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
Bundle: Cornerstones of Cost Management, Loose-Leaf Version, 4th + CengageNOWv2, 1 term Printed Access Card
- 2. Assume that Kizzle's management allocates Maintenance costs based on the number of service calls. Further assume that in a given period, the Janitorial, Mixing, and Cooking activities incur 16, 40, and 24 service calls, respectively, and that the Janitorial and Maintenance costs of that period are $3,000 and $4,200, respectively. Determine the total costs allocated from each support activity to the other three activities using the reciprocal services method. Malntenance cost allocation: Janitorial: Mixing: $4 Cooking: Janitorial cost allocation: Maintenance: Mixing: Cooking: 3. The company is considering changing from the reciprocal service method to a simpler method. Why should the company continue with the reciprocal service method? a. It is complex, but more accurate. b. It can be practiced if the company has sufficient resources and capacity. C. The simpler cost allocation methods are less accurate. d. All the above.arrow_forwardThe following is a system of simultaneous linear equations to allocate costs using the reciprocal method. Matrix algebra is not required. The following costs were incurred in three operating departments and three service departments in Westmoreland Company. Department Direct Costs Label Subassemblies $570,000 P1 Final assembly 795,000 P2 Marketing Building occupancy 305,000 P3 105,000 S1 Research & development 140,000 S2 Supervision 65,000 S3 Use of services by other departments is as follows. User Departments Sub- Final Building Service Cost Center assemblies Assembly Marketing Оссирancy R&D Supervision Building occupancy 0.30 0.20 0.20 0.15 0.15 R&D 0.50 0.50 --- --- Supervision 0.20 0.30 0.20 0.20 0.10 The equation for department P3 (marketing) is: Multiple Choice P3 = $305,000 + 0.50S1 + 0.50S3. P3 = $305,000 + 0.20S1 + 0.70S2 + 0.20S3. P3 = $305,000 + 0.20S1 + 0.20S2 + 0.70S3. P3 = $305,000 + 0.20S1 + 0.20S3.arrow_forwardThe following is a system of simultaneous linear equations to allocate costs using the reciprocal method. Matrix algebra is not required. The following costs were incurred in three operating departments and three service departments in Westmoreland Company. Department Direct Costs Label Subassemblies $570,000 P1 Final assembly 795,000 Р2 Marketing Building occupancy 305,000 P3 105,000 S1 Research & development 140,000 S2 Supervision 65,000 S3 Use of services by other departments is as follows. User Departments Sub- Final Building Service Cost Center assemblies Assembly Marketing Оссирancy R&D Supervision Building occupancy 0.30 0.20 0.20 0.15 0.15 R&D 0.50 0.50 --- --- --- Supervision 0.20 0.30 0.20 0.20 0.10 The equation for department S1 (building occupancy) is: Multiple Choice S1 = $105,000 + 0.20S3. S1 = $105,000 + 0.80S2 + 0.20S3. S1 = $105,000 + 1.00S3. S1 = 0.20S3.arrow_forward
- 2. Based on your response in part (1), determine the total costs allocated from each support department to each production department using the sequential method. Maintenance Molding Assembly Department Department Department Personnel Department cost allocation $ 1,500 X 24 X Maintenance Department cost allocation$ 7,740 3. Which allocation method is usually the most accurate? a. Direct method. b. Reciprocal method. c. Sequential method. d. None of the above. What is a potential disadvantage of the reciprocal method? a. It is the most complex method of cost allocation. b. Both fixed and variable costs are allocated based on the computed cost base. c. It considers the support department cost as its own department cost. d. All the above. aarrow_forwardRefer 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_forwardWhich of the following will give you the most accurate allocation between a cost's fixed component and variable component? a. Examination of a students’ registration forms for miscellaneous fees and tuition fees b. Use of the least squares method to allocate the cost of electricity c. Dividing the total cost on the water bill among the different departments based on direct labor hours d. Dividing the total cost of the postpaid plan using the high-low methodarrow_forward
- Fill in the blanks in the schedule below for two separate investment centers A and B. Investment Center: Sales Income Average assets Profit margin Investment turnover Return on investment Investment Center A B Investment Turnover: Investment Center A B Return on investment: Investment Center A Use the information in the table above to compute each department's contribution to overhead (both in dollars and as a percent): (Round your final answers to 2 decimal places.) Profit Margin: B Numerator: Numerator: A Numerator: $? $ 584,600 $1,580,000 10% 7 28 B $ 12,200,000 Denominator: Denominator: $? $7 Denominator: 7% 1.3. 13% Profit Margin =Profit margin 10.00 % = Investment Turnover = Investment turnover 1.30 Return on investment = Return on investment. % 13.00 %arrow_forwardConsidering the reciprocal services method, what are the equations that represent the algebraic expressions for the two equations needed to capture the total costs of a Janitorial Department (J) that includes not only $350,000 of direct costs but also 30% of the Maintenance Department (M) cost and the Maintenance Department that includes not only $50,000 of direct costs but also 50% of the Janitorial Department? (0.30×M) 3nd M-S50000 (0.50 x J) 3=5350.000 + (0.30 × M) and MES5O00+(0,50 xJ) J-(S350.000 × 0.30)+M and M-(S50.000 x050) - J (550.000x0.502)arrow_forwardRequired: 1. Using the five most expensive activities, calculate the overhead cost assigned to each prod-uct. Assume that the costs of the other activities are assigned in proportion to the cost of the five activities.2. Calculate the error relative to the fully specified ABC product cost and comment on the outcome.3. What if activities 1, 2, 5, and 8 each had a cost of $650,000 and the remaining activities hada cost of $50,000? Calculate the cost assigned to Wafer A by a fully specified ABC systemand then by an approximately relevant ABC approach. Comment on the implications forthe approximately relevant approach.arrow_forward
- Direct Method Seattle Western University has provided the following data to be used in its service department cost allocations: Required: Using the direct method, allocate the costs of the service departments to the two operating departments. Allocate the Administration cost on the basis of student credit-hours and the Facility Services cost on the basis of space occupied.arrow_forwardManhattan Partners provides management consulting services to government and corporate clients. Manhattan has two support departments administrative services (AS) and information systems (IS)-and two operating departments-government consulting (GOVT) and corporate consulting (CORP). For the first quarter of 2017, Manhattan's cost records indicate the following: (Click the icon to view the cost records.) Read the requirements. Requirement 1a. Allocate the two support departments' costs to the two operating departments using the direct method. (Do not round intermediary calculations and round your final answers to the nearest whole. dollar. Use parentheses or a minus sign when decreasing departments by allocating costs. Enter a "0" for any zero balances.) Operating Departments Support Departments AS GOVT CORP Direct Method Budgeted overhead costs before interdepartment cost allocations Allocation of AS costs Budgeted overhead costs before any interdepartment cost allocations Support work…arrow_forwardAI Rawabi company consist of two support departments (Administration and R& D) and two operating departments (Manufacturing & Assembling). The cost of Administration department is allocated based on number of employees and the cost of R& D department is allocated based on research hours. The table below shows the cost details. Allocate the cost of the support departments to the operating departments using step-down method. How much is the Assembling department total cost after cost allocation: Support Departments Operating Departments R&D Manufacturing Assembling Total Cost Admin Cost: Salaries 30000 60000 44000 70000 204000 Supplies 10000 30000 25000 30000 95000 Total 40000 90000 69000 100000 299000 Allocation Base: Research Hours 200 300 450 250 Number of Employees 7 10 9 13 Select one: O a. RO 155775 O b. RO 162090.3 O c. RO 143225 O d. 136909.7arrow_forward
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning