Concept explainers
Refer to the data in Exercise 7.20. The company has decided to use the sequential method of allocation instead of the direct method. The support departments are ranked in order of highest cost to lowest cost.
Required:
- 1. Allocate the
overhead costs to the producing departments using the sequential method. (Take allocation ratios out to four significant digits. Round allocated costs to the nearest dollar.) - 2. Using machine hours, compute departmental overhead rates. (Round the overhead rates to the nearest cent.)
1.
Allocate the overhead costs to the producing departments suing the sequential method.
Explanation of Solution
Sequential method of allocation: The sequential method of allocation foresees that the interactions between the supports departments occur; conversely the sequential method considers only partial account of this interaction.
Calculation allocation ratio:
Power |
General Factory | Purchasing | Pesticide |
Liquid Fertilizer | |
Square feet | (1)0.125 | (2)0.125 | (3)0.35 | (4)0.4 | |
Machine hours | (5)0.75 | (6)0.25 | |||
Purchase orders | (7)0.1 | (8)0.6 | (9)0.3 |
Table (1)
Calculate assignment of costs:
Figure (1)
Working notes:
(1)Calculate the allocation of square feet to Power department:
(2)Calculate the allocation of square feet to Purchasing department:
(3)Calculate the allocation of square feet to Pesticide department:
(4)Calculate the allocation of square feet to Liquid fertilizer department:
(5)Calculate the allocation of machine hours to Pesticide department:
(6)Calculate the allocation of machine hours to Liquid Fertilizer department:
(7)Calculate the allocation of purchase orders to power department:
(8)Calculate the allocation of purchase orders to pesticide department:
(9)Calculate the allocation of purchase orders to liquid fertilizer department:
2.
Calculate departmental overhead rates using machine hours.
Explanation of Solution
Departmental overhead rates: Departmental overhead rate is calculated by adding the allocated service costs to the overhead costs that are directly noticeable to the producing departments and dividing this total by some measure of activity, such as direct labor hours or machine hours.
Calculate the departmental overhead rate for pesticide department:
Therefore, the departmental overhead rate for pesticide department is $17.71 per machine hour.
Calculate the departmental overhead rate for Liquid fertilizer department:
Therefore, the departmental overhead rate for liquid fertilizer department is $41.59 per machine hour.
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Chapter 7 Solutions
Cornerstones of Cost Management (Cornerstones Series)
- Refer to the data in Exercise 7.22. The company has decided to simplify its method of allocating support service costs by switching to the direct method. Required: 1. Allocate the costs of the support departments to the producing departments using the direct method. (Round allocation ratios to four significant digits. Round allocated costs to the nearest dollar.) 2. Using direct labor hours, compute departmental overhead rates. (Round to the nearest cent.)arrow_forwardRefer to the data in Exercise 7.22. The support departments are ranked in order of highest cost to lowest cost. Required: 1. Allocate the costs of the support departments using the sequential method. (Round allocation ratios to four significant digits. Round allocated costs to the nearest dollar.) 2. Using direct labor hours, compute departmental overhead rates. (Round to the nearest cent.)arrow_forwardRefer to the data in Exercise 7.18. When the capacity of the HR Department was originally established, the normal usage expected for each department was 20,000 direct labor hours. This usage is also the amount of activity planned for the two departments in Year 1 and Year 2. Required: 1. Allocate the costs of the HR Department using the direct method and assuming that the purpose is product costing. 2. Allocate the costs of the HR Department using the direct method and assuming that the purpose is to evaluate performance.arrow_forward
- Young Company is beginning operations and is considering three alternatives to allocate manufacturing overhead to individual units produced. Young can use a plantwide rate, departmental rates, or activity-based costing. Young will produce many types of products in its single plant, and not all products will be processed through all departments. In which one of the following independent situations would reported net income for the first year be the same regardless of which overhead allocation method had been selected? a. All production costs approach those costs that were budgeted. b. The sales mix does not vary from the mix that was budgeted. c. All manufacturing overhead is a fixed cost. d. All ending inventory balances are zero.arrow_forwardGeneva, Inc., makes two products, X and Y, that require allocation of indirect manufacturing costs. The following data were compiled by the accountants before making any allocations: The total cost of purchasing and receiving parts used in manufacturing is 60,000. The company uses a job-costing system with a single indirect cost rate. Under this system, allocated costs were 48,000 and 12,000 for X and Y, respectively. If an activity-based system is used, what would be the allocated costs for each product?arrow_forwardLansing. Inc., provided the following data for its two producing departments: Machine hours are used to assign the overhead of the Molding Department, and direct labor hours are used to assign the overhead of the Polishing Department. There are 30,000 units of Form A produced and sold and 50,000 of Form B. Required: 1. Calculate the overhead rates for each department. 2. Using departmental rates, assign overhead to live two products and calculate the overhead cost per unit. How does this compare with the plantwide rate unit cost, using direct labor hours? 3. What if the machine hours in Molding were 1,200 for Form A and 3,800 for Form B and the direct labor hours used in Polishing were 5,000 and 15,000, respectively? Calculate the overhead cost per unit for each product using departmental rates, and compare with the plantwide rate unit costs calculated in Requirement 2. What can you conclude from this outcome?arrow_forward
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- Refer to Cornerstone Exercise 7.3. Now assume that Valron Company uses the sequential method to allocate support department costs. The support departments are ranked in order of highest cost to lowest cost. Required: 1. Calculate the allocation ratios (rounded to four significant digits) for the four departments using the sequential method. 2. Using the sequential method, allocate the costs of the Human Resources and General Factory departments to the Fabricating and Assembly departments. (Round all allocated costs to the nearest dollar.) 3. What if the allocation ratios in Requirement 1 were rounded to six significant digits rather than four? How would that affect any rounding error in the allocation of costs?arrow_forwardThe controller for Muir Companys Salem plant is analyzing overhead in order to determine appropriate drivers for use in flexible budgeting. She decided to concentrate on the past 12 months since that time period was one in which there was little important change in technology, product lines, and so on. Data on overhead costs, number of machine hours, number of setups, and number of purchase orders are in the following table. Required: 1. Calculate an overhead rate based on machine hours using the total overhead cost and total machine hours. (Round the overhead rate to the nearest cent and predicted overhead to the nearest dollar.) Use this rate to predict overhead for each of the 12 months. 2. Run a regression equation using only machine hours as the independent variable. Prepare a flexible budget for overhead for the 12 months using the results of this regression equation. (Round the intercept and x-coefficient to the nearest cent and predicted overhead to the nearest dollar.) Is this flexible budget better than the budget in Requirement 1? Why or why not?arrow_forwardMott Company recently implemented a JIT manufacturing system. After one year of operation, Heidi Burrows, president of the company, wanted to compare product cost under the JIT system with product cost under the old system. Motts two products are weed eaters and lawn edgers. The unit prime costs under the old system are as follows: Under the old manufacturing system, the company operated three service centers and two production departments. Overhead was applied using departmental overhead rates. The direct overhead costs associated with each department for the year preceding the installation of JIT are as follows: Under the old system, the overhead costs of the service departments were allocated directly to the producing departments and then to the products passing through them. (Both products passed through each producing department.) The overhead rate for the Machining Department was based on machine hours, and the overhead rate for assembly was based on direct labor hours. During the last year of operations for the old system, the Machining Department used 80,000 machine hours, and the Assembly Department used 20,000 direct labor hours. Each weed eater required 1.0 machine hour in Machining and 0.25 direct labor hour in Assembly. Each lawn edger required 2.0 machine hours in Machining and 0.5 hour in Assembly. Bases for allocation of the service costs are as follows: Upon implementing JIT, a manufacturing cell for each product was created to replace the departmental structure. Each cell occupied 40,000 square feet. Maintenance and materials handling were both decentralized to the cell level. Essentially, cell workers were trained to operate the machines in each cell, assemble the components, maintain the machines, and move the partially completed units from one point to the next within the cell. During the first year of the JIT system, the company produced and sold 20,000 weed eaters and 30,000 lawn edgers. This output was identical to that for the last year of operations under the old system. The following costs have been assigned to the manufacturing cells: Required: 1. Compute the unit cost for each product under the old manufacturing system. 2. Compute the unit cost for each product under the JIT system. 3. Which of the unit costs is more accurate? Explain. Include in your explanation a discussion of how the computational approaches differ. 4. Calculate the decrease in overhead costs under JIT, and provide some possible reasons that explain the decrease.arrow_forward
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