CHAPTER 7
ALLOCATING COSTS OF SUPPORT DEPARTMENTS
AND JOINT PRODUCTS
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.
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).
2. 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.
3. 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.
4. 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.
5. Allocating actual costs passes on the efficiencies or inefficiencies of the service department, something that the manager of the
producing department cannot control. Allocating budgeted costs avoids this problem.
6. 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
133
7.
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.
8.
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.
9.
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 provider 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
service centers and the direct method ignores interactions.
10. The reciprocal method is more accurate
because it fully considers interactions among
service centers.
134
11.
A joint cost is a cost incurred in the simultaneous production of two or more products.
At least one of these joint products must be
a main product. It is possible for the joint
production process to produce a product of
relatively little sales value relative to the
main product(s); this product is known as a
by-product.
12.
Joint costs occur only in cases of joint production. A joint cost is a common cost, but a
common cost is not necessarily a joint cost.
Many overhead costs are common to the
products manufactured in a factory but do
not signify a joint production process.
EXERCISES
7–1
a.
support
f.
support
k.
support
b.
producing
g.
support
l.
support
c.
support
h.
producing
m.
support
d.
producing
i.
producing
n.
support
e.
support
j.
producing
o.
support
a.
support
e.
producing
i.
producing
b.
support
f.
support
j.
support
c.
producing
g.
support
d.
producing
h.
producing
7–2
7–3
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
135
7–4
1.
Single charging rate = ($3,000/1,000) + $1.50
= $4.50 per gift
Store
The Paper Chase ...........................
Reservation Art .............................
Kid-Sports ......................................
Sugar Shack ..................................
Designer Shoes .............................
Boutique de Donatessa ................
Alan’s Drug and Sundries ............
Total ........................................
Number
of Gifts
170
310
240
10
50
200
450
1,430
Store
The Paper Chase ...........................
Reservation Art .............................
Kid-Sports ......................................
Sugar Shack ..................................
Designer Shoes .............................
Boutique de Donatessa ................
Alan’s Drug and Sundries ............
Total ........................................
Number
of Gifts
175
400
100
75
20
130
100
1,000
2.
Charging
Rate
$4.50
4.50
4.50
4.50
4.50
4.50
4.50
×
Percent
17.50
40.00
10.00
7.50
2.00
13.00
10.00
100.00
=
Total
$ 765
1,395
1,080
45
225
900
2,025
$6,435
Allocated
Fixed Amount*
$ 525
1,200
300
225
60
390
300
$3,000
*Allocated fixed amount = Percent × $3,000.
Variable rate = $1.50 per gift
Store
The Paper Chase ..................
Reservation Art ....................
Kid-Sports .............................
Sugar Shack .........................
Designer Shoes ....................
Boutique de Donatessa .......
Alan’s Drug and Sundries ...
Total ...............................
Number
of Gifts
170
310
240
10
50
200
450
1,430
136
Variable
Amount
$ 255
465
360
15
75
300
675
$2,145
+
Fixed
Total
Amount = Charge
$ 525
$ 780
1,200
1,665
300
660
225
240
60
135
390
690
300
975
$3,000
$5,145
7–4
3.
Concluded
The shops that 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. The Sugar Shack originally anticipated having 75 gifts wrapped per month but actually had only 10
gifts wrapped. Under the single charging rate, The Sugar Shack pays $45;
under the dual charging rate, it pays $240.
The dual charging rate method is preferred by shops that use the service as
much as or more than anticipated. Alan’s Drug and Sundries had a much
greater use for the service and would be charged $975 under the dual rate
but $2,025 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 three vacant spaces. The opportunity cost of using it to wrap gifts is
zero. Until the ninth space is rented and there is an occupant for the tenth,
perhaps the fixed cost should include only the wages paid to the gift wrappers.
7–5
1.
Allocation ratios:
Machine hours
Square feet
No. of employees
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.
Traditional
0.2500
0.6000
0.5625
Gel
0.7500
0.4000
0.4375
$ 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
137
52,500
222,500
$462,500
7–6
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 $
Traditional
Gel
$137,500 $222,500
67,500
52,500
41,250
0
$
0
$381,250
123,750
$488,750
Traditional: $381,250/8,000 = $47.66* per MHr
Gel:
$488,750/24,000 = $20.36* per MHr
*Rounded
7–7
1.
Square footage ..............
Number of employees ...
Maintenance
—
0.10
P = 60,000 + 0.2M
P = 60,000 + 0.2(200,000 + 0.1P)
P = 60,000 + 40,000 + 0.02P
0.98P = 100,000
P = 102,041
138
Personnel
0.20
—
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
7–7
Concluded
Maintenance ..........
Personnel ...............
Assembly ...............
Painting ..................
Allocate
Maintenancea
$(210,204)
42,041
84,082
84,082
Direct Cost
$ 200,000
60,000
43,000
74,000
$ 377,000
Allocate
Personnelb
$ 10,204
(102,041)
24,490
67,347
*Difference due to rounding error.
a(0.20
b(0.10
× $210,204) = $42,041
(0.40 × $210,204) = $84,082
(0.40 × $210,204) = $84,082
2.
× $102,041) = $10,204
(0.24 × $102,041) = $24,490
(0.66 × $102,041) = $67,347
Departmental rates:
Assembly: $151,572/25,000 = $6.06 per direct labor hour
Painting:
$225,429/40,000 = $5.64 per direct labor hour
7–8
1.
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
Assembly: $159,002/25,000 = $6.36 per direct labor hour
Painting: $217,998/40,000 = $5.45 per direct labor hour
139
Total after
Allocation
$
0
0
151,572
225,429
$ 377,001*
7–9
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 × $100,000) ...................
Direct costs ......................................
Total ..................................................
2.
Assembly
0.4000
0.2667
Painting
0.4000
0.7333
$40,000
$ 80,000
$ 80,000
26,670
$40,000
43,000
$149,670
73,330
74,000
$ 227,330
Assembly: $149,670/25,000 = $5.99 per direct labor hour
Painting: $227,330/40,000 = $5.68 per direct labor hour
7–10
1.
Andol .........
Incol ...........
Ordol..........
Exsol..........
Total .....
Units
1,000
1,500
2,500
3,000
8,000
2.
Andol ........
Incol ..........
Ordol.........
Exsol.........
Total ....
Units
1,000
1,500
2,500
3,000
Percent ×
0.1250
0.1875
0.3125
0.3750
Weight
× Factor
3.0
2.0
0.4
1.0
Joint Cost
$100,000
100,000
100,000
100,000
=
Allocated Joint Cost
$ 12,500
18,750
31,250
37,500
$ 100,000
Weighted
Joint
Units
Percent ×
Cost
3,000
0.30
$100,000
3,000
0.30
100,000
1,000
0.10
100,000
3,000
0.30
100,000
10,000
140
Allocated
Joint Cost
$ 30,000
30,000
10,000
30,000
$ 100,000
7–11
Andol ........
Incol ..........
Ordol.........
Exsol.........
Total ....
Units
1,000
1,500
2,500
3,000
5,000
Price at
Split-Off
$20.00
75.00
64.00
22.50
Market Value
at Split-Off
$ 20,000
112,500
160,000
67,500
$ 360,000
Joint
Percent
Cost
0.0556 $100,000
0.3125
100,000
0.4444
100,000
0.1875
100,000
Allocated
Cost
$ 5,560
31,250
44,440
18,750
$100,000
7–12
1.
Units
Ups ........... 39,000
Downs ...... 21,000
Total ....
Price
$2.00
2.18
Eventual
Separable
Market Value
Costs
$78,000
$18,000
45,780
5,780
Joint cost .................................................................
× Percent of hypothetical market value .................
Allocated joint cost .................................................
2.
Hypothetical
Market Value
$ 60,000
40,000
$ 100,000
Ups
$ 42,000
× 0.60
$ 25,200
Value of ups at split-off (39,000 × $1.80) ........
$70,200
Value of ups when processed further ............
Less: Further processing cost ........................
Incremental value of further processing ........
$78,000
18,000
$60,000
Percent
0.60
0.40
Downs
$ 42,000
× 0.40
$ 16,800
Ups should not be processed further as there will $10,200 more profit if sold
at split-off.
141
PROBLEMS
7–13
1.
Ratio for fixed costs* ..........
Fixed costs ..........................
Variable costs** ...................
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.
**$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 products through the use of an overhead rate or rates.
3.
If the purpose is to cost out individual services, then the allocation is identical to that given in Requirement 1.
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 ..........................
4.
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 service center are not
assigned to the user departments.
142
7–14
1.
Allocation ratios for fixed costs (uses normal levels):
SLC
Hours of flight time ............. 0.2500
Number of passengers ....... 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:
(0.2500 × $240,000) ..............
(0.5000 × $240,000) ..............
(0.2500 × $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
143
$242,000
10,667
$ 103,172
7–14
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 of
support centers will not be passed on.
7–15
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 ..............................................................
144
Pottery
0.375
0.429
Retail
0.625
0.571
$ 37,500
$ 62,500
87,945
80,000
$ 205,445
117,055
50,000
$229,555
7–15
2.
Concluded
Sequential method:
Machine hours .................
Number of 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
Resources
—
—
Pottery
0.375
0.375
Retail
0.625
0.500
$100,000
$ 205,000
$ 80,000
$ 50,000
25,625
(47,109)
(78,516)
$
0
(25,625)
(76,875)
(102,500)
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 ..................
Number of employees ......
HR
HR
HR
0.975HR
HR
Human
Resources
0.200
—
Power
—
0.125
= $205,000 + 0.200P
= $205,000 + 0.200($100,000 + 0.125HR)
= $205,000 + $20,000 + 0.025HR
= $225,000
= $230,769
P = $100,000 + 0.125HR
P = $100,000 + 0.125($230,769)
P = $100,000 + 28,846
P = $128,846
Pottery
Human resources:
(0.375 × $230,769) .......................
(0.500 × $230,769) .......................
Power:
(0.300 × $128,846) .......................
(0.500 × $128,846) .......................
Direct costs ......................................
Retail
$ 86,538
$115,385
38,654
80,000
$ 205,192
145
64,423
50,000
$229,808
7–16
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 ..
2.
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
$ 2.462
Algebraic equations for relationship between service departments
(R = Repair department; P = Power department):
R = $48,000 + 0.2P
P = $250,000 + 0.1R
R=
R=
0.98R =
R=
$48,000 + 0.2($250,000 + 0.1R)
$48,000 + $50,000 + 0.02R
$98,000
$100,000
P = $250,000 + 0.1($100,000)
P = $260,000
Repair
Department costs ............. $ 48,000
Allocation of:
Repair (0.1, 0.1, 0.8) ... (100,000)
Power (0.2, 0.7, 0.1)....
52,000
Total overhead cost ......... $
0
Direct labor hours ............
Overhead rate per DLH ....
3.
Power
$ 250,000
Molding
$ 200,000
Assembly
$ 320,000
10,000
(260,000)
$
0
10,000
182,000
$ 392,000
÷ 40,000
$
9.80
80,000
26,000
$ 426,000
÷ 160,000
$ 2.6625
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.
146
7–17
1.
Two Oil .............
Six Oil ...............
Distillates .........
Total ............
Units
150,000
120,000
60,000
330,000
Percent
0.4545
0.3636
0.1818
×
Joint Cost
$5,000,000
5,000,000
5,000,000
=
Allocated Joint Cost
$2,272,500
1,818,000
909,000
$4,999,500*
* Rounding error.
2.
Two Oil .......
Six Oil .........
Distillates ...
Total ......
Units
150,000
120,000
60,000
330,000
Price at Market Value
Split-Off at Split-Off
$40
$ 6,000,000
60
7,200,000
30
1,800,000
Percent
0.4000
0.4800
0.1200
Joint
Allocated
Cost
Cost
$5,000,000 $ 2,000,000
5,000,000
2,400,000
5,000,000
600,000
$ 5,000,000
7–18
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)
= $31,025
= 36,500
= 27,375
= 45,625
= 41,975
*($26)(3,750) + $85,000 = $182,500.
2.
Share of accounting department fixed costs based on 2006 sales:
Henderson
Boulder City
Kingman
Flagstaff
Glendale
($337,500/$2,250,000)($85,000)
($450,000/$2,250,000)($85,000)
($360,000/$2,250,000)($85,000)
($540,000/$2,250,000)($85,000)
($562,500/$2,250,000)($85,000)
= $12,750
= 17,000
= 13,600
= 20,400
= 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
147
+
+
+
+
+
+
=
=
=
=
=
=
Total
$51,100
27,400
37,988
35,012
31,000
7–18
3.
Concluded
The method in Requirement 2 is better because it ties cost allocated to the
driver that causes the cost. Thus, managers 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.
7–19
1.
a.
Relative sales-value-at-split-off method:
Studs ..........................
Decorative pieces ....
Posts ..........................
Total ......................
b.
Sales
Price
per Unit
$ 8
60
20
Relative
Sales Value Percent of
at Split-Off
Sales
$ 600,000
46.15%
300,000
23.08
400,000
30.77
$ 1,300,000
100.00%
Allocated
Joint
Costs
$ 461,500
230,800
307,700
$ 1,000,000
Physical units (volume) method at split-off:
Studs .........................
Decorative pieces .....
Posts .........................
Total .....................
c.
Monthly
Unit
Output
75,000
5,000
20,000
Units
75,000
5,000
20,000
100,000
Percent ×
0.750
0.050
0.200
Joint Cost
$1,000,000
1,000,000
1,000,000
=
Allocated Joint Cost
$ 750,000
50,000
200,000
$1,000,000
Estimated net realizable value method:
Studs .........................
Decorative pieces .....
Posts .........................
Total .....................
Fully
Processed
Monthly
Sales
Net
Unit
Price
Realizable Percent of
Output
per Unit
Value
Value
75,000
$ 8
$ 600,000
44.44%
4,500*
100
350,000**
25.93
20,000
20
400,000
29.63
$ 1,350,000
100.00%
Estimated
Allocated
Joint
Costs
$ 444,400
259,300
296,300
$ 1,000,000
*5,000 monthly units of output – 10% normal spoilage = 4,500 good units.
**4,500 good units × $100 = $450,000 – Further processing cost of $100,000 =
$350,000.
7–19
Concluded
148
2.
Monthly unit output .......................................................
Less: Normal further processing shrinkage ...............
Units available for sale ............................................
5,000
500
4,500
Final sales value (4,500 units @ $100 per unit) ..........
Less: Sales value at split-off ........................................
Differential revenue ..................................................
Less: Further processing costs ...................................
Additional contribution from further processing ........
$450,000
300,000
$150,000
100,000
$ 50,000
7–20
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
COLLABORATIVE LEARNING EXERCISE
149
7–21
1.
a.
Direct method
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
Cooking
0.6667
0.5556
$ 226,678
$ 113,322
111,120
88,880
55,000
$ 257,202
75,000
$ 412,798
Cooking: $412,798/40,000 = $10.32 per machine hour
Packaging and freezing: $257,202/30,000 = $8.57 per direct labor hour
Prime costs ..............................................
Cooking ($10.32 × 2) ................................
Packaging and freezing ($8.57 × 0.5) .....
Total cost .............................................
Markup (20%)............................................
Bid price ...............................................
b.
$ 16.00
20.64
4.29
$ 40.93
8.19
$ 49.12
Sequential method:
Machine hours .................
Kilowatt hours .................
Direct costs......................
Maintenance:
(0.4000 × $340,000) .....
(0.4000 × $340,000) .....
(0.2000 × $340,000) .....
Power:
(0.5556 × $336,000) ....
(0.4444 × $336,000) ....
Maintenance
—
—
Power
0.4000
—
Cooking
0.4000
0.5556
Packaging
and
Freezing
0.2000
0.4444
$ 340,000
$ 200,000
$ 75,000
$ 55,000
(136,000)
(136,000)
(68,000)
$
0
150
136,000
136,000
68,000
(186,682)
$ (149,318)
$
0
186,682
$397,682
149,318
$272,318
7–21
Continued
Cooking: $397,682/40,000 = $9.94 per machine hour
Packaging and freezing: $272,318/30,000 = $9.08 per direct labor hour
Prime costs ..............................................
Cooking ($9.94 × 2) ..................................
Packaging and freezing ($9.08 × 0.5) .....
Total cost .............................................
Markup (20%)............................................
Bid price ...............................................
c.
$ 16.00
19.88
4.54
$ 40.42
8.08
$ 48.50
Reciprocal method:
Machine hours .................
Kilowatt-hours .................
M
M
M
0.96M
M
Maintenance
—
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
Packaging
and
Freezing
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
Packaging
and Freezing
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 per machine hour
Packaging and freezing: $270,000/30,000 = $9 per direct labor hour
Prime cost ................................................
Cooking ($10 × 2) .....................................
Pack/freeze ($9 × 0.5) ...............................
Total cost .............................................
Markup (20%)............................................
Bid price ...............................................
151
$ 16.00
20.00
4.50
$ 40.50
8.10
$ 48.60
140,000
55,000
$ 270,000
7–21
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
7–22
Answers will vary.
152