Chapter 15 Homework Solutions - Wofford College

[Pages:10]ACCOUNTING 342 Chapter 15 Homework Solutions

15-1 Operating departments are the units in an organization within which the central purposes of the organization are carried out; these departments usually generate revenue. By contrast, service departments provide support or assistance to the operating departments. Examples of service departments include laundry services, internal auditing, airport maintenance services (ground crews), cafeteria, personnel, cost accounting, and so on.

15-2 Service department costs are allocated to products and services in two stages. Service department costs are first allocated to the operating departments. These allocated costs are then included in the operating departments overhead rates, which are used to cost products and services.

15-3 Interdepartmental service costs exist whenever two service departments perform services for each other. Under the step method, the costs of the service department performing the greatest amount of service for the other service departments are allocated first, the costs of the service department performing the next greatest amount of service are allocated next, and so forth through all the service departments. Once a service department s costs have been allocated, costs are not reallocated back to it under the step method.

15-4 Under the direct method, costs are not allocated from one service department to another. Rather, all service department costs are allocated directly to operating departments.

15-5 If a service department generates revenues, these revenues should be offset against the department s costs and only the net amount of cost remaining after this offset should be allocated to other departments.

15-6 Two general guidelines govern the allocation of fixed service department costs to other departments: (1) allocate only budgeted costs, and (2) allocate fixed costs in predetermined, lump-sum amounts, according to

how much of the service department s capacity is acquired to serve each of the other departments.

Two general guidelines also govern the allocation of variable service department costs to other departments: (1) allocate at budgeted rates, and (2) allocate the costs according to whatever activity (direct labor-hours, pounds of laundry, etc.) causes their incurrence.

15-7 If a variable base is used to allocate fixed costs, the costs allocated to one department will depend in large part on what is happening in other departments. As a consequence, the amount of service department cost allocated to a department will increase or decrease depending on the activity in other departments.

Problem 15- 10

1.

(Thousands of ?)

Factory

Admini- Custodial

Mainte-

stration Services Personnel nance Machining Assembly

Step method

Operating department costs ......

?376,300 ?175,900

Costs to be allocated ................ ?270,000 ? 68,760 ? 28,840 ? 45,200

Allocations:

Factory Administration

@ ?1,800 per labor-hour ..... (270,000) 5,400

9,000 39,600 54,000 162,000

Custodial Services

@ ?720 per square foot. ......

(74,160) 2,160

7,200 50,400 14,400

Personnel

@ ?320,000 per employee ...

(40,000) 8,000 12,800 19,200

Maintenance

@ ?1,250 per machine-

hour...................................

(100,000) 87,500 12,500

Total overhead after

allocations............................. ?

0 ?

0 ?

0 ?

0 ?581,000 ?384,000

Divide by machine-hours

(thousands) ..........................

70

Divide by direct labor-hours

(thousands) ..........................

80

Overhead rate..........................

? 8,300 ? 4,800

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Problem 15- 10 (continued)

2.

(Thousands of ?)

Factory

Admini- Custodial

Mainte-

stration Services Personnel nance Machining Assembly

Direct method

Operating department costs ......

?376,300 ?175,900

Costs to be allocated ................ ?270,000 ?68,760 ?28,840 ?45,200

Allocations:

Factory Administration

(1/4, 3/4) ........................... (270,000)

67,500 202,500

Custodial Services (7/9, 2/9)...

(68,760)

53,480 15,280

Personnel (2/5, 3/5)...............

(28,840)

11,536 17,304

Maintenance (7/8, 1/8) ..........

(45,200) 39,550

5,650

Total overhead after

allocations............................. ?

0 ? 0 ? 0?

0 ?548,366 ?416,634

Divide by machine-hours

(thousands) ..........................

70

Divide by direct labor-hours

(thousands) ..........................

80

Overhead rate..........................

? 7,834 ? 5,208

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Problem 15- 10 (continued)

3. Plantwide rate

Overhead rate= Total overhead cost Total direct labor-hours

= ?965,000,000 = ?9,650 per DLH 100,000 DLHs

4. The amount of overhead cost assigned to the job would be:

Step method: Machining Department: ?8,300 per machine-hour ? 190 machine-hours................................................. ?1,577,000 Assembly Department: ?4,800 per direct labor-hour ? 75 direct labor-hours ........................................... 360,000

Total overhead cost ..................................................... ?1,937,000

Direct method: Machining Department: ?7,834 per machine-hour ? 190 machine-hours................................................. ?1,488,460 Assembly department: ?5,208 per direct labor-hour ? 75 direct labor-hours .............................................. 390,600

Total overhead cost ..................................................... ?1,879,060

Plantwide method: ?9,650 per direct labor-hour ? 100 direct labor-hours.. ? 965,000

The plantwide method, which is based on direct-labor hours, assigns very little overhead cost to the job since it requires little labor time. Assuming that Factory Administrative costs really do vary in proportion to labor-hours, Custodial Services with square feet occupied, and so on, the company will tend to undercost such jobs if a plantwide overhead rate is used (and it will tend to overcost jobs requiring large amounts of labor time). The direct method is better than the plantwide method, but the step method will generally provide the most accurate overhead rates of the three methods.

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Problem 15- 11

1.

Variable costs: $3 per meal ? 35,000 meals..... $3 per meal ? 20,000 meals.....

Fixed costs: 65% ? $40,000....................... 35% ? $40,000.......................

Total cost allocated.....................

Auto Division $105,000

26,000 $131,000

Truck Division

$60,000

14,000 $74,000

The variable costs are allocated by multiplying the budgeted rate per meal by the budgeted number of meals that will be served in each division during the month. The fixed costs are allocated in predetermined, lump-sum amounts based on the peak-period need for meals in each division.

2.

Variable costs: $3 per meal ? 20,000 meals..... $3 per meal ? 20,000 meals.....

Fixed costs: 65% ? $40,000....................... 35% ? $40,000.......................

Total cost allocated.....................

Auto Division $60,000

26,000 $86,000

Truck Division

$60,000

14,000 $74,000

The variable costs are allocated according to the budgeted rate per meal and not according to the actual rate. The fixed costs are again allocated in predetermined, lump-sum amounts, based on budgeted fixed costs. Any difference between budgeted and actual costs is not allocated, but rather is treated as a spending variance of the cafeteria:

Total actual costs for the month................ Total cost allocated above ........................ Spending variance not allocated .............

Variable $128,000

120,000 $ 8,000

Fixed $42,000

40,000 $ 2,000

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Problem 15- 11 (continued)

3. Actual variable costs.............. Actual f ixed costs.................. Total actual costs ..................

$128,000 42,000

$170,000

One-half of the cost, or $85,000, would be allocated to each division, since an equal number of meals were served in each division during the month.

4. This method has two major problems. First, the spending variances should not be allocated, since this forces the inefficiencies of the service department onto the using departments. Second, the fixed costs should not be allocated according to month-by-month usage of services, since this causes the allocation to one division to be affected by what happens in another division.

5. Their strategy probably will be to underestimate their peak period requirements in order to force a greater proportion of any allocation onto other departments. Top management can control ploys of this type by careful follow-up, with rewards being given to those managers who estimate accurately, and severe penalties assessed against those managers who underestimate their peak period requirements. For example, departments whose managers underestimate their peak period requirements may be denied access to the cafeteria once their estimates have been exceeded.

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Problem 15- 12

1. Yes, there is merit to the complaint. The company is using a variable base (hours of hangar use) to allocate costs that are largely fixed. Thus, the amount of cost that is charged to a division during a given month will depend to a large extent on usage in other divisions. A reduction in usage in one division can result in shifts of costs from it onto the other divisions, even though the other divisions receive no more service.

2. 1st quarter activity ............... 2nd quarter activity .............. Difference............................

Hours of Use 3,000 2,000 1,000

Total Cost $172,000

168,000 $ 4,000

Variable cost element = Change in cost Change in activity

= $4,000 = $4 per hour 1,000 hours

Fixed cost per quarter: Total cost, 1st quarter................................................ $172,000 Less variable cost ($4 per hour ? 3,000 hours)............ 12,000 Fixed cost ................................................................. $160,000

Thus, the cost formula is $160,000 f ixed cost plus $4 per hour variable cost.

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Problem 15- 12 (continued)

3. Even though the peak-period level of activity will not be reached until the fourth quarter, it should still be used to allocate the fixed costs of the hangar. The reason is that peak-period requirements determine the present level of fixed costs. The fact that the divisions do not need a peak-period level of servicing every quarter is immaterial. If the divisions require such servicing at certain times, then the capacity to deliver it must be available, and it is the responsibility of the divisions to bear the cost of that capacity.

Domestic Overseas

Freight Passenger Passenger

1st quarter allocation:

Variable cost:

$4 per hour ? 900 hours ................. $ 3,600

$4 per hour ? 1,800 hours...............

$ 7,200

$4 per hour ? 300 hours .................

$ 1,200

Fixed cost: 30% ? $160,000 ............................ 48,000 50% ? $160,000 ............................ 20% ? $160,000 ............................

Total cost allocation ........................... $51,600

80,000 $87,200

32,000 $33,200

2nd quarter allocation: Variable cost: $4 per hour ? 800 hours ................. $4 per hour ? 700 hours ................. $4 per hour ? 500 hours .................

$ 3,200

Fixed cost: 30% ? $160,000 ............................ 48,000 50% ? $160,000 ............................ 20% ? $160,000 ............................

Total cost allocation ........................... $51,200

$ 2,800

80,000 $82,800

$ 2,000

32,000 $34,000

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