a.
Find the amount of service department costs which will be allocated to each of the production departments.
a.
Explanation of Solution
Cost allocation:
Cost allocation refers to the process where the common cost of the production and service rendered to the various departments of the business are distributed. It is used to calculate the actual cost attributed to a specific department.
The main purpose of cost allocation is providing detailed cost information to the management. It is essential because it is the process through which cost incurred in producing a product or service is determined. If costs are wrongly allocated a business would be wasting resources on products that are improperly determined as profitable.
It is used to calculate the actual cost attributed to a specific department.
Determine the amount of service department costs which will be allocated to each of the production departments by using the direct method:
| Costs | Member Department | Commercial Department | Total |
| Accounting | $8,000 (1) | $8,000 (2) | $16,000 |
| Computer Services | $12,320 (3) | $49,280 (4) | $61,600 |
| Total | $20,320 | $57,280 | $77,600 |
Table: (1)
Working note 1:
Compute allocation of the accounting cost for member department:
Working note 2:
Compute allocation of the accounting cost for the commercial department:
Working note 3:
Compute allocation of the computer services cost for member department:
Working note 4:
Compute allocation of the computer services cost for the commercial department:
b.
Identify whether the given situation is ethical or not.
b.
Explanation of Solution
Ethical dilemma:
The situation where the two or more perspectives are involved out of which neither is morally acceptable or unacceptable is termed as an ethical dilemma.
The changing of computer time for Member Department and Commercial Department as 20 percent and 30 percent respectively shows the unethical behavior of the controller. The activity might amount to fraud as well. It will lead to the wrong allocation of costs as well as manipulation to the cost records.
Thus, the activity of the controller is not ethical.
c.
Identify whether the given situation is ethical or not.
c.
Explanation of Solution
If the employee wages are used to allocate the cost of the accounting department; the cost allocation might not be appropriate because the number of employees is an effective measure for allocating costs of the accounting department. Use of the employee wages can be ethical if there is a direct relation between the wages of employees and the cost of the accounting department.
Thus, the being ethical or unethical of the situation depends on the relationship between the employee wages and the accounting department costs. If there is no direct link between the employee wages and the accounting department cost then this would be unethical.
d.
Find the amount of service department costs which will be allocated to each of the production departments by using the step method.
d.
Explanation of Solution
Cost allocation:
Cost allocation refers to the process where the common cost of the production and service rendered to the various departments of the business are distributed. It is used to calculate the actual cost attributed to a specific department.
The main purpose of cost allocation is providing detailed cost information to the management. It is essential because it is the process through which cost incurred in producing a product or service is determined. If costs are wrongly allocated a business would be wasting resources on products that are improperly determined as profitable.
It is used to calculate the actual cost attributed to a specific department.
Step method:
Step method allows the allocation of the cost to the production department and service departments. Unlike the direct method, it also allocates the cost of the service to various service departments. Allocation of the cost starts from the department that has provided the highest proposition of service to the department that has provided the least service. Step method allows only one-way allocation of cost among service departments.
Determine the amount of service department costs which will be allocated to each of the production departments by using the step method:
| Computer Services | Accounting | Member Department | Commercial Department | |
| Costs before allocation | $61,600 | $16,000 | $0 | $0 |
| Computer Services | ($61,600) | $30,800 (5) | $6,160 (6) | $24,640 (7) |
| Accounting | ($46,800) | $23,400 | $23,400 (8) | |
| Total | $0 | $0 | $29,560 | $48,040 |
Table: (2)
Working note 5:
Compute allocation of the computer services cost for the accounting department:
Working note 6:
Compute allocation of the computer services cost for member department:
Working note 7:
Compute allocation of the computer services cost for the commercial department:
Working note 8:
Compute allocation of the accounting cost for the commercial department:
e.
Find the amount of service department costs which will be allocated to each of the production departments by using the reciprocal method.
e.
Explanation of Solution
Cost allocation:
Cost allocation refers to the process where the common cost of the production and service rendered to the various departments of the business are distributed. It is used to calculate the actual cost attributed to a specific department.
The main purpose of cost allocation is providing detailed cost information to the management. It is essential because it is the process through which cost incurred in producing a product or service is determined. If costs are wrongly allocated a business would be wasting resources on products that are improperly determined as profitable.
It is used to calculate the actual cost attributed to a specific department.
Step method:
Step method allows the allocation of the cost to the production department and service departments. Unlike the direct method, it also allocates the cost of the service to various service departments. Allocation of the cost starts from the department that has provided the highest proposition of service to the department that has provided the least service. Step method allows only one-way allocation of cost among service departments.
Determine the amount of service department costs which will be allocated to each of the production departments by using the reciprocal method:
| Cost | Accounting | Computer Services | Member Department | Commercial Department |
| From: | ||||
| Costs before allocation | $16,000 | $61,600 | ||
| Accounting | ($52,000) | $10,400 (9) | $20,800 (10) | $20,800 (11) |
| Computer Services | $36,000 (12) | ($72,000) | $7,200 (13) | $28,800 (14) |
| Total | $0 | $0 | $28,000 | $49,600 |
Table: (3)
Working note 9:
Compute allocation of the accounting cost for computer services department:
Working note 10:
Compute allocation of the accounting cost for member department:
Working note 11:
Compute allocation of the accounting cost for the commercial department:
Working note 12:
Compute allocation of the computer services cost for the accounting department:
Working note 13:
Compute allocation of the computer services cost for member department:
Working note 14:
Compute allocation of the computer services cost for the commercial department:
f.
Identify whether the given situation is ethical or not.
f.
Explanation of Solution
If the highest costs are allocated to the member department, the method of cost allocation will not be implemented. Also, it will show that the member department is the only accountable departments for the costs of the entity. The reciprocal method can be applied for allocating costs to various departments. The allocation of more cost to the member department is not an ethical mean of allocation of costs.
Thus, the suggestion given by the controller is not ethical.
Want to see more full solutions like this?
Chapter 11 Solutions
FUNDAMENTALS OF COST ACCOUNTING
- Ginnian and Fitch, a regional accounting firm, performs yearly audits on a number of different for-profit and not-for-profit entities. Two years ago, Luisa Mellina, Ginnians partner in charge of operations, became concerned about the amount of audit time required by not-for-profit entities. As a result, she instituted a series of training programs focusing on the auditing of not-forprofit entities. Now, she would like to see if the training seemed to work. So, she ran a multiple regression on 22 months of data for Ginnian for three variables: the total monthly cost of audit professional time, the number of not-for-profit audits, and the hours of training in the audit of not-for-profit entities. The following printout was obtained: Required: 1. Write out the cost equation for Ginnians audit professional time. 2. If Ginnian expects to have 9 audits of not-for-profits next month and expects that audit professionals will have a total of 130 hours of not-for-profit training, what is the anticipated cost of professional time? 3. Are the hours spent auditing not-for-profit entities positively or negatively correlated with audit professional costs? Is percentage of experienced team members positively or negatively correlated with audit professional cost? 4. What does R2 mean in this equation? Overall, what is your evaluation of the cost equation that was developed for the cost of audit professionals?arrow_forwardAssume that Charity A and Charity B are alike in every way except as described below. Assume that each of these questions is independent from all other questions.a. Each charity suffers significant damage from a hail storm this year. Each hires a person to repair the damage. Each of these workers donates the labor to the charity. Charity A looks at the repair work and believes it required a specialized skill that it would have had to buy. Charity B looks at the repair work and decides that it did not require a specialized skill. After the recording, which entity will report the largest amount of unrestricted net assets?b. Each charity receives a large investment in shares of a publicly traded company. The investment must be held forever. Charity A can spend the resulting income as it sees fit. Charity B must spend the resulting income to supplement salaries. Both charities receive the same amount of income this year. Both charities immediately spend the income to supplement salaries.…arrow_forwardFaith Community Church is exempt from Federal income taxation under § 501(c)(3). To supplement its contribution revenue, it holds bingo games on Saturday nights. It holds all of the licenses and permits required to do so.The net income from the bingo games is $90,000. Of these funds, $60,000 is used to support the ministry of the church. The balance of $30,000 is invested in Faith’s endowment fund for church music. Faith Community Church is located in a resort city where bingo games can be conducted by churches, charities, and for-profit entities. Calculate the Federal tax liability, if any, associated with the bingo games.arrow_forward
- For each of the following organizations, determine its UBTI and any related UBIT. Connect, Inc., an exempt organization, provides food for the homeless. It oper- ates a thrift store that sells used clothing to the general public. The thrift shop is staffed solely by four salaried employees. All of the clothes it sells are received as contributions. The $100,000 profit generated for the year by the thrift shop is used in Connect’s mission of providing food to the homeless. Small, Inc., an exempt organization, recorded gross unrelated business income of $900 and unrelated business expenses of $400.arrow_forwardKanlungan, Inc., is a registered non-stock, non-profit entity with the purpose of helping the poor mainly by gathering donations from benevolent donors and distributing the same to the needy. On one occasion, Kanlungan, Inc., used a certain amount of donation to purchase a commercial stall. Kanlungan designated some of its staff to operate the commercial stall to generate income to boost the funds of the organization. Is the income from the stall taxable? a. No, as long as it is used for the main purpose of the organization. b. No, as long as the organization is tax exempt, its transactions remain tax exempt as well. c. Yes, the income is from an unrelated source hence, taxable. d. Answer not given.arrow_forwardFor each of the following organizations, determine its UBTI and any related UBIT. a. AIDS, Inc., an exempt charitable organization that provides support for indivi- duals with AIDS, operates a retail medical supply store open to the general public. The net income of the store, before any Federal income taxes, is $305,000. b. Andrew Episcopal Church operates a retail gift shop. The inventory consists of the typical items sold by commercial gift shops in the city. The director of the gift shop estimates that 80% of the gift shop sales are to tourists and 20% are to church members. The net income of the gift shop, before the salaries of the three gift shop employees and any Federal income taxes, is $300,000. The salaries of the employees total $80,000. c. Innovation University, Inc., a private institution, has placed vending machines in the student dormitories and academic buildings on campus. In recognition of recent tuition increases, the university has adopted a policy of merely trying…arrow_forward
- Which of the following best describes a non-profit organization? One in which the leadership is governed by a board of directors O One in which the workforce is made up of volunteers O One that reinvests profit into the organization instead of distributing it to owners One that relies solely on private donations for the organization's financial needs do in 30 minutesarrow_forwardIn May, Parr and Presba, while in the course of negotiations with Barker (a salesperson for Quaker Hill) to purchase plants and flowers, undertook to organize a corporation to be named the Denver Memorial Nursery, Inc. On May 14 and 16, Parr signed two orders on behalf of Denver Memorial Nursery, Inc., which, to the knowledge of Quaker Hill, was not yet formed, that fact being noted in the contract. A down payment in the amount of $1,000 was made. The corporation was not formed prior to entering into the contract because Quaker Hill insisted that the deal be concluded at once since the growing season was rapidly passing. Under the contract, the balance of the purchase price was not due until the end of the year. The plants and flowers were shipped immediately and arrived on May 26. The Denver Memorial Nursery, Inc., was never formed. Quaker Hill seeks to recover the unpaid balance of the purchase price from Parr and Presba. a. What are the arguments that Parr and Presba are personally…arrow_forwardA voluntary health and welfare entity sends a mailing to all of its members including those who have donated in the past and others who have never donated. The mailing, which had a total cost of $22,000, asks for monetary contributions to help achieve the charity’s stated mission. In addition, 80 percent of the material included in the mailing is educational in nature, providing data about the entity’s goals. Which of the following is true? Some part of the $22,000 should be reported as a program service cost because of the educational materials included. No part of the $22,000 should be reported as a program service cost because there is no specific call to action. No part of the $22,000 should be reported as a program service cost because the mailing was sent to both previous donors and individuals who have not made donations. Some part of the $22,000 should be reported as a program service cost because more than 50 percent of the material was educational in nature.arrow_forward
- Thirty years ago, a group of civic-minded merchants in Mayfair organized the ‘‘Committee of 100’’ for the purpose of establishing the Mayfair Sports Club, a not-for-profit sports organization for local youth. Each of the committee’s 100 members contributed $1,000 toward the club’s capital. In addition, each participant agreed to pay dues of $200 a year for the club’s operations. All dues have been collected in full by the end of each fiscal year, which ends on March 31. Members who have discontinued their participation have been replaced by an equal number of new members by transferring the participation certificates from the former members to the new ones.Following are the Club’s trial balances at April 1, 2018: Debit CreditCash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,000Investments (at market value, equal to cost) . . . . . 88,000Inventories .…arrow_forwardMother to Child Connection is a non-profit organizaton that employs abused and battered women staying in shelters. The mission of this orgainzation is to establish productive lifestyles for these women by employing them in the manufacture of affordable clothing for children. All proceeds fund the shelters in which these women live. Additional Information: Materials purchased on account: $15,500 Materials requisitioned and labor used: Job No. Materials Factory Labor 100 $2650 $1770 101 $1240 $650 102 $980 $420 103 $3420 $1900 104 $1000 $500 105 $2100 $1760 For general factory use: $450 $650 Factory overhead costs incurred on account: $2700 Depreciation on machinery: $1750 Factory overhead applied at a rate of 70% of direct labor cost Completed jobs this period: 101, 101, 102, 104 Shipped jobs: 100, 101, 102 and billed customers $8100, $3800, and $3500, respectively. Questions: a. Record journal entries for the transactions…arrow_forwardA voluntary health and welfare entity sends a mailing to all of its members including those who have donated in the past and others who have never donated. The mailing, which had a total cost of $22,000, asks for monetary contributions to help achieve the charity’s stated mission. In addition, 80 percent of the material included in the mailing is educational in nature, providing data about the entity’s goals. Which of the following is true? Choose the correct.a. Some part of the $22,000 should be reported as a program service cost because of the educa-tional materials included.b. No part of the $22,000 should be reported as a program service cost because there is no specific call to action.c. No part of the $22,000 should be reported as a program service cost because the mailing was sent to both previous donors and individuals who have not made donations.d. Some part of the $22,000 should be reported as a program service cost because more than 50 percent of the material was educational…arrow_forward
Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning