5-18
(15 min.) Alternative allocation bases for a professional services firm.
1.
Client
(1)
SEATTLE
DOMINION
Wolfson
Brown
Anderson
TOKYO
ENTERPRISES
Wolfson
Brown
Anderson
Direct Professional Time
Rate per umber
Total
of Hours
Hour
(2)
(3)
(4) = (2) × (3)
Support Services
Rate
(5)
Amount
Billed to
Total
Client
(7)
=
(4) + (6)
(6) = (4) × (5)
$500
120
80
15
3
22
$7,500
360
1,760
30%
30
30
$2,250
108
528
$ 9,750
468
2,288
$12,506
$500
120
80
2
8
30
$1,000
960
2,400
30%
30
30
$300
288
720
$1,300
1,248
3,120
$5,668
2.
Direct Professional Time
Support Services
Rate per umber
Rate per
Hour
of Hours
Total
Hour
Total
(2)
(3)
(5)
(4) = (2) × (3)
(6) = (3) × (5)
Client
(1)
SEATTLE
DOMINION
Wolfson
Brown
Anderson
TOKYO
ENTERPRISE
S
Wolfson
Brown
Anderson
Amount
Billed to
Client
(7) = (4) + (6)
$500
120
80
15
3
22
$7,500
360
1,760
$50
50
50
$ 750
150
1,100
$ 8,250
510
2,860
$11,620
$500
120
80
2
8
30
$1,000
960
2,400
$50
50
50
$ 100
400
1,500
$1,100
1,360
3,900
$6,360
Seattle Dominion
Tokyo Enterprises
Requirement 1
$12,506
5,668
$18,174
Requirement 2
$11,620
6,360
$17,980
Both clients use 40 hours of professional labor time. However, Seattle Dominion uses a higher
proportion of Wolfson’s time (15 hours), which is more costly. This attracts the highest supportservices charge when allocated on the basis of direct professional labor costs.
3.
Assume that the Wolfson Group uses a cause-and-effect criterion when choosing the
allocation base for support services. You could use several pieces of evidence to determine
whether professional labor costs or hours is the driver of support-service costs:
a. Interviews with personnel. For example, staff in the major cost categories in support
services could be interviewed to determine whether Wolfson requires more support
per hour than, say, Anderson. The professional labor costs allocation base implies that
an hour of Wolfson’s time requires 6.25 ($500 ÷ $80) times more support-service
dollars than does an hour of Anderson’s time.
b. Analysis of tasks undertaken for selected clients. For example, if computer-related
costs are a sizable part of support costs, you could determine if there was a systematic
relationship between the percentage involvement of professionals with high billing
rates on cases and the computer resources consumed for those cases.
5-20
(10–15 min.) ABC, process costing.
Rates per unit cost driver.
Activity
Cost Driver
Machining
Machine-hours
Rate
$375,000 ÷ (25,000 + 50,000)
= $5 per machine-hour
Set up
Production runs
$120,000 ÷ (50 + 50)
= $1,200 per production run
Inspection
Inspection-hours
$105,000 ÷ (1,000 + 500)
= $70 per inspection-hour
Overhead cost per unit:
Machining: $5 × 25,000; 50,000
Set up: $1,200 × 50; $1,200 × 50
Inspection: $70 × 1,000; $70 × 500
Total manufacturing overhead costs
Divide by number of units
Manufacturing overhead cost per unit
Mathematical
$125,000
60,000
70,000
$255,000
÷ 50,000
$
5.10
Financial
$250,000
60,000
35,000
$345,000
÷100,000
$
3.45
2.
Mathematical Financial
Manufacturing cost per unit:
Direct materials
$150,000 ÷ 50,000
$300,000 ÷ 100,000
Direct manufacturing labor
$50,000 ÷ 50,000
$100,000 ÷ 100,000
Manufacturing overhead (from requirement 1)
Manufacturing cost per unit
$3.00
$3.00
1.00
5.10
$9.10
1.00
3.45
$7.45
5-32
(30 min.) Plantwide versus department overhead cost rates.
1.
Molding
Manufacturing department overhead
Service departments:
Power
Maintenance
Total budgeted plantwide overhead
$21,000
Amounts
(in thousands)
Component
Assembly
$16,200
$22,600
Budgeted direct manufacturing labor-hours (DMLH):
Molding
Component
Assembly
Total budgeted DMLH
Plantwide overhead rate =
=
2.
Total
$59,800
18,400
4,000
$82,200
500
2,000
1,500
4,000
Budgeted plantwide overheard
Budgeted DMLH
$82,200
= $20.55 per DMLH
4,000
The department overhead cost rates are shown in Solution Exhibit 5-32
3.
MumsDay Corporation should use department rates to allocate plant overhead because:
(1) the cost drivers of resources used in each department differ and (2) the departments do not
use resources from the support departments in the same proportion. Hence, department rates
better capture cause-and-effect relationships at MumsDay than does a plantwide rate.
4.
MumsDay should further subdivide the department cost pools into activity-cost pools if
(a) significant costs are incurred on different activities within the department, (b) the different
activities have different cost drivers, and (c) different products use different activities in different
proportions.
Budgeted Rate (Budgeted overhead ÷ Alloc. Base)
2 (b) Allocation Base
Total budgeted overhead of manufacturing
departments
2 (a)
Departmental overhead costs
Allocation of maintenance costs (direct method)
$4,000 × 90/125, 25/125, 10/125
Allocation of power costs
$18,400 × 360/800, 320/800, 120/800
2,760
SOLUTIO EXHIBIT 5-32
$
0
(18,400)
$18,400
$
0
2,880
(4,000)
$36.75/MH
875 MH
$32,160
8,280
$21,000
$4,000
1,500 DMLH
$25,680
7,360
320
$22,600
Assembly
$12.18/DMLH $17.12/DMLH
2,000 DMLH
$24,360
800
$16,200
Departments (in thousands)
Service
Manufacturing
Power
Maintenance
Molding
Component