleventh space is rented and there is an occupant for the twelfth,
perhaps the fixed cost should include only the salary of the wrapper.
6–7
1.
Allocation ratios:
Department A
Department B
Allocation:
Department A
Department B
Year 1
0.40
0.60
$48,000
72,000
Year 2
0.50
0.50
$60,000
60,000
2.
The manager of Department B is not controlling maintenance costs better
than the manager of Department A. The only reason that Department A’s allocation of maintenance cost increased is because Department B’s usage decreased.
3.
First, variable and fixed costs should be allocated separately. Second, budgeted (not actual) costs should be allocated. Variable costs should be assigned to the two user departments by multiplying the budgeted variable cost
per hour by the actual hours or budgeted hours used, depending on whether
the purpose is performance evaluation or product costing. Fixed costs would
be assigned in proportion to the practical or normal activities of each user
department.
186
6–8
1.
Product costing (Year 1 and Year 2 are identical):
Department A
Variable costs:
($0.25  20,000)
($0.25  20,000)
Fixed costs:
(0.50  $100,000)
(0.50  $100,000)
Total cost
2.
Department B
$ 5,000
$ 5,000
50,000
50,000
$ 55,000
$ 55,000
Performance evaluation:
Year 1
Department A
Variable costs:
($0.25  24,000)
($0.25  36,000)
Fixed costs:
(0.50  $100,000)
(0.50  $100,000)
Total cost
Department B
$ 6,000
$ 9,000
50,000
50,000
$ 59,000
$ 56,000
Year 2
Department A
Variable costs:
($0.25  25,000)
($0.25  25,000)
Fixed costs:
(0.50  $100,000)
(0.50  $100,000)
Total cost
Department B
$ 6,250
$ 6,250
50,000
$ 56,250
187
50,000
$ 56,250
6–9
1.
Allocation ratios:
Traditional
0.2500
0.6000
0.5625
Machine hours
Square feet
No. of employees
Gel
0.7500
0.4000
0.4375
Cost assignment:
Power:
(0.2500  $90,000)
(0.7500  $90,000)
General Factory:
(0.6000  $300,000)
(0.4000  $300,000)
Personnel:
(0.5625  $120,000)
(0.4375  $120,000)
Direct costs
Total
2.
$ 22,500
$ 67,500
180,000
120,000
67,500
137,500
$407,500
Departmental overhead rates:
Traditional: $407,500/8,000 = $50.94* per MHr
Gel:
$462,500/24,000 = $19.27* per MHr
*Rounded
188
52,500
222,500
$462,500
6–10
1.
Assume the support department costs are allocated in order of highest to
lowest cost: General Factory, Personnel, and Maintenance.
General
Power
Factory Personnel Traditional
Gel
Square feet
0.15
—
0.10
0.45
0.30
No. employees
0.20
—
—
0.45
0.35
Machine hours
—
—
—
0.25
0.75
Direct costs
General Factory:
(0.15)($300,000)
(0.10)($300,000)
(0.45)($300,000)
(0.30)($300,000)
Personnel:
(0.20)($150,000)
(0.45)($150,000)
(0.35)($150,000)
Power:
(0.25)($165,000)
(0.75)($165,000)
Total
2.
General
Power
Factory
$ 90,000 $ 300,000
45,000
Personnel
$120,000
(45,000)
(30,000)
(135,000)
(90,000)
30,000
135,000
90,000
30,000
(30,000)
(67,500)
(52,500)
(41,250)
(123,750)
$
0 $
189
67,500
52,500
41,250
0
$
Traditional: $381,250/8,000 = $47.66* per MHr
Gel:
$488,750/24,000 = $20.36* per MHr
*Rounded
Traditional
Gel
$137,500 $222,500
0
$381,250
123,750
$488,750
6–11
1.
Allocation:
Square footage
Number of employees
P
P
P
0.98P
P
Maintenance
—
0.10
= $60,000 + 0.2M
= $60,000 + 0.2($200,000 + 0.1P)
= $60,000 + $40,000 + 0.02P
= $100,000
= $102,041
Maintenance
Personnel
Assembly
Painting
Assembly
0.40
0.24
Painting
0.40
0.66
M = $200,000 + 0.1P
M = $200,000 + 0.1($102,041)
M = $200,000 + $10,204
M = $210,204
Allocate
Maintenance*
$(210,204)
42,041
84,082
84,082
Direct Cost
$200,000
60,000
43,000
74,000
$377,000
*(0.20  $210,204) = $42,041
(0.40  $210,204) = $84,082
(0.40  $210,204) = $84,082
Allocate
Personnel**
$ 10,204
(102,041)
24,489***
67,347
Total After
Allocation
$
0
0
151,571
225,429
$377,000
**(0.10  $102,041) = $10,204
(0.24  $102,041) = $24,489
(0.66  $102,041) = $67,347
***Rounded down to balance.
2.
Personnel
0.20
—
Departmental overhead rates:
Assembly: $151,571/25,000 = $6.06*/DLH
Painting: $225,429/40,000 = $5.64*/DLH
*Rounded
190
6–12
1.
Allocation:
Square footage
Number of employees
Maintenance:
(0.5000  $200,000)
(0.5000  $200,000)
Personnel:
(0.2667  $60,000)
(0.7333  $60,000)
Direct costs
2.
Assembly
0.5000
0.2667
Painting
0.5000
0.7333
$100,000
$100,000
16,002
43,000
$159,002
43,998
74,000
$217,998
Department overhead rates:
Assembly: $159,002/25,000 = $6.36*/DLH
Painting: $217,998/40,000 = $5.45*/DLH
*Rounded
6–13
1.
Allocation:
Square footage
Number of employees
Personnel
0.2000
—
Maintenance:
(0.2000  $200,000)
(0.4000  $200,000)
(0.4000  $200,000)
Personnel:
[0.2667  ($60,000 + $40,000)]
[0.7333  ($60,000 + $40,000)]
Direct costs
Total
2.
Assembly
0.4000
0.2667
Painting
0.4000
0.7333
$40,000
$ 80,000
$ 80,000
26,670
$40,000
Departmental overhead rates:
Assembly: $149,670/25,000 = $5.99* per DLH
Painting: $227,330/40,000 = $5.68* per DLH
*Rounded
191
43,000
$149,670
73,330
74,000
$227,330
6–14
1.
Allocation:
Ratio for fixed costs*
Fixed costs**
Variable costs***
Total
Tulsa
0.65
Ames
0.35
$ 39,000
65,000
$104,000
$ 21,000
35,000
$ 56,000
*Tulsa = 1,625/2,500 = 0.65; Ames = 875/2,500 = 0.35
**($60,000  0.65) (60,000  0.35)
***$40  1,625 and $40  875
2.
Costing out services serves the same purposes as costing out tangible products (e.g., pricing, profitability analysis, and performance evaluation). Once
the costs are allocated to each revenue-producing center, then the costs
must be assigned to individual services through the use of an overhead rate
or rates.
6–15
1.
a. If the purpose is to cost out individual services, the allocation is identical
to that given in Requirement 1 of Exercise 6-14.
b. If the purpose is for performance evaluation, then variable costs equal the
predetermined rate multiplied by the actual usage. The fixed costs are allocated the same way as before.
Tulsa
Variable costs:
$40  1,200
$40  1,100
Fixed costs
2.
Ames
$ 48,000
39,000
$ 87,000
$ 44,000
21,000
$ 65,000
The allocated costs of $152,000 were $1,500 higher than the actual costs of
$150,500, because the producing departments are charged an allocation
based on budgeted costs rather than actual costs. Budgeted costs are allocated so that the efficiencies or inefficiencies of the legal services center are
not assigned to the user departments.
192
6–16
1.
2003 graphics rate $12,000/(2,000 + 2,000) = $3.00/hour
2004 graphics rate $14,000/(2,000 + 2,000 + 1,000) = $2.80/hour
2.
Total charge to the Nonprofit Organ. Dept. = $2.80  1,000 = $2,800
Mike Adams is no doubt angry. The amount charged was $800 above the indicated charge of $2,000.
3.
Graphics Department charges did increase by $2,000 ($14,000 – $12,000).
However, the charging rate changed as well. Thus, Tangible Goods and Public Relations saw a decrease in their graphics charges of $400 each. It is this
$400 decrease (times 2) which showed up as an $800 increase in Mike’s bill.
193
PROBLEMS
6–17
1.
Allocation ratios for fixed costs (uses normal levels):
Hrs. of flight time
No. of passengers
SLC
0.2500
0.3333
Reno
0.5000
0.5000
Portland
0.2500
0.1667
Variable rates:
Maintenance: $30,000/8,000 = $3.75 per flight hour
Baggage:
$64,000/30,000 = $2.1333 per passenger
SLC
Maintenance—fixed:
(0.25  $240,000)
(0.50  $240,000)
(0.25  $240,000)
Maintenance—variable:
($3.75  2,000)
($3.75  4,000)
($3.75  2,000)
Baggage—fixed:
(0.3333  $150,000)
(0.5000  $150,000)
(0.1667  $150,000)
Baggage—variable:
($2.1333  10,000)
($2.1333  15,000)
($2.1333  5,000)
Reno
Portland
$ 60,000
$120,000
$ 60,000
7,500
15,000
7,500
49,995
75,000
25,005
21,333
32,000
$138,828
194
$242,000
10,667
$103,172
6–17
2.
Concluded
The allocations are the same as in Requirement 1, except variable costs are
assigned using actual instead of budgeted activity.
Maintenance—fixed
Maintenance—variable:
($3.75  1,800)
($3.75  4,200)
($3.75  2,500)
Baggage—fixed
Baggage—variable:
($2.1333  8,000)
($2.1333  16,000)
($2.1333  6,000)
SLC
$ 60,000
Reno
$120,000
Portland
$ 60,000
6,750
15,750
49,995
75,000
9,375
25,005
17,066
34,133
$133,811
$244,883
12,800
$107,180
Yes, maintenance actually cost $315,000, but only $271,875 was allocated.
Baggage actually cost $189,000, but $213,999 was allocated (no costs remain). Actual costs are not allocated so that inefficiencies or efficiencies are
not passed on.
6–18
1.
Direct method:
Proportion of:
Machine hours
Number of employees
Power:
(0.375  $100,000)
(0.625  $100,000)
Human Resources:
(0.429  $205,000)
(0.571  $205,000)
Direct costs
Pottery
0.375
0.429
Retail
0.625
0.571
$ 37,500
$ 62,500
87,945
80,000
$205,445
195
117,055
50,000
$229,555
6–18
2.
Concluded
Sequential method:
Machine hours
Employees
Direct costs
Human Resources:
(0.125  $205,000)
(0.375  $205,000)
(0.500  $205,000)
Power:
(0.375  $125,625)
(0.625  $125,625)
3.
Power
—
0.125
Human Res.
—
—
$100,000
$ 205,000
25,625
(47,109)
(78,516)
$
0
(25,625)
(76,875)
(102,500)
Pottery
0.375
0.375
Retail
0.625
0.500
$ 80,000
$ 50,000
76,875
102,500
47,109
$
0
$203,984
78,516
$231,016
Pottery
0.300
0.375
Retail
0.500
0.500
Reciprocal method:
Machine hours
Employees
Power
—
0.125
Human Res.
0.200
—
HR = $205,000 + 0.200P
HR = $205,000 + 0.200($100,000 + 0.125HR)
HR = $205,000 + $20,000 + 0.025HR
0.975HR = $225,000
HR = $230,769
Human Resources:
(0.375  $230,769)
(0.500  $230,769)
Power:
(0.3  $128,846)
(0.5  $128,846)
Direct costs
Total Cost
$230,769
P = $100,000 + 0.125HR
P = $100,000 +
0.125($230,769)
P = $128,846
Pottery
Retail
$ 86,538
$115,385
128,846
38,654
80,000
$205,192
196
64,423
50,000
$229,808
6–19
1.
Department costs
Allocation of:
Repair (1/9, 8/9)
Power (7/8, 1/8)
Total overhead cost
Direct labor hours
Overhead rate per DLH
Repair
$ 48,000
Power
$ 250,000
Molding
$200,000
Assembly
$ 320,000
(48,000)
0
$
0
0
(250,000)
$
0
5,333
218,750
$424,083
÷ 40,000
$ 10.60*
42,667
31,250
$ 393,917
÷ 160,000
$
2.46*
*Rounded
2.
Algebraic equations for relationship between service departments
(R = Repair Department; P = Power Department):
R = $48,000 + 0.2P
P = $250,000 + 0.1R
R = $48,000 + 0.2($250,000 + 0.1R)
= $48,000 + $50,000 + 0.02R
0.98R = $98,000
R = $100,000
P = $250,000 + 0.1($100,000)
P = $260,000
Department costs
Allocation of:
Repair (0.1, 0.1, 0.8)
Power (0.2, 0.7, 0.1)
Total overhead cost
Direct labor hours
Overhead rate per DLH
Repair
$ 48,000
Power
$ 250,000
Molding
$200,000
Assembly
$ 320,000
(100,000)
52,000
$
0
10,000
(260,000)
$
0
10,000
182,000
$392,000
÷ 40,000
$
9.80
80,000
26,000
$ 426,000
÷ 160,000
$
2.66*
*Rounded
3.
The direct allocation method ignores any service rendered by one support
department to another. Allocation of each support department’s total cost is
made directly to the production departments. The reciprocal allocation method recognizes all support department support to one another through the use
of simultaneous equations or linear algebra. This allocation procedure is
more accurate and should lead to better results which would be of greater
value to management. However, the method is infrequently used in actual
practice because of the problems associated with developing a more complex or difficult model to recognize the interrelationships between support
departments.
197
6–20
1.
$40,000/300,000 = $0.1333/mile (uses normal activity)
2.
Variable rate: ($40,000 – $16,000)/300,000 = $0.08/mile
Fixed cost allocation ratios
Allocation of costs:
Fixed portion ($16,000  ratio*)
Variable portion (act. miles  $0.08)
Budget
0.4000
Luxury
0.3333
Truck
0.2667
$ 6,400
12,000
$ 18,400
$ 5,333
8,800
$ 14,133
$ 4,267
8,000
$12,267
*Budget: 120,000/300,000
Luxury: 100,000/300,000
Truck:
80,000/300,000
3.
Of the actual fixed costs, $1,100 ($17,100 – $16,000) was not allocated. Only
budgeted fixed costs were allocated. Variable costs of $1,200 ($30,000 –
$28,800) weren’t allocated because the actual variable rate ($0.083 per mile =
$30,000/360,000) was greater than the budgeted rate ($0.08 per mile). In both
cases, this practice follows the principle of not passing on efficiencies or inefficiencies of the support department to the producing departments.
6–21
1.
Henderson
Boulder City
Kingman
Flagstaff
Glendale
($431,800/$2,540,000)($182,500)*
($508,000/$2,540,000)($182,500)
($381,000/$2,540,000)($182,500)
($635,000/$2,540,000)($182,500)
($584,200/$2,540,000)($182,500)
*($26)(3,750) + $85,000 = $182,500
198
= $31,025
= $36,500
= $27,375
= $45,625
= $41,975
6–21
2.
3.
Concluded
Share of Accounting Department fixed costs based on 2003 sales:
Henderson
Boulder City
Kingman
Flagstaff
Glendale
($337,500/$2,250,000)($85,000) = $12,750
($450,000/$2,250,000)($85,000) = $17,000
($360,000/$2,250,000)($85,000) = $13,600
($540,000/$2,250,000)($85,000) = $20,400
($562,500/$2,250,000)($85,000) = $21,250
Henderson
Boulder City
Kingman
Flagstaff
Glendale
Variable Cost
($26)(1,475) = $38,350
($26)(400)
= $10,400
($26)(938)
= $24,388
($26)(562)
= $14,612
($26)(375)
= $9,750
+
+
+
+
+
+
Fixed Cost
$12,750
$17,000
$13,600
$20,400
$21,250
=
=
=
=
=
=
The method in Requirement 2 ties cost allocated to the driver that causes the
cost. Thus, motels would be more likely to use Accounting Department time
efficiently. The method in Requirement 1 assigns accounting costs on the basis of a variable which may not be causally related. Also, a motel with stable
sales from year to year may still experience wild fluctuations in allocated cost
due to changing sales patterns of other motels.
6–22
1.
Total
$51,100
$27,400
$37,988
$35,012
$31,000
Single rate = [$210,000 + 6,000($14)]/6,000 = $49 per legal hour
Great West Tissue (25  $49)
Morton Canned Meats (1,400  $49)
Pettigrew Valve and Tap (3,600  $49)
Bellini Musical Instruments (1,000  $49)
Total
199
$
1,225
68,600
176,400
49,000
$295,225
6–22
2.
Concluded
Dual rate: $14 per legal hour plus share of budgeted fixed costs
Budgeted
Hours
500
1,500
3,000
1,000
6,000
Division
Great West Tissue
Morton Canned Meats
Pettigrew Valve and Tap
Bellini Musical Instruments
Total
Division
Great West Tissue
Morton Canned Meats
Pettigrew Valve & Tap
Bellini Musical Instr.
Total
3.
Actual variable costs
Actual fixed costs
Costs charged
Difference
Actual
Hours
25
1,400
3,600
1,000
$ 83,145
215,000
Var.
Rate
$14
14
14
14
Percent
8.333
25.000
50.000
16.667
100.000
Var.
Amount
$
350
19,600
50,400
14,000
$ 84,350
Share of
Fixed Cost
$ 17,499
52,500
105,000
35,001
$210,000
Fixed
Amount
$ 17,499
52,500
105,000
35,001
$210,000
Total
Cost
$ 17,849
72,100
155,400
49,001
$294,350
$298,145
294,350
$ 3,795
The Legal Department spent $3,795 more than was charged to the divisions.
Fixed costs were $5,000 over budget. (Actual fixed costs were $215,000, and
budgeted fixed costs were $210,000.) However, variable costs came in under
budget. The budgeted variable rate was $14, but actual variable cost per hour
was $13.80 ($83,145/6,025), resulting in $0.20 savings times the 6,025 actual
hours worked.
4.
In general, the dual-rate method is preferred. However, some divisions would
not be pleased with their charges after the first year. In particular, Great West
Tissue is charged far more under the dual-rate method ($17,849) than under
the single-rate method ($1,225), because it overestimated its legal needs for
the first year. This led to a larger share of fixed costs. This may not be a longterm problem, since Great West may require more legal services in the future
(making the first-year experience an anomaly). Note that the estimates made
by all four divisions led to the establishment of the size Legal Department
created and that each division must bear responsibility for its estimate.
200
6–23
1.
Clearly, some expenses pertain to women living in the house while others
pertain to all members. In-house members use the second floor, most of the
food, and most of the variable expenses. All members use the first-floor facilities, food for Monday night dinners, and cereal and milk for snacks. HCB
must determine a fair method of allocating the costs since the sorority is a
nonprofit entity and house bills in total must equal house costs. It is difficult
to allocate the costs precisely to the two types of members given the sketchy
nature of the data.
2.
Using a benefits-received approach, the following charging rates might be
applied.
In-house members:
Use of second floor ($240,000 – $40,000)/2
Use of first floor [($240,000 – $40,000)/2]0.6
Food* ($1.01)(60)(20)(32)
Variable expenses
Total
$100,000
60,000
38,784
34,800
$233,584
Charging rate per in-house member per year: $233,584/60 = $3,893
*Cost per meal: $40,000/{[40 + (60  20)]  32} = $1.01
Out-of-house members:
Use of first floor [($240,000 – $40,000)/2]0.4
Food ($1.01)(32)(40)
Total
$40,000
1,293
$41,293
Charging rate per out-of-house member per year: $41,293/40 = $1,032
201
CASE
6–24
1.
Allocation, direct method:
Allocation ratios:
Administrative (employees)
Laundry (lbs.)
Janitorial (sq. ft.)
Laboratory
0.286
0.200
0.200
Nursing
0.714
0.800
0.800
Allocation:
Administrative:
0.286  $20,000
0.714  $20,000
Laundry:
0.20  $75,000
0.80  $75,000
Janitorial:
0.20  $50,000
0.80  $50,000
Direct costs
Total costs
$ 5,720
$ 14,280
15,000
60,000
10,000
43,000
$ 73,720
202
40,000
150,000
$264,280
6–24
2.
Continued
Cost-to-charges ratio:
Let X = Number of blood count tests (Test B)
X + 2X + 3X = 22,500 (RVUs)
6X = 22,500
X = 3,750 tests
Revenues:
B: $5.00  3,750
C: $19.33  3,750
CB: $22.00  3,750
Total revenues
$ 18,750
72,488
82,500
$173,738
Costs:
Materials:
B: $2.00  3,750
C: $5.00  3,750
CB: $3.00  3,750
$ 7,500
18,750
11,250
$ 37,500
Labor:
B: $2.00  3,750
C: $4.00  3,750
CB: $6.00  3,750
$ 7,500
15,000
22,500
45,000
73,720
$156,220
Overhead (from Requirement 1)
Total costs
Cost-to-charge ratio = $156,220/$173,738 = 0.90
3.
Cost per test using the cost-to-charges ratio:
Test B: 0.90  $5.00 = $4.50
Test C: 0.90  $19.33 = $17.40
Test CB: 0.90  $22.00 = $19.80
203
6–24
4.
Concluded
Cost per test using RVUs:
Overhead rate: $73,720/22,500 = $3.28 per RVU
Test B:
Materials ($2.00  1)
Labor ($2.00  1)
Overhead ($3.28  1)
Total
$2.00
2.00
3.28
$7.28
Test C:
Materials ($2.50  2)
Labor ($2.00  2)
Overhead ($3.28  2)
Total
$ 5.00
4.00
6.56
$15.56
Test CB:
Materials ($1.00  3)
Labor ($2.00  3)
Overhead ($3.28  3)
Total
$ 3.00
6.00
9.84
$18.84
5.
RVU costing is the more accurate approach. This method traces materials
and labor to each product and assigns overhead using a factor that correlates
with its consumption. The cost-to-charges approach makes no effort at all to
identify specific consumption of resources by individual products.
6.
Test CB, bid using cost-to-charges ratio:
Cost (from Requirement 3)
Markup (5%)
Bid price
$19.80
0.99
$20.79
Test CB, bid using RVU costing:
Cost (from Requirement 4)
Markup (5%)
Bid price
$18.84
0.94
$19.78
As the problem illustrates, inattention to costing accuracy can cause the
hospital to lose bids. If other hospitals, equally efficient, have better cost information, then they will tend to be more successful bidders.
204
COLLABORATIVE LEARNING EXERCISE
6–25
1.
a. Direct method
Cooking
0.6667
0.5556
Machine hours
Kilowatt-hours
Maintenance:
(0.6667  $340,000)
(0.3333  $340,000)
Power:
(0.5556  $200,000)
(0.4444  $200,000)
Direct costs
Packaging and Freezing
0.3333
0.4444
$226,678
$113,322
111,120
75,000
$412,798
Cooking: $412,798/40,000 = $10.32*/MHr
Packaging and freezing: $257,202/30,000 = $8.57*/DLH
Prime costs
Cooking ($10.32  2)
Pack./Freez. ($8.57  0.5)
Total cost
Markup (20%)
Bid price
$16.00
20.64
4.29*
$40.93
8.19*
$49.12
*Rounded
205
88,880
55,000
$257,202
6–25
Continued
b. Sequential method:
Maint.
—
—
Machine hours
Kilowatt-hours
Direct costs
Maintenance:
(0.4  $340,000)
(0.4  $340,000)
(0.2  $340,000)
Power:
(0.5556  $336,000)
(0.4444  $336,000)
$ 340,000
(136,000)
(136,000)
(68,000)
$
0
Power
0.4000
—
Cooking
0.4000
0.5556
Pack./Freez.
0.2000
0.4444
$ 200,000
$ 75,000
$ 55,000
136,000
136,000
68,000
(186,682)
(149,318)
$
0
Cooking: $397,682/40,000 = $9.94*/MHr
Pack. and Freez.: $272,318/30,000 = $9.08*/DLH
Prime costs
Cooking ($9.94  2)
Pack./Freez. ($9.08  0.5)
Total cost
Markup (20%)
Bid price
$16.00
19.88
4.54
$40.42
8.08
$48.50
*Rounded
206
186,682
$397,682
149,318
$272,318
6–25
Continued
c. Reciprocal method:
Machine hours
Kilowatt-hours
M
M
M
0.96M
M
Maint.
—
0.1
Power
0.4
—
= $340,000 + 0.1P
= $340,000 + 0.1($200,000 + 0.4M)
= $340,000 + $20,000 + 0.04M
= $360,000
= $375,000
Total
Cooking
0.4
0.5
Pack./Freez.
0.2
0.4
P = $200,000 + 0.4M
P = $200,000 + 0.4($375,000)
P = $200,000 + $150,000
P = $350,000
Cooking
Pack./Freez.
From:
Maintenance:
(0.4  $375,000)
(0.2  $375,000)
Power:
(0.5  $350,000)
(0.4  $350,000)
Direct costs
$375,000
$150,000
$ 75,000
350,000
175,000
75,000
$400,000
Cooking: $400,000/40,000 = $10/MHr
Pack. and Freez.: $270,000/30,000 = $9/DLH
Prime cost
Cooking ($10  2)
Pack./Freez. ($9  0.5)
Total cost
Markup (20%)
Bid price
$16.00
20.00
4.50
$40.50
8.10
$48.60
207
140,000
55,000
$270,000
6–25
2.
Concluded
No, the direct method did not produce a winning bid. The direct method fails
to consider the interrelationships of the support centers, and, as a consequence, assigns too much of the support center costs to the Cooking Department. Since the job spends more time in the Cooking Department than in
the Packaging and Freezing Department, it receives too much overhead and
is overpriced. The reciprocal method is the most accurate as it takes into account the use of support departments by other support departments.
CYBER RESEARCH CASE
6–26
Answers will vary.
208