Chapter 7 – Cost Allocation: Departments, Joint Products, and By-Products
7-35 (continued-2)
The Step Method
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Chapter 7 – Cost Allocation: Departments, Joint Products, and By-Products
7-35 (continued -3)
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Chapter 7 – Cost Allocation: Departments, Joint Products, and By-Products
7.36 Departmental Cost Allocation (20 min)
1. Calculate cost allocation
Production
Department
Outside
Price
Percentage
based on
Outside Price
Allocation of Total
Maintenance Cost Using
Outside Prices
A $115,000 25% $450,000 x .25 = $112,500
B 92,000 20 90,000
C 69,000 15 67,500
D 184,000 40 180,000
Total $460,000 100 $450,000
Departments A and C will be charged more based on the outside
pricing percentage, because the cost of obtaining maintenance
outside the firm is higher for these departments.
2. The overall effect of the new plan will be to motivate the production
departments to continue to use the internal supplier of maintenance
when the outside price is high (as in Departments A and C), and
motivate those departments which have an opportunity to obtain
relatively low cost outside maintenance to do so (Departments B and
closely match the outside prices. If so, the firm should consider
adopting a new allocation base.
Note however that we do not know what portion of the $450,000 is
fixed and what portion is variable. If this internal cost is all fixed, then
the use of outsourcing by the two departments will not reduce total
what costs would be saved and what costs would be added by
outsourcing one or more departments.
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Education.
Chapter 7 – Cost Allocation: Departments, Joint Products, and By-Products
7-34
Chapter 7 – Cost Allocation: Departments, Joint Products, and By-Products
7-37 Departmental Cost Allocation (30 min)
The Direct Method:
7-35
Chapter 7 – Cost Allocation: Departments, Joint Products, and By-Products
7-37 (continued -1)
The Step Method
7-36
Chapter 7 – Cost Allocation: Departments, Joint Products, and By-Products
(continued -2)
Reciprocal Method
7-37
Note: Equations to Solve (using Solver):
CFL = 210,000 + .2 x Computer
7-38
Chapter 7 – Cost Allocation: Departments, Joint Products, and By-Products
7-38 Departmental Cost Allocation (25 min)
The Direct Method
7-39
Chapter 7 – Cost Allocation: Departments, Joint Products, and By-Products
7-38 (continued -1)
The Step Method
The maintenance department goes first since it has a greater percentage of service (25%) to utilities
than the utilities department has to maintenance (15%).
7-40