Toy Creations Ltd, a small and medium enterprise, specialises in children’s toys with its products being categorised into three major groups: Plushies, Dolls and Animals. The market for Plushies is expected to expand in the future but Toy Creations is currently struggling to maintain its market share due to the intense price competition in the industry. The market for Animals is assessed to be least price-sensitive among allproducts. The company currently uses the step-down method to allocate its Material Handling and Quality Assurance (QA) costs to the three product groups, and prices all products using a cost-plus basis. The Material Handling and QA department costs are allocated based on the amount of purchases and number of labour hours respectively. The following information is available for the cost allocation exercise. Material Handling QA Plushies Dolls Animals Cost before allocation (incl. salaries) $2,500,000 $2,000,000 $1,800,000 $4,300,000 $3,250,000 Purchases $750,000 $500,000 $600,000 $1,000,000 $400,000 Number of labour hours 250 150 200 550 500 Questions 1. Explain which department should be allocated first in a step down approach. 2. Ignoring your answer in 1., determine the total cost for Animals toys after support cost allocation using the step-down method beginning with the Material Handling department. 3. Which product group would have the largest allocated support cost decrease, if support cost allocation is done using the direct method? Briefly explain the reason(s).
Toy Creations Ltd, a small and medium enterprise, specialises in children’s toys with its products being categorised into three major groups: Plushies, Dolls and Animals.
The market for Plushies is expected to expand in the future but Toy Creations is currently struggling to maintain its market share due to the intense price competition in the industry. The market for Animals is assessed to be least price-sensitive among allproducts.
The company currently uses the step-down method to allocate its Material Handling and Quality Assurance (QA) costs to the three product groups, and prices all products using a cost-plus basis. The Material Handling and QA department costs are allocated based on the amount of purchases and number of labour hours respectively. The following information is available for the cost allocation exercise.
| Material Handling | QA | Plushies | Dolls | Animals | |
| Cost before allocation (incl. salaries) | $2,500,000 | $2,000,000 | $1,800,000 | $4,300,000 | $3,250,000 |
| Purchases | $750,000 | $500,000 | $600,000 | $1,000,000 | $400,000 |
| Number of labour hours | 250 | 150 | 200 | 550 | 500 |
Questions
1. Explain which department should be allocated first in a step down approach.
2. Ignoring your answer in 1., determine the total cost for Animals toys after support cost allocation using the step-down method beginning with the Material Handling department.
3. Which product group would have the largest allocated support cost decrease, if support cost allocation is done using the direct method? Briefly explain the reason(s).
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