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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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(Appendix 4B) Support Department Cost Allocation

MedServices Inc. is divided into two operating departments: Laboratory and Tissue Pathology. The company allocates delivery and accounting costs to each operating department. Delivery costs include the costs of a fleet of vans and drivers that drive throughout the state each day to clinics and doctors’ offices to pick up samples and deliver them to the centrally located laboratory and tissue pathology offices. Delivery costs are allocated on the basis of number of samples. Accounting costs are allocated on the basis of the number of transactions processed. No effort is made to separate fixed and variable costs; however, only budgeted costs are allocated. Allocations for the coming year are based on the following data:

Chapter 4, Problem 64P, (Appendix 4B) Support Department Cost Allocation MedServices Inc. is divided into two operating

Required:

  1. 1. Assign the support department costs by using the direct method. (Note: Round allocation ratios to four decimal places.)
  2. 2. Assign the support department costs by using the sequential method, allocating accounting costs first. (Note: Round allocation ratios to four decimal places.)

1.

To determine

Calculate the assigned cost of support departments by using direct method.

Explanation

Direct Method:

Direct method implies that the unit cost must include all the factory costs. It states that the cost of support departments should not be added in the unit cost if it is not included in operating departments’ cost because they do not play any role in selling the unit or product.

Use the following formula to calculate assignment ratios on the basis of number of samples:

Laboratory department:

Laboratory department=NumberofsamplesinlaboratoryTotalsamplesinoperatingdepartments

Substitute 70,200 for number of samples in laboratory and 117,000 for total samples in operating department in the above formula.

Laboratory department=70,200samples117,000samples=0.60

Therefore, the assignment ratio for laboratory department is 0.60.

Pathology department:

Pathology department=NumberofsamplesinpathologyTotalsamplesinoperatingdepartments

Substitute 46,800 for number of samples in laboratory and 117,000 for total samples in operating department in the above formula.

Pathology department=46,800samples117,000samples=0.40

Therefore, the assignment ratio for pathology department is 0.40.

Use the following formula to calculate assignment ratios on the basis of transactions processed:

Laboratory department:

Laboratory department=Transactions processedinlaboratoryTotaltransactions processedinoperatingdepartments

Substitute 24,700 for transactions processed in laboratory and 38,000 for total transactions processed in operating department in the above formula

2.

To determine

Calculate the assigned cost of support departments by using sequential method and allocate accounting costs first.

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