Survey Of Accounting
Survey Of Accounting
4th Edition
ISBN: 9780077862374
Author: Edmonds, Thomas P.
Publisher: Mcgraw-hill Education,
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Chapter 12, Problem 14P

a. (1)

To determine

Identify the costs that are direct costs of Department M.

a. (1)

Expert Solution
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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 CategoriesDepartment 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.

a. (2)

Expert Solution
Check Mark

Explanation of Solution

The direct costs are identified as follows:

Cost Assignment CategoriesDepartment 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.

a. (3)

Expert Solution
Check Mark

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 CategoriesIndirect 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.

b.

Expert Solution
Check Mark

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

×

Weight

of Base

=

Allocated

To Department M

Allocated

To Department N

Salary of Vice President$100,000×1 department=$100,000 
Salary of Vice President $100,000×1 department= $100,000
General utilities$0.25×$120,000=$30,000 
General utilities $0.25×$24,000= $6,000
Production supplies $0.05×$300,000=$15,000 
Production supplies  $0.05×$420,000= $21,000
Fringe benefits $0.15×$240,000=$36,000 
Fringe benefits $0.15×$680,000= $102,000
Depreciation$120×5,000 hours=$600,000 
Depreciation$120×1,000 hours= $120,000
Total allocated cost    $781,000$349,000

Table (4)

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

CostBaseAmountCost driver

Allocation Rate

(1)/(2)

(1)(2)
Salary of Vice PresidentNumber of department$200,000 2 department$100,000 per department
General utilitiesDirect utility cost$36,000 $144,000$0.25 per utility cost
Production suppliesDirect material cost$36,000 $720,000$0.05 per material cost
Fringe benefitsDirect labor cost$138,000 $920,000$0.15 per labor cost
DepreciationMachine hours$720,0006,000 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.

c.

Expert Solution
Check Mark

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:

ParticularsDepartment  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)2,0004,000
Cost per unit (c) (a)/(b)$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:

ParticularsDepartment  M Department N
Cost per unit (a)$760.50$383.25
Add: Increased by 40% (a)×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.

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