Concept explainers
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?
1.
Calculate the allocation ratios for the four departments using the direct method.
Explanation of Solution
Sequential method of allocation: Sequential method of allocation identifies interactions between the support departments; conversely, the sequential method considers only partial account of this interaction.
Compute the allocation ratios for the four departments:
Proportion of driver used | ||||
Human resources | General factory | Fabricating | Assembly | |
Human resources | (1)0.32 | (2)0.68 | ||
General factory | (3)0.05 | (4)0.285 | (5)0.665 |
Table (1)
Working notes:
(1)Calculate the proportion of employees in fabricating:
(2)Calculate the proportion of employees in assembly:
(3)Calculate the proportion of square feet in human resources:
(4)Calculate the proportion of square feet in fabricating:
(5)Calculate the proportion of square feet in assembly:
2.
Allocate the costs of the human resources and general factory departments to the fabricating and assembly departments.
Explanation of Solution
Allocate the costs of the human resources and general factory departments to the fabricating and assembly departments:
Support Departments | Producing departments | |||
Direct costs | Human resources | General factory | Fabricating department | Assembly department |
Allocate | $160,000 | $340,000 | $114,600 | $93,000 |
General factory | $17,000 | ($340,000) | $96,900 | $226,100 |
Human resources | ($177,000) | $56,640 | $120,360 | |
Total after allocation | $0 | $0 | $268,140 | $439,460 |
Table (2)
Working notes:
(6)Calculate the amount of general factory allocated to human resources:
(7)Calculate the amount of general factory allocated to fabricating department:
(8)Calculate the amount of general factory allocated to assembly department:
(9)Calculate the amount of human resources allocated to fabricating department:
(10)Calculate the amount of human resources allocated to assembly department:
3.
Explain the situation if the allocation ratios in requirement 1 is rounded to six significant digits rather than four and explain the manner in which rounding error is affected in the allocation of cost.
Explanation of Solution
Usually, “rounding the allocation ratios to six significant digits” will produce exact allocation of costs and will “decrease” rounding error. In this situation, all allocation ratios came out efficiently to three significant digits, so rounding to six will not make much difference.
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Chapter 7 Solutions
Cornerstones Of Cost Management
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