Chapter 11 – Service Department and Joint Cost Allocation
11-11
11–27. (20 min.) Cost Allocation—Step Method: University Printers
Maintenance
Personnel
Printing
Service department costs ….……………………….
$ 15,000
$36,000
NA
NA
Maintenancea ………………….……….
(15,000)
3,000
$3,000
$ 9,000
Personnelb ……………………..……
(39,000)
7,800
31,200
Total costs allocated ………..…………………
$ –0–
$ –0–
$10,800
$40,200
a
$3,000
=
1,000
x $15,000
(1,000 + 1,000 + 3,000)
$9,000
=
3,000
x $15,000
(1,000 + 1,000 + 3,000)
b $39,000 cost of Personnel is $36,000 (direct cost) + $3,000 (allocated from
Maintenance)
$7,800
=
500
x $39,000
(500 + 2,000)
$31,200
=
2,000
x $39,000
(500 + 2,000)
Using this method, more costs ($150) are allocated to the Developing Department than
by using the direct method.
Chapter 11 – Service Department and Joint Cost Allocation
11-12
11–28. (30 min.) Cost Allocation—Reciprocal Method: Warren Ltd.
Set up the equations:
Total service
department costs
=
Direct costs of the
service department
+
Cost allocated
to the service
department
S1 (Maintenance)
=
$200,000
+
0.80 S2
S2 (Cafeteria)
=
160,000
+
0.20 S1
Substituting, the first equation into the second yields,
S2
=
$160,000 + 0.20 ($200,000 + 0.80 S2)
S2
=
$160,000 + $40,000 + 0.16 S2
0.84 S2
=
$200,000
S2
=
$238,095
Substituting the value of S2 back into the first equation gives,
S1
=
$200,000 + 0.80 ($238,095)
S1
=
$390,476
Allocations
Cost Allocation To:
From:
Maintenance
Cafeteria
Building A
Building B
Service dept.
costs ………….
$200,000
$160,000
$ 0
$ 0
Maintenancea …
(390,476)
78,095
195,238
117,143
Cafeteriab ………
190,476
(238,095)
23,810
23,809
Total …………
$ 0
$ 0
$219,048
$140,952
a $78,095 = 0.2 x $390,476; $195,238 = 0.5 x $390,476; $117,143 = 0.3 x $390,476.
b $190,476 = 0.8 x $238,095; $23,810 = 0.1 x $238,095 (rounded up);
$23,809 = 0.1 x $238,095 (rounded down).
Chapter 11 – Service Department and Joint Cost Allocation
11–29. (30 min.) Cost Allocation—Reciprocal Method, Two Service Departments:
Postaic Company.
Chapter 11 – Service Department and Joint Cost Allocation
11-14
11–29 (continued)
Allocations
Cost Allocation To:
From:
Administration
Factory Support
Fabrication
Assembly
Finishing
Service department costs ..
$240,000
$625,000
—
—
—
Administrationa ………………
(315,104)
$126,042
$ 94,532
$ 63,020
$ 31,510
Factory Supportb ……………
75,104
(751,042)
150,208
112,656
413,074
Total Allocations ………….
$0
$0
$ 244,740
$ 175,676
$ 444,584
Direct costs …………………..
780,000
134,000
119,000
Total costs …………………….
$1,024,740
$ 309,676
$ 563,584
a $126,042 = 0.4 x $315,104; $94,532 = 0.3 x $315,104; $63,020 = 0.2 x $315,104; $31,510 = 0.1 x $315,104.
b $75,104 = 0.1 x $751,042; $150,208 = 0.2 x $751,042; $112,656 = 0.15 x $751,042; $413,073 = 0.55 x $751,042,
subject to some minor rounding differences.
Chapter 11 – Service Department and Joint Cost Allocation
11-15
11–30. (35 min.) Cost Allocation—Reciprocal Method: University Printers
Set up the equations:
Total service
department costs
=
Direct costs of
the service
department
+
Cost allocated
to the service
department
S1 (Maintenance)
=
$15,000
+
(1/6) S2
S2 (Personnel)
=
36,000
+
(1/5) S1
Substituting, the first equation into the second yields,
S2
=
$36,000 + 0.20 [$15,000 + (1/6) S2]
S2
=
$36,000 + $3,000 + (1/30) S2
(29/30) S2
=
$39,000
S2
=
$40,345
Substituting the value of S2 back into the first equation gives,
S1
=
$15,000 + (1/6) ($40,345)
S1
=
$21,724
Allocations
Cost Allocation To:
From:
Maintenance
Personnel
Printing
Developin
g
Service department
costs …………………………..
$15,000
$36,000
—
—
Maintenancea ……………..…..
(21,724)
$4,345
$4,345
$ 13,034
Personnelb ……………………..
6,724
(40,345)
6,724
26,897
Totalc …………………….…..
$0
$0
$11,069
$39,931
a $4,345 = 0.2 x $21,724; $4,345 = 0.2 x $21,724; $13,034 = 0.6 x $21,724.
b $6,724 = (1/6) x $40,345; $6,724 = (1/6) x $40,345; $26,897 = (2/3) x $40,345.
c Slight discrepancy due to rounding.
Chapter 11 – Service Department and Joint Cost Allocation
11-16
11–31. (15 min.) Evaluate Cost Allocation Methods: University Printers
a. The answer to this question depends on the cost and benefits of each method. The
reciprocal method takes into account the fact that each service department uses the
Chapter 11 – Service Department and Joint Cost Allocation
11–32. (15 min.) Reciprocal Cost Allocation – Outsourcing a Service Department:
Warren Ltd.
To determine the avoidable cost, first determine the variable cost (including the
Chapter 11 – Service Department and Joint Cost Allocation
11–33. (15 min.) Reciprocal Cost Allocation – Outsourcing a Service
Department: University Printers.
To determine the avoidable cost, first determine the variable cost (including the
Chapter 11 – Service Department and Joint Cost Allocation
11-19
11–34. (15 min.) Net Realizable Value Method.
Total joint costs are $270,000 (based on the $90,000 materials plus $180,000
conversion). These costs are allocated as follows:
Chapter 11 – Service Department and Joint Cost Allocation
11-20
11–35. (20 min.) Estimated Net Realizable Value Method: Blasto, Inc.
Although not required, the process may be diagrammed as follows:
The diagram can be used to help organize the solution, which follows:
Lead
Copper
Manganese
Total
Selling price …………………………..
$40,000
$80,000
$60,000
$180,000
Additional processing ………….……………….
(12,000)
(10,000)
(18,000)
(40,000)
Approximate sales value at
split-off ……………………………..……………………….
$28,000
$70,000
$42,000
$140,000
% of total sales values at
split-offa …………………………….……………………….
20%
50%
30%
100%
Cost Allocation:
20% x $100,000 …………………………..
$20,000
50% x $100,000 …………………………..
$50,000
30% x $100,000 …………………………..
$30,000
Check:
Total allocated = $100,000 = $20,000 + $50,000 + $30,000
a 20% =
$28,000
; 50%
=
$70,000
; 30%
=
$42,000
$140,000
$140,000
$140,000