Chapter 12, Problem 14P

a. (1)

To determine

Identify the costs that are direct costs of Department M.

Explanation of Solution

Direct cost: The costs that can be directly attributed to the production. Examples of direct costs are direct materials and direct labor.

The direct costs are identified as follows:

Cost Assignment Categories	Department M
Salary of supervisor Department M	$ 80,000
Direct materials cost Department M	$300,000
Direct labor cost Department M	$240,000
Direct utilities cost Department M	$120,000
Total costs	$740,000

Table (1)

Hence, the direct costs of Department M are $740,000.

a. (2)

To determine

Identify the costs that are direct costs of Department N.

Explanation of Solution

The direct costs are identified as follows:

Cost Assignment Categories	Department N
Salary of supervisor Department N	$60,000
Direct materials cost Department N	$420,000
Direct labor cost Department N	$680,000
Direct utilities cost Department N	$24,000
Total costs	$1,184,000

Table (2)

Hence, the direct costs of Department N are $1,184,000.

a. (3)

To determine

Identify the costs that are indirect costs.

Explanation of Solution

Indirect cost: The costs that cannot be directly attributed to the production. Examples of direct costs are indirect materials and indirect labor.

The indirect costs are identified as follows:

Cost Assignment Categories	Indirect costs
Salary of Vice President of production division	$200,000
General factory wide utilities	$36,000
Production supplies	$36,000
Fringe benefits	$138,000
Depreciation	$720,000
Total costs	$1,130,000

Table (3)

b.

To determine

Identify the appropriate cost drivers for the indirect costs and allocate these costs to Departments M and N.

Explanation of Solution

Cost driver: Cost driver is one of the measurements that help the company in tracing directly the number of units produced. It is considered as one of the casual factors, at the time of incurrence of the overhead cost. The cost driver is used as activity base while computing the overhead application rate.

Indirect Costs	Allocation Rate	$\times$	Weight of Base	$=$	Allocated To Department M	Allocated To Department N
Salary of Vice President	$100,000	$\times$	1 department	$=$	$100,000
Salary of Vice President	$100,000	$\times$	1 department	$=$		$100,000
General utilities	$0.25	$\times$	$120,000	$=$	$30,000
General utilities	$0.25	$\times$	$24,000	$=$		$6,000
Production supplies	$0.05	$\times$	$300,000	$=$	$15,000
Production supplies	$0.05	$\times$	$420,000	$=$		$21,000
Fringe benefits	$0.15	$\times$	$240,000	$=$	$36,000
Fringe benefits	$0.15	$\times$	$680,000	$=$		$102,000
Depreciation	$120	$\times$	5,000 hours	$=$	$600,000
Depreciation	$120	$\times$	1,000 hours	$=$		$120,000
Total allocated cost					$781,000	$349,000

Table (4)

Working note 1: Determine the weight of base for the costs.

Cost	Base	Amount	Cost driver	Allocation Rate $\left(1\right)/\left(2\right)$
		(1)	(2)
Salary of Vice President	Number of department	$200,000	2 department	$100,000 per department
General utilities	Direct utility cost	$36,000	$144,000	$0.25 per utility cost
Production supplies	Direct material cost	$36,000	$720,000	$0.05 per material cost
Fringe benefits	Direct labor cost	$138,000	$920,000	$0.15 per labor cost
Depreciation	Machine hours	$720,000	6,000 hours	$120 per machine hour

Table (5)

c.

To determine

Determine the total estimated cost of the products made in Departments M and N and calculate the price per unit must it charge for Product M and for Product N if Company M prices its products at cost plus 40 percent of cost.

Explanation of Solution

Cost: The amount paid to purchase the asset, install it, and put it into operations, is referred to as cost.

Determine the total estimated cost of the products made in Departments M and N:

Particulars	Department  M	Department N
Total direct cost	$740,000	$1,184,000
Total indirect cost	$781,000	$349,000
Total production costs (a)	$1,521,000	$1,533,000
Number of units (b)	2,000	4,000
Cost per unit (c) $\left(\text{a}\right)/\left(\text{b}\right)$	$760.50	$383.25

Table (6)

Thus, the cost per unit for Product M and for Product N is $760.50 and $383.25 respectively.

Calculate the price per unit must it charge for Product M and for Product N if Company M prices its products at cost plus 40 percent of cost:

Particulars	Department  M	Department N
Cost per unit (a)	$760.50	$383.25
Add: Increased by 40% $\left(\text{a}\right)\times \text{40\%}$	$304.20	$153.30
Price	$1,064.70	$536.55

Table (7)

Thus, the price per unit for Product M and for Product N would be $1064.70 and $536.55 respectively, if Company M prices its products at cost plus 40 percent of cost.