978-0077733773 Chapter 7 Solution Manual Part 3

subject Type Homework Help
subject Pages 9
subject Words 785
subject Authors David Stout, Edward Blocher, Gary Cokins, Paul Juras

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Chapter 7 - Cost Allocation: Departments, Joint Products, and By-Products
7-30 Joint Products;
As the text notes, the physical units method often involves inappropriate
allocation of costs as the physical measure may be unrelated to the
ultimate value of the different joint products. This appears to be true in the
production of the three blood products, as reported by the U.K. National
Blood Authority (NBA). The result is that prices, when based on allocated
cost, can vary widely as the volumes of each product vary from time to time
due to changes in supply or demand. The NBAs solution was to charge
all joint costs to the red cells product (a product used primarily in surgery);
the effect is that the red cells product would bear the full cost of the
production of the products and the lesser-used platelets and plasma would
have little or no cost associated with them, except for the additional
processing costs that are involved (it turns out the additional processing
costs for plasma can be extensive). The solution of the NBA appears to be
reasonable given the circumstances of the three products. However, as
the text notes, a good solution is often to use the relative sales value or net
realizable value methods when there is an ultimate product price and
additional processing costs are involved, as in this case. So these
methods deserve consideration.
Postscript: a Chartered Institute of Management Accountant’s (CIMA; a
U.K.-based professional organization) study proposed that both the current
and prior allocation methods be replaced with one based on the usefulness
of the three blood products, as assessed by hematologists. This approach
appears to be closer to the net realizable method we have discussed in the
chapter.
Source: Paul Trenchard and Rob Dixon, “Armful Practice,” Financial
Management(London), April 2004, pp. 30–32
7-21
Education.
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Chapter 7 - Cost Allocation: Departments, Joint Products, and By-Products
7-31 Joint Products (10 min)
The allocation for the net realizable value method is shown below. Note
however, that Product T has a very small sales value relative to the two
other products. Should it more properly have been treated as a by-
product?
7-22
Education.
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Chapter 7 - Cost Allocation: Departments, Joint Products, and By-Products
7-32 Joint Products (20 min)
this product.
7-23
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Chapter 7 - Cost Allocation: Departments, Joint Products, and By-Products
7-33 Joint Product Costing; By-Products (Appendix) (25 min)
7-24
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Chapter 7 - Cost Allocation: Departments, Joint Products, and By-Products
PROBLEMS
7-34 Departmental Cost Allocation; Outsourcing (30 min)
1. a. Departmental Cost Allocation: Direct Method
7-25
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Chapter 7 - Cost Allocation: Departments, Joint Products, and By-Products
7-34 (continued -1)
b. Step Method (Design Department goes first)
7-26
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Chapter 7 - Cost Allocation: Departments, Joint Products, and By-Products
7-34 (continued -2)
c. The Reciprocal Method (using Solver)
7-27
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Chapter 7 - Cost Allocation: Departments, Joint Products, and By-Products
7-34 (continued -3)
2. Assuming total fixed costs remain the same, the current variable cost is
the only relevant cost to consider in the analysis. Currently programming
cost in-house is $36,000/2,000 total hours = $18 per hour, which is less
than the outside price of $25 per hour; thus, do not outsource.
7-28
Education.
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Chapter 7 - Cost Allocation: Departments, Joint Products, and By-Products
7-35 Departmental Cost Allocation (30 min)
1., 2.
Total Service Dept.
Cost Allocated
Total Production Cost
Direct Method
Assembly $177,818 $587,818
Finishing 192,182 447,182
Step Method
Assembly 181,818 591,818
Finishing 188,182 443,182
Reciprocal Method
Assembly 179,437 589,437
Finishing 190,563 445,563
See following pages for calculations.
7-29
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Chapter 7 - Cost Allocation: Departments, Joint Products, and By-Products
7-35 (continued -1)
The Direct Method
7-30

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