Concept explainers
Refer to Cornerstone Exercise 7.3. Now assume that Valron Company uses the reciprocal method to allocate support department costs.
Required:
- 1. Calculate the allocation ratios (rounded to four significant digits) for the four departments using the reciprocal method.
- 2. Develop a simultaneous equations system of total costs for the support departments. Solve for the total reciprocated costs of each support department. (Round reciprocated total costs to the nearest dollar.)
- 3. Using the reciprocal 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.)
- 4. What if the square footage in Fabricating were 13,300 and the square footage in Assembly were 5,700. How would that affect the allocation of support department costs?
1.
Calculate the allocation ratios for the four departments using the reciprocal method.
Explanation of Solution
Reciprocal method of allocation: Reciprocal method of allocation identifies all interactions of support department. The usage of one support department by another is used to identify the total cost of each support department.
Calculate the allocation ratios:
Proportion of drivers used | ||||
Human resources | General factory | Fabricating | Assembly | |
Human resources | (1)0.1935 | (2)0.2581 | (3)0.5484 | |
General factory | (4)0.0500 | (5)0.2850 | (6)0.6650 |
Table (1)
Working notes:
(1)Calculate the proportion of employees in general factory:
(2)Calculate the proportion of employees in fabricating:
(3)Calculate the proportion of employees in assembly:
(4)Calculate the proportion of square feet in human resources:
(5)Calculate the proportion of square feet in fabricating:
(6)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
Let HR be “Human Resources” and GF be “General Factory”.
Calculation for human resources:
Calculation for general factory:
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
Support Departments | Producing departments | |||
Direct costs | Human resources | General factory | Fabricating department | Assembly department |
Allocate | $160,000 | $340,000 | $114,600 | $93,000 |
Human resources | ($178,729) | (7)$34,584 | (8)$46,130 | (9)$98,015 |
General factory | (10)$18,729 | ($374,584) | (11)$106,756 | (12)$249,098 |
Total after allocation | $0 | $0 | $267,486 | $440,113 |
Table (2)
(7)Calculate the amount of human resources allocated to general factory:
(8)Calculate the amount of human resources allocated to fabricating department:
(9) Calculate the amount of human resources allocated to assembly department:
(10)Calculate the amount of general factory allocated to human resources:
(11)Calculate the amount of general factory allocated to fabricating department:
(12)Calculate the amount of general factory allocated to assembly department:
4.
State the manner in which the allocation of support department costs are affected if the square footage in fabricating is $13,300 and the square footage in assembly is $5,700.
Explanation of Solution
Fabricating department will get the largest allocation of General Factory costs, if Fabricating had the bulk of the square footage. Thus, Fabricating would have the majority of support department costs, instead of Assembly.
Want to see more full solutions like this?
Chapter 7 Solutions
Cornerstones of Cost Management (Cornerstones Series)
- 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_forwardRefer 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_forwardWhen using the sequential distribution method of distributing service department costs, if each of two service departments services the same number of other departments, how is it determined as to which service department to allocate first?arrow_forward
- Use the following information for Exercises 11-31 and 11-32: Washington Company has two divisions: the Adams Division and the Jefferson Division. The following information pertains to last years results: Washingtons actual cost of capital was 12%. Exercise 11-32 Residual Income Refer to the information for Washington Company above. In addition, Washington Companys top management has set a minimum acceptable rate of return equal to 8%. Required: 1. Calculate the residual income for the Adams Division. 2. Calculate the residual income for the Jefferson Division.arrow_forward(Appendix 4B) The method that assigns support department costs only to producing departments in proportion to each departments usage of the service is known as a. the sequential method. b. the proportional method. c. the reciprocal method. d. the direct method. e. None of these.arrow_forwardManagement at C. Pier Press has decided to allocate costs of the paper’s two support departments (administration and human resources) to the two revenue-generating departments (advertising and circulation). Administration costs are to be allocated on the basis of dollars of assets employed; human resources costs are to be allocated on the basis of number of employees. The following costs and allocation bases are available: Department Direct Costs Number of Employees Assets Employeed Administration $1,094,100 14 $541,940 Human resources 689,780 11 408,380 Advertising 1,340,920 17 1,067,360 Circulation 1,893,640 36 2,618,420 Totals $5,018,440 78 $4,636,100 a. Using the direct method, allocate the support department costs to the revenue-generating departments. Amount allocated to Advertising: $______ Amount allocated to Circulation: $______ b. Using your answer to (a), what are the total costs of the revenue-generating departments after the allocations? Advertising total…arrow_forward
- Bens Corporation has three service departments (Repairs, HR, and IT) and two production departments (M1 and M2). The following usage data for each of the service departments for the previous period follow. Repair HR IT M1 M2 Repairs - 0% 0%` 40% 60% HR 10% - 20% 35% 35% IT 0% 10% - 20% 70% The direct costs of the service departments in the previous period were $20,000 for Repairs, $39,600 for HR, and $45,000 for IT. Required :- Use the reciprocal method to allocate the service department costs to the production departments. (Matrix algebra is not required.)arrow_forwardOxmoor Corporation has two service departments (Maintenance and Human Resources) and three production departments (Machining, Assembly, and Finishing). The two service departments service the production departments as well as each other, and studies have shown that Maintenance provides the greater amount of service. On the basis of this information, which of the following cost allocations would likely occur under the step-down method? Maintenance cost would be allocated to Finishing. Machining cost would be allocated to Assembly. Maintenance cost would be allocated to Human Resources. Human Resources cost would be allocated to Maintenance. Both maintenance cost would be allocated to Finishing and maintenance cost would be allocated to Human Resources.arrow_forwardSenen Corporation has two service departments (Maintenance Department and Security Department) and two producing departments (Assembly Department and Finishing Department). The following are the percentage usage of each department. Departments Use of Maintenance Department Use of Security Department Maintenance 5% Security 10% Assembly 60% 40% Finishing 30% 55% The Maintenance Department cost is $900,000 and the Security Department cost is $500,000. Compute the service cost allocated to Security Department using the direct method. Compute the service cost allocated to Maintenance Department using the step-down/sequential method.arrow_forward
- Management Accounting Company B is interested in using the reciprocal allocation method. The following data from operations were collected for analysis: Budgeted manufacturing overhead costs: Plant Maintenance PM (Support Dept) $350,000 Data Processing DP (Support Dept) $75,000 Machining M (Operating Dept) $225,000 Capping C (Operating Dept) $125,000 Services furnished: By Plant Maintenance (budgeted labour-hours): to Data Processing 3,500 to Machining 5,000 to Capping 8,200 By Data Processing (budgeted computer time): to Plant Maintenance 600 to Machining 3,500 to Capping 600 Required : a. What is the complete reciprocated cost of the Plant Maintenance Department? b. What is the complete reciprocated cost of the Data Processing Department? c. "The direct allocation method incorporates mutual services provided among all support departments."…arrow_forwardOrganic Laboratories allocates research and development costs to its three research facilities based on each facility's total annual revenue from new product developments: Facility location Kentucky Arizona Illinois Total New product revenue $ 57,792,000 $ 100,400,000 $ 82,608,000 $ 240,800,000 Research & Development $ 60,400,000 Using revenue as an allocation base, the amount of costs allocated to the Kentucky research facility is calculated to be:arrow_forwardKia Corporation has two departments, A and B. Central costs could be allocated to the two departments in various ways. Square footage of department A and B 6,000 and 18,000 square feet respectively, Number of employees of department A and B 1,500 and 500 respectively, and sales of department A and B $400,000 and $2,000,000 respectively. If total processing costs of $96,000 are allocated on the basis of number of employees, the amount allocated to Department B would be: a. $24,000 b. $28,800 c. $16,000 d. $67,200arrow_forward
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage LearningManagerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage LearningPrinciples of Cost AccountingAccountingISBN:9781305087408Author:Edward J. Vanderbeck, Maria R. MitchellPublisher:Cengage Learning