978-0133058789 Chapter 12 Part 1

CHAPTER 12

COVERAGE OF LEARNING OBJECTIVES

LEARNING

OBJECTIVE

FUNDA-

MENTAL

ASSIGN-

MENT

MATERIAL

CRITICAL

THINKING

EXERCISES,

AND

EXERCISES

PROBLEMS

CASES,

NIKE 10K,

EXCEL,

COLLAB. &

INTERNET

EXERCISES

LO1: Describe the

general framework for

cost allocation.

A1, B1

37, 39, 44

LO2: Allocate the

variable and fixed costs

of service departments to

other organizational

units.

A1,B1

25, 27, 28, 29

37, 38, 39, 44

54, 56

LO3: Use the direct and

step-down methods to

allocate service

department costs to user

departments.

A1, B1

31, 32

37, 40, 45, 46

54

LO4: Allocate costs from

producing departments

to products or services

using the traditional and

ABC approaches.

30, 31

37, 40, 47, 48

51, 55

LO5: Allocate costs

associated with customer

actions to customers.

A2, B2

33

37, 41, 42, 43

51, 53, 55

LO6: Allocate the

central corporate costs

of an organization.

26, 30

49

52

LO7: Allocate joint costs

to products using the

physical-units and

relative-sales-value

methods

A3, B3

34, 35, 36

50

507

CHAPTER 12

Cost Allocation

12-A1 (30-50 min.) The numerical answers for requirements 1 and 2 are in Exhibit 12-

3. The allocation types from Exhibit 12-1 are 3 and 4. Each of the allocations to the

12-A2 (40-50 min.)

1. Product

A B C Total

2. Product

A B C Total

Customer Type 1

Sales $500 $1,000 $13,000 $14,500

Gross Margin 50 200 5,200 5,450

508

EXHIBIT 12-A1 General Finishing

Factory Engi- and

Total Administration Cafeteria neering Machining Assembly Painting

Total labor hours 1,296,000 – 36,000 120,000 300,000 720,000 120,000

Employees 780 – – 60 120 540 60

Engineering hours 80,000 – – – 50,000 20,000 10,000

Total Engineering Finishing

Cost Drivers Labor Hours Employees Hours Machining Assembly & Painting

Method 1, Direct Method

Total department overhead before allocation $950,000 $150,000 $1,600,000 – – – – – – – – – – Not Given– – – – – – – – – – –

1 300 + 720 + 120 = 1,140; (300÷1,140) × 950,000 = 250,000; (720÷1,140) × 950,000 = 600,000; etc.

2 120 + 540 + 60 = 720; (120÷720) × 150,000 = 25,000; (540÷720) × 150,000 = 112,500; etc.

3 50 + 20 + 10 = 80; 50/80 × 1,600,000 = 1,000,000; 20/80 × 1,600,000 = 400,000; etc.

4 36+120+300+720+120 =1,296 ; (36÷1,296)×950,000 =26,389 ; (120÷1,296)×950,000 =87,963 ; (300÷1,296)×950,000 =219,907 ; etc.

5 60+120+540+60 =780 ; (60÷780)×176,389 =13,568 ; (120÷780)×176,389 =27,137 ; (540÷780)×176,389 =122,115 ; etc.

3. Cost to Serve $12,000

Cost to Serve per Visit $12,000 ÷ (4 + 16) = $600

Customer Type 1

4. Customer Type 1

Sales $14,500

5. Most Profitable

Profitability Measure Customer Type

510

12–A3 (20–30 min.)

Note that total joint costs are $11 × 1,000,000 + $4 × 1,000,000 = $15,000,000.

1. Physical units method:

Allocation of

2. Relative sales value method:

Relative Sales Value Allocation of

3. The sales value of B at the split-off point must be approximated:

Sales value of B = Final sales value – Separable costs

= ($18.75 × 800,000) – [$200,000 + ($1 × 800,000)]

12–B1 (30–40 min.)

1. Direct method:

Personnel Administrative Residential Commercial

Direct departmental

costs before allocation $ 70,000 $ 100,000 $240,000 $400,000

2. Step-down method:

Personnel Administrative Residential Commercial

Direct departmental

cost before allocation $ 70,000 $ 100,000 $240,000 $400,000

4. Allocations from the personnel to the administrative departments are type 3

12-B2 (40-50 min.)

1.

Product

Alpha Beta Gamma Total

Sales $4,000 $8,000 $20,000 $32,000

3. Cost to Serve $10,000

Cost to Serve per Visit $10,000 ÷ (6 + 4) = $1,000

Customer Type 1

4. Customer Type 1

Sales $8,000

5. Most Profitable

Profitability Measure Customer Type

12-B3 (15 min.)

1. Allocation of

Pounds Weighting Joint Costs

2. Relative Sales Allocation of

Value at Split-off* Weighting Joint Costs

3. Estimated value of oat flour at split-off:

Sales value of oat flakes, $2.90 × 800,000 pounds $2,320,000

– Processing cost after split-off point, ($.60 × 800,000

12-1 For most companies, accountants can directly trace less than 60% of operating costs

12-2 Exhibit 12-1 shows the ten types of cost assignments.

2. Indirect costs allocated to departments

4. Service department costs allocated to producing departments

6. Directly traced costs to producing departments that an organization can also

trace directly to products and services

8. Directly traced costs to service departments that an organization can also trace

directly to customers

10. Product/service costs assigned to customers

12-4 The preferred guidelines for allocating service department costs are:

a. Evaluate performance using budgets for each service (staff) department, just as

they are used for each production or operating (line) department. When feasible,

12-5 The distinction between direct and indirect depends on the cost object. A cost

such as the salaries of service department personnel are a direct cost when the cost object

12-6 Using budgeted rather than actual cost rates protects the using departments from

inefficiencies in the service departments and from intervening price fluctuations.

12-7 The motivation to underestimate long-run usage is a common problem with

12-8 It would be ideal if every cost pool would contain only fixed or only variable

costs. This should be the goal. In practice, there are many reasons why this goal may not

12-9 Two methods of allocating service department costs are the direct method and

the step-down method. The direct method ignores other service departments when any

given service department’s costs are allocated. No costs are allocated from one service

12-10 The direct method of allocating service department costs ignores services that one

service department provides to another service department. The method is easier to apply

12-12 The four steps are as follows:

2. Trace the direct costs to the appropriate products or services.

4. Allocate (apply) the costs in each cost pool to the products or services in

proportion to their usage of the related cost-allocation base.

12-13 First, managers identify the key activities in the organization, and they collect

12-14 Some possible activities and cost drivers are:

Activity Cost driver

12-15 Step 1: Determine the key components of the system.

Step 2: Develop the relationships between resources,

12-16 The simplest answer is to recommend a traditional costing system for the

Youngstown plant and an ABC costing system for the Salem plant. Why? Because one

of the primary purposes of any costing system is to provide as accurate cost information

12-17 When the cost objective is customers, allocating customer-related service-

12-18 Suppose that not only are all of a company’s products profitable (that is, gross

profit is positive), its average gross profit margin percentage is 30%. What if the total

costs of the distribution and customer service value-chain functions is 35% of sales? In

12-19 Low Cost to Serve High Cost to Serve

Large order quantity Small order quantity

Few order changes Many order changes

12-20 If allocations are based on actual rather than forecasted sales, the allocation to a

12-21 What is worse, no allocation or inaccurate allocation based on either implausible

or unreliable cost drivers? Most cost accountants would opt for no allocation. This would

12-22 Joint costs are allocated to products or services for purposes of inventory

12-23 The physical units method allocates joint costs in proportion to some physical

12-24 By-products, like joint products, are not separately identifiable before the split–

off point. However, by-products have relatively insignificant sales values compared to

12-25 Fixed costs are often allocated separately from variable costs because they are

12-26 Sales dollars are often a poor basis for allocation of costs because they reflect

12-27 One way to allocate national advertising costs to territories is on the basis of

1. Business Engineering

Fixed costs per month:

2. Business Engineering

Fixed costs per month:

210/610 × $100,000 $34,426

users.

12-29 (10-15 min.)

2. Fixed cost pool allocated as a lump sum depending on predicted usage:

To City Planning: (36,000 ÷ 100,000) × $3,000 = $1,080 per month

3. The second method, the one that allocated fixed- and variable-cost pools

separately, is preferable. It better recognizes the causes of the costs. The fixed

12-30 (10 – 15 min.)

Bellevue Richfield Hightower

2. Allocation based on actual sales** 120,000 140,000 100,000

3. The major argument against using actual sales as a cost driver for cost allocation

is that a department’s allocation depends on the success of other departments.

Here, Bellevue is allocated an extra $12,000 because sales in the Richfield store

12-31 (25-30 min.)

1. See Exhibit 12-31. Calculations for the exhibit follow:

3 + 12 + 18 + 8 = 41

(3  41) × $92,000 = $6,732

2. See Exhibit 12-31. Calculations for the exhibit follow:

5 + 3 + 12 + 18 + 8 = 46

(5  46) × $92,000 = $10,000

(3  46) × $92,000 = $6,000

(12  46) × $92,000 = $24,000

522

12–32 (15–20 min.)

1. Direct method:

Personnel Custodial Machining Assembly

Direct department costs

2. Step-down method:

Personnel Custodial Machining Assembly

Direct department costs

12-33 (30-40 min.)

1. Product A Product B Product C Product D

Sales $32,000 $88,000 $280,000 $143,000

Cost of sales 20,000 70,400 224,000 81,000

23.2%) as well as the largest dollar contribution to operating income ($17,251 – $7,368 =

$9,883).

Exhibit 12-33

C 51.38 10.28 50 2,569 514 400 20,552 4,112 5,000 256,900 51,400

D 89.38 38.75 400 35,752 15,500 800 71,504 31,000 400 35,752 15,500

Total 750 $42,574 17,251 4,600 $140,886 49,128 8,900 $359,577 81,240

5. The chart below shows customer profitability for the three customer types and suggested

strategies for profit improvement.

Grow business with this customer type by

focused sales efforts and quantity discounts.

Work with customers to lower

the cost to serve. Seek internal

process improvements to lower

those elements of the cost to

serve controllable by the

company.

Work with customers to change

their ordering patterns, focusing