Financial & Managerial Accounting, 5th Edition
1258
Exercise 22-5 (25 minutes)
COZY BOOKSTORE
Departmental Expense Allocation Spreadsheet
For Period Ended _______
Allocation of Expenses to Departments .
Alloca-
tion Base
Exp.
Account
Balance
Adver-
tising
Dept.
Purch-
asing
Dept.
Books
Dept.
Maga-
zines
Dept.
News-
papers
Dept.
Total dept. exp. …….………….
$698,000
$24,000
$34,000
$425,000
$90,000
$125,000
Service Dept. Expenses
Advertising Dept. ..……………..
Sales
(24,000)
13,200
5,280
5,520
Purchasing
Dept. …………………………..
Purch.
orders
______
(34,000)
14,620
10,200
9,180
Total expenses
allocated to
operating depts.
$698,000
$ 0
$ 0
$452,820
$105,480
$139,700
Computations for allocations of service dept. costs to operating departments
Advertising: $24,000
Sales
% of Total
Cost
Books Dept. …………………..………
$495,000
55%
$13,200
Magazines Dept. ……………………
198,000
22
5,280
Newspapers Dept.………….………
207,000
23
5,520
Totals ……………………………………
$900,000
100%
$24,000
Purchasing: $34,000
Purchase Orders
% of Total
Cost
Books Dept. …………………..………
516
43%
$14,620
Magazines Dept. ……………………
360
30
10,200
Newspapers Dept.………….………
324
27
9,180
Totals ……………………………………
1,200
100%
$34,000
Exercise 22-6 (20 minutes)
Allocation of annual wages between the two departments
Hours Worked*
% of Total
Cost
Jewelry Dept ……………………….….
57
75%
$22,500
Hosiery Dept ……………………….….
19
25
$ 7,500
Totals …………………………………………
76
100%
$30,000
*Computation of hours worked in the two selling departments
Jewelry department
Selling …………………………………………………..
51
Arranging and stocking …………………..……..
6
57 hours
Hosiery department
Selling …………………………………………………..
12
Arranging and stocking …………………..……..
7
19 hours
Total hours …………………………..…………………..
76 hours
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Exercise 22-8 (continued)
(2)
Investment Center
Electronics
Sporting
Goods
Net income ………………..
$2,880,000
$2,040,000
Target net income
$16,000,000 x 12% …..
12,000,000 x 12% ……
(1,920,000)
(1,440,000)
Residual income……. $ 960,000 $ 600,000
Comment: The Electronics division is the superior investment center on
the basis of investment center residual income.
Exercise 22-9 (15 minutes)
Investment Center
Net Income
Sales
Profit Margin
Electronics …………….….
$2,880,000
$40,000,000
7.20%
Sporting Goods ……..….
2,040,000
20,000,000
10.20%
Investment Center
Sales
Average Assets
Investment
Turnover
Electronics …………….….
$40,000,000
$ 16,000,000
2.50
Sporting Goods ……..….
20,000,000
12,000,000
1.67
Comments: The Sporting goods division generates the most net income
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Exercise 22-10 (20 minutes)
Exercise 22–11A (15 minutes)
1. If the Trailer division is currently operating at full capacity, its manager
2. If the Trailer division is currently producing 20,000 trailers and the
Assembly division will order 15,000 more trailers, the Trailer division will
3. The Trailer division would prefer a transfer price of $140 per trailer,
since it provides a $60 ($140 – $80) contribution margin per trailer. At a
transfer price of $80 the Trailer division reports a contribution margin of $0
Exercise 22–12B (20 minutes)
Preliminary calculations
Land cost ……………………………………………………………..…….
$4,000,000
Improvements ……………………………………………………….
3,500,000
Total cost of lots …………………………………………………..…..
$7,500,000
Lots
Quantity
Price
Total
Canyon …………………………………..
450
$ 55,000
$24,750,000
Hilltop ………………………………..…..
150
110,000
16,500,000
Total market value ……………..…..
$41,250,000
Allocated cost—value basis of allocation: $7,500,000
Market
% of
Allocated
Average
Value
Total
Cost
Lot Cost
Canyon section ………...
$24,750,000
60%
$4,500,000
$10,000
Hilltop section …………..
16,500,000
40%
$3,000,000
$20,000
Totals ………………………….
$41,250,000
100%
$7,500,000
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Exercise 22–13B (25 minutes)
Preliminary calculations
Lobster cost (2,400 lbs. x $4.50) ……………………….
$10,800
Labor cost ……………………………………………………...
1,800
Total cost of processed lobsters ……………………..
$12,600
Parts
Quantity*
Price
Total
Lobster tails ……………………..
1,248 lbs.
$21
$26,208
Lobster flakes …………………..
528 lbs.
14
7,392
Total market value …………....
$33,600
Allocated cost—value basis allocation: $12,600
Market
% of
Allocated
Cost
Parts
Value
Total
Cost
per lb.
Lobster tails …………….….
$26,208
78.0%
$9,828
$7.875
Lobster flakes ………….….
7,392
22.0
2,772
5.250
Total ………………………..…
$33,600
100.0%
$12,600
(1) Cost of goods sold
Parts
Quantity (given)
Cost
Total
Lobster tails ……………………....
1,096 lbs.
$7.875
$ 8,631
Lobster flakes…………………....
324 lbs.
5.250
1,701
Total cost of goods sold …....
$10,332
(2) Cost of ending inventory
Parts
Quantity
Cost
Total
Lobster tails ……………………....
152 lbs.*
$7.875
$ 1,197
Lobster flakes…………………....
204 lbs.**
5.250
1,071
Total inventory cost …………...
$ 2,268
* 1,248 lbs. – 1,096 lbs. sold = 152 lbs.
** 528 lbs. – 324 lbs. sold = 204 lbs.
Note: Cost of goods sold ($10,332) plus cost of ending inventory
($2,268) equals the total cost of $12,600.
Exercise 22-14 (20 minutes)
(1) Profit margin = Income/Sales
Investment Center
Income*
Sales*
Profit margin
Professional products ……….
€ 552
€2,717
20.32%
Consumer products …………..
1,765
9,530
18.52%
Luxury products………………..
791
4,507
17.55%
Active cosmetics……………….
278
1,386
20.06%
*In € millions
The Professional products department has the highest profit margin.
(2) Investment turnover = Sales/Average invested assets
Investment Center
Sales*
Avg. assets*
Investment
turnover
Professional products ……….
€2,717
€2,570
1.06
Consumer products …………..
9,530
5,745
1.66
Luxury products………………..
4,507
3,855
1.17
Active cosmetics……………….
1,386
824
1.68
*In € millions. Avg. assets = Beginning assets plus ending assets, divided by two.
Note: Profit margin and investment turnover amounts are rounded to two decimal places.
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PROBLEM SET A
Problem 22-1A (60 minutes)
Part 1
These costs are assigned to the two departments as follows
Department
Square Footage
Rate
Total
Linder’s Dept. ……………
1,000
$8.25
$ 8,250
Chiro’s Dept. ……………..
1,800
8.25
$14,850
*A total of $23,100 ($8,250 + $14,850) in occupancy costs is allocated to these
departments. The company would follow a similar approach in allocating the remaining
occupancy costs ($42,900, computed as $66,000 – $23,100) to its other departments (not
shown in this problem).
Part 2
Market rates are used to allocate occupancy costs for depreciation,
interest, and taxes. Heating, lighting, and maintenance costs are allocated
to the departments on both floors at the average rate per square foot.
These costs are separately assigned to each class as follows:
Total
Costs
Value-Based
Costs
Usage–Based
Costs
Depreciation—Building ………….……
$18,000
$18,000
Interest—Building mortgage ….……
27,000
27,000
Taxes—Building and land ……………
9,000
9,000
Gas (heating) expense …………..……
3,000
$ 3,000
Lighting expense …………………..……
3,000
3,000
Maintenance expense …………….……
6,000
______
6,000
Total ……………………………………..……
$66,000
$54,000
$12,000
Problem 22-1A (Continued)
Value-based costs are allocated to departments in two steps
(i) Compute market value of each floor
Floor
Square
Footage
Value per
Sq. Ft.
Total
First floor ………………..…………
4,000
$30
$120,000
Second floor ………………………
4,000
20
80,000
Total market value …..…………
$200,000
(ii) Allocate $54,000 to each floor based on its percent of market value
Floor
Market
Value
% of
Total
Allocated
Cost
Cost per
Sq. Ft.
First floor ………………..…………
$120,000
60%
$32,400
$8.10
Second floor ………………………
80,000
40
21,600
5.40
Totals ……………………..……
$200,000
100%
$54,000
Usage-based costs allocation rate = $12,000 / 8,000 sq. ft.
= $1.50 per sq. ft.
We can then compute total allocation rates for the floors
Floor
Value
Usage
Total
First floor …………………………..
$8.10
$1.50
$9.60
Second floor ………………………
5.40
1.50
$6.90
These rates are applied to allocate occupancy costs to departments
Department
Square
Footage
Rate
Total
Linder’s Department …………………...
1,000
$9.60
$ 9,600
Chiro’s Department……………………..
1,800
6.90
$12,420
Part 3
A second-floor manager would prefer allocation based on market value. This is a
Problem 22-2A (70 minutes)
Williams Company
Forecasted Departmental Income Statements
For Year Ended December 31, 2014
Clock
Mirror
Paintings
Combined
Sales …………………………..…………...
$140,400
$59,400
$50,000
$249,800
(1)
Cost of goods sold …………………...
68,796
36,828
22,500
128,124
(2)
Gross profit ……………………………...
71,604
22,572
27,500
121,676
Direct expenses
Sales salaries ………………………….
20,000
7,000
8,000
35,000
Advertising ……………………………..
1,200
500
800
2,500
Store supplies used ………………...
972
432
500
1,904
(3)
Depreciation of equipment ……...
1,500
300
200
2,000
Total direct expenses ……………...
23,672
8,232
9,500
41,404
Allocated expenses
Rent expense ………………………….
5,616
2,835
2,349
10,800
(4)
Utilities expense ……………………..
2,080
1,048
872
4,000
(4)
Share of office dept. expenses ...
12,364
5,236
4,400
22,000
(5)
Total allocated expenses ………...
20,060
9,119
7,621
36,800
Total expenses ………………………….
43,732
17,351
17,121
78,204
Net income ……………………………….
$ 27,872
$ 5,221
$10,379
$ 43,472
Supporting Computations—coded (1) through (5) in statement above
Note 1 (Sales)
Clock
Mirror
Paintings
2013 sales …………………………………..
$130,000
$ 55,000
Growth rate (8% increase) ……………
x 108%
x 108%
2014 sales …………………………………..
$140,400
$ 59,400
$ 50,000
Note 2 (Cost of Goods Sold)
Clock
Mirror
Paintings
2013 cost of goods sold ……………….
$ 63,700
$ 34,100
$ 50,000
Growth rate (8% increase) ……………
x 108%
x 108%
x 45%*
2014 cost of goods sold ……………….
$ 68,796
$ 36,828
$ 22,500
ALTERNATIVELY
2013 cost of goods sold ……………….
$ 63,700
$ 34,100
2013 sales …………………………………..
$130,000
$ 55,000
2013 cost as % of sales………………..
49.0%
62.0%
2014 sales ………………………………….
$140,400
$ 59,400
$ 50,000
2014 cost as % of sales ……………….
x 49.0%
x 62.0%
x 45%*
2014 cost of goods sold ……………….
$ 68,796
$ 36,828
$ 22,500
* The 45% cost of goods sold percent is computed as 100% minus the predicted 55% gross margin.
Problem 22-2A (Continued)
Note 3 (Store Supplies Used)
Clock
Mirror
Paintings
2013 store supplies used …………..……
$ 900
$ 400
Growth rate (8% increase) ………….……
x 108%
x 108%
2014 store supplies …………………..……
$ 972
$ 432
$ 500
Note 4 (Rent and Utilities)
Clock
Mirror
Paintings
2013 rent …………………………………..……
$ 7,020
$ 3,780
One-fifth from clock to paintings
(1,404)
$ 1,404
One-fourth from mirror to
paintings
______
(945)
945
2014 allocation of $10,800 rent …………
$ 5,616
$ 2,835
$ 2,349
Percent of total * ……………………….….
52.0%
26.2%†
21.8%†
2014 allocation of $4,000
total utilities …………………………………
$ 2,080
$ 1,048
$ 872
† Adjusted to eliminate rounding difference.
Note 5 (Office Department Expenses)
Clock
Mirror
Paintings
2014 sales ………………………………………
$140,400
$ 59,400
$ 50,000
Percent of total sales * ……………….……
56.2%
23.8%
20.0%
2014 allocation of $22,000
total office department
expenses($15,000 in 2013
plus $7,000 increase) ………………..……
$ 12,364
$ 5,236
$ 4,400
Financial & Managerial Accounting, 5th Edition
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Problem 22-3A (50 minutes)
Part 1
Responsibility Accounting Performance Report
Dept. Manager, Camper Department
For the Year
Budgeted
Actual
Over (Under)
Amount
Amount
Budget
Controllable Costs
Raw materials ………………………..…
$195,000
$194,200
$ (800)
Employee wages …………………………
104,000
106,600
2,600
Supplies used ………………………..…
33,000
31,700
(1,300)
Depreciation—Equipment ……………
60,000
60,000
0
Totals …………………………………………
$392,000
$392,500
$ 500
b.
Responsibility Accounting Performance Report
Dept. Manager, Trailer Department
For the Year
Budgeted
Actual
Over (Under)
Amount
Amount
Budget
Controllable Costs
Raw materials ………………………..…
$275,000
$273,200
$(1,800)
Employee wages ………………………..
205,000
206,400
1,400
Supplies used ………………………..…
90,000
91,600
1,600
Depreciation—Equipment …………..
125,000
125,000
0
Totals ………………………………………..
$695,000
$696,200
$ 1,200
Problem 22-3A (Continued)
c.
Responsibility Accounting Performance Report
Plant Manager, Indiana Plant
For the Year
Budgeted
Actual
Over (Under)
Amount
Amount
Budget
Controllable Costs
Dept. manager salaries ………….…
$ 95,000
$ 97,500
$ 2,500
Utilities ………………………………….…
9,000
8,300
(700)
Building rent …………………………..
15,000
14,000
(1,000)
Other office salaries …………………
32,500
30,100
(2,400)
Other office costs ………………….…
25,000
23,000
(2,000)
Camper department ……………….…
392,000
392,500
500
Trailer department ……………………
695,000
696,200
1,200
Total ……………………………………..…
$1,263,500
$1,261,600
$ (1,900)
Part 2
The plant manager did a better job of controlling costs and meeting the
budget. She came in under budget for the plant even though she paid the
Financial & Managerial Accounting, 5th Edition
1272
Problem 22–4AB (60 minutes)
Part 1
Allocations of joint costs on the basis of sales values
Tree pruning and care: $405,000
Grade
Sales
Value
Percent
of Total
Allocated
Cost
No. 1 ……………….…………
$450,000
48.0%
$194,400
No. 2 ……………….…………
300,000
32.0
129,600
No. 3 ……………….…………
187,500
20.0
81,000
Total ……………….…………
$937,500
100.0%
$405,000
Picking, sorting, and grading: $202,500
Grade
Sales
Value
Percent
of Total
Allocated
Cost
No. 1 ……………….…………
$450,000
48.0%
$ 97,200
No. 2 ……………….…………
300,000
32.0
64,800
No. 3 ……………….…………
187,500
20.0
40,500
Total ……………….…………
$937,500
100.0%
$202,500
Delivery: $30,000 to Grade Nos. 1 & 2
Grade
Sales
Value
Percent
of Total
Allocated
Cost
No. 1 ……………….…………
$450,000
60.0%
$18,000
No. 2 ……………….…………
300,000
40.0
12,000
No. 3 [identified] ..…………
________
_____
37,500*
Total ……………….…………
$750,000
100.0%
$67,500
* If students did not round percents to one-tenth, their answers will vary
slightly from those reported here.
**The No. 3 Grade delivery costs are given in the problem description.