11
Service Department and Joint Cost Allocation
Solutions to Review Questions
11–1.
Companies allocate costs to estimate or assess the costs of their activities (products,
processes, etc.). It is an estimate and subject to the problem that cost allocation
contains an arbitrary element. Not allocating costs, however, is also an estimate—an
estimate of zero. This may be appropriate for some decisions, but not for others.
Some of the disadvantages (costs) include:
(1) Additional bookkeeping;
11–2.
The three methods of allocating service department costs are the (1) direct method, (2)
step method, and (3) reciprocal method.
11–3.
The essential difference is the allocation of costs among service departments. The
11–4.
Allocations usually begin from the service department that has provided the greatest
proportion of its services to other service departments, or that services the greatest
11–5.
11–6.
11–7.
Joint cost allocations are usually made to assign a cost to a product after the split-off
11–8.
Because net realizable values of the output provide a measure of the economic benefit
11–9.
It could be preferable to use a physical quantities measure if it reflects the economic
benefit ultimately obtainable from the production process, particularly if there is no
11–10.
For joint products, costs of the inputs up to the split-off point are allocated to each of the
11–11.
Solutions to Critical Analysis and Discussion Questions
11–12.
Management might believe there are benefits to the use of allocated costs. An
awareness of total costs may influence managerial behavior and decision making. For
11–13.
Allocating zero costs is another allocation method. It, too, is an arbitrary method.
11–14.
As with all cost allocation methods, there is a cost-benefit trade-off to be made. If the
11–15.
The concepts of direct and indirect are related to a specific cost object within the
organization. Costs that can be attributed to a cost object and can, in both a physical
11–16.
The reciprocal method takes into account all of the services rendered among the
11–17.
11–18.
The addition of an employee in one department will increase the allocation base and,
therefore, reduce the allocation to the department that does not add the employee. The
manager of the department that does not add the employee benefits from the actions of
11–19.
Answers will vary. Before deciding to outsource a service department, a company would
want to consider some of the following. (1) Will the quality of service be the same?
11–20.
Answers will vary. First, it is useful to consider whether there are any reciprocal
services. Both the Library and Career Development make use of Computer Support, but
Computer Support probably uses little or no service from the other two. This suggests a
11–21.
Some managers use fully allocated cost numbers for long-run pricing and other long-run
11–22.
The two situations are similar in that the conceptual treatment of the allocation problem
11–23.
11–24.
The allocation of joint cost is similar to that of fixed costs in the sense that if I sell less of
Solutions to Exercises
11–25. (15 min.) Why Costs Are Allocated—Ethical Issues: Giga-Corp.
a. The president of Stable Division would probably prefer to allocate Personnel costs
11–26. (20 min.) Cost Allocation—Direct Method: Caro Manufacturing.
Direct Method:
To
From
Machining
Maintenance ………………………………
$25,000a
Cafeteria ……………………………………
costs by Maintenance are ignored.)
11–27. (30 min.) Allocating Service Department Costs First to Production
Departments and Then to Jobs: Caro Manufacturing.
Machining
Assembly
Total
Costs allocated to each department
(from Exercise 11.26) ………………………………….
$41,000
$31,000
$72,000
Allocation bases:
Total ………………………………………………………
270
330
Department rates:
11–28. (15 min.) Cost Allocation–Direct Method: University Printers
Maintenance
Personnel
Printing
Developing
Service department
costs ………………………………………………………….
$5,000
$12,000
–0–
–0–
$1,250
11–29. (25 min.) Cost Allocation—Step Method: Caro Manufacturing.
a. Step Method—Maintenance First:
To
From
Maintenance
Cafeteria
Machining
Assembly
Service department costs ……………………………..
$40,000
$32,000
b. Step Method—Cafeteria First:
To
From
Cafeteria
Maintenance
Assembly
Service department costs ……………………………..
$32,000
$40,000
11–30. (20 min.) Cost Allocation—Step Method: University Printers
Maintenance
Personnel
Printing
Developing
Service department costs ……………………………..
$ 5,000
$12,000
NA
NA
(13,000)
1,000
(1,000 + 1,000 + 3,000)
3,000
(500 + 2,000)
11–31. (30 min.) Cost Allocation—Reciprocal Method: Caro Manufacturing.
Set up the equations:
S2 (Cafeteria)
=
+
Substituting, the first equation into the second yields,
S2
=
$32,000 + 0.20 ($40,000 + 0.80 S2)
S2
=
$32,000 + $8,000 + 0.16 S2
S2
=
$47,619
S1
=
$40,000 + 0.80 ($47,619)
S1
=
$78,095
Allocations
Cost Allocation To:
From:
Maintenance
Cafeteria
Assembly
4,762
Service dept.
11–32. (30 min.) Cost Allocation—Reciprocal Method, Two Service Departments:
Kim & Co.
Set up the equations:
Total service
department costs
=
Direct costs of
the service
department
+
Cost allocated
to the service
department
11–32 (continued)
Allocations
Cost Allocation To:
From:
Administration
Factory Support
Fabrication
Assembly
Finishing
Service department costs ..
$480,000
$1,250,000
—
—
—
Administrationa ………………
(630,208)
$252,084
$ 189,064
$ 126,040
$ 63,020
Direct costs …………………..
11–33. (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
=
+
=
Substituting the value of S2 back into the first equation gives,
Allocations
Cost Allocation To:
From:
Maintenance
Personnel
Printing
Developin
g
11–34. (15 min.) Evaluate Cost Allocation Methods: University Printers
a. The answer to this question depends on the cost and benefits of each method. The
b. The value of any particular method depends on how the numbers will be used. If the
11–35. (15 min.) Reciprocal Cost Allocation – Outsourcing a Service Department:
Caro Manufacturing
To determine the avoidable cost, first determine the variable cost (including the
variable cost of reciprocal services for the maintenance department). This can be
done by setting up the equations for the reciprocal method using only variable costs.
Set up the equations:
11–36. (15 min.) Reciprocal Cost Allocation – Outsourcing a Service
Department: University Printers.
To determine the avoidable cost, first determine the variable cost (including the
variable cost of reciprocal services for the maintenance department). This can be
done by setting up the equations for the reciprocal method using only variable costs.
11–37. (15 min.) Net Realizable Value Method: Euclid Corporation.
Total joint costs are $432,000 (based on the $144,000 materials plus $288,000
conversion). These costs are allocated as follows:
To Output P-11:
11–38. (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 …………………………………..
(40,000)
split-off ………………………………………………………
Cost Allocation:
$30,000
Check:
11–39. (20 min.) Net Realizable Value Method To Solve For Unknowns: GG
Products, Inc.
Since the sales value of each product at the split-off point is available, the appropriate
11–40. (10 min.) Net Realizable Value Method: Bixel Components.
11–41. (10 min.) Net Realizable Value Method with By-Products: Butterfly
Company.
11–42. (15 min.) Net Realizable Value Method: Deming & Sons.
The net realizable value method is a cost allocation method that allocates joint costs in
proportion to the net realizable value of the individual products. The calculation is:
Net Realizable
Value at
Split-Off
($000)
Allocation
Joint Costs
Allocated
W-10 ………….
$ 336
(336 ÷ 960)
x
$384,000
$134,400
W-40 ………….
(144 ÷ 960)
x
Note: The costs incurred after split-off are not joint costs and are therefore not
included.
11–43. (15 min.) Physical Quantities Method: Deming & Sons.
The physical units method is a cost allocation method that allocates joint costs in
proportion to the units produced of the individual products. The calculation is:
Production
(units)
Allocation
Joint Costs
Allocated
W-10 ………….
x
$384,000
$134,400
W-40 ………….
x
11–44. (15 min.) Sell or Process Further: Deming & Sons.
Product W-10. The sales value at split-off is $336,000. If processed further, the sales
value is $30,000 more, but you incur an additional $36,000 in processing costs. The
11–45. (20 min.) Physical Quantities Method: Kyle Company.
a.
Total units of KA ………………
=
84,000
units
Total units produced …………
=
units
Joint product costs ……………
=
$189,000
b.
Net realizable value of KB at split-off ……..
=
$210,000
Total net realizable value at split-off ………
=
600,000
Joint product costs ………………………………
=
Additional processing costs ………………………….
11–46. (20 min.) Physical Quantities Method; Sell or Process Further: Kyle
Company.
a.
When KC can no longer be sold and must be disposed of, the disposal costs become
part of the joint cost of production for KA and KB. Using the physical units method,
the allocated costs are:
11–47. (20 min.) Physical Quantities Method With By-Product: Trans-Pacific
Lumber
The allocation computations are:
To Grade-A Lumber:
Solutions to Problems
11–48. (50 min.) Step Method With Three Service Departments: Model, Inc.
a. To facilitate the solution, reduce the different allocation bases to proportions used by
departments other than the same department.
Proportion Used By
Administration
Accounting
Maintenance
Molding
Painting
Building Area ………………………………………………
—a
.06b
.04b
.72
.18
Employees …………………………………………………
.35
.50
11-48. (continued)
Model, Inc.
Step Method
To
Maintenance
Accounting
Administration
Molding
Painting
Direct Costs ……………………………………………….
$200,000
$400,000
$250,000
$687,500
$485,000
FROM
Maintenancea ……………………………………………..
(200,000)
40,000
2,000
104,000
54,000
_________
_______
(.01 + .20 + .52 + .27)
(.01 + .20 + .52 + .27)
(.72 + .18)
11-48. (continued)
b.
Molding
Painting
Direct materials …………………………………………..
$237,500
$210,000
Direct labor ………………………………………………..
337,500
200,000
Overhead (direct) ………………………………………..
112,500
Overhead (allocated) …………………………………..
Molding:
$1,190,632 ÷ 100,000 units …………………………..
=
Painting:
=
c. Unit cost of allocated service department costs:
11–49. (40 min.) Comparison of Allocation Methods: BluStar Company.
a. Direct Method:
Administration
Accounting
Domestic
International
Department costs …………………………..……………
$360,000
$144,000
$936,000
$3,600,000
a
$288,000
(45 + 180)
b
(20,000 + 80,000)
x $144,000
45
b. Step Method—Administration First:
To
From
Admin
Accounting
Domestic
International
Department costs ………………………………………..
$936,000
$3,600,000
a
$ 36,000
=
25
x $360,000
(25 + 45 + 180)
=
x $360,000
(25 + 45 + 180)
=
x $360,000
(25 + 45 + 180)
=
x $180,000
=
x $180,000
(20,000 + 80,000)
11-49. (continued)
c. Reciprocal Method:
Set up the equations:
Total service
department costs
=
Direct costs of
the service
department
+
Cost Allocated
to the Service
Department
S1 (Administration)
=
$360,000
+
0.20 S2
=
Allocations:
Administration
Accounting
Domestic
International
d.
Regardless of the allocation method used, the final allocations are the same. The
11–50. (40 min.) Solve For Unknowns: Frank’s Foods.
a. Since the direct method is used, Operations Support’s (S2’s) costs are allocated
only to P1 and P2, not to S1.
To find the cost of S2’s services:
b.
Amount allocated from S2 to P1
=
$45,000
= (
.5
x
$72,000
)
.5 + .3
11–51. (40 min.) Solve For Unknowns: RT Renovations.
11–52. (60 min.) Cost Allocation—Step Method With Analysis And Decision
Making: Steamco Corporation.
11–52. (continued)
b.
Let:
S1
=
Steam generation
S2
=
Electric generating—fixed
S3
=
Electric generating—variable
P1
=
Alpha
P2
=
Beta
Allocation:
To Department:
(Direct Costs Shown Below Department)
S4
S2
S3
P1
P2
$144
$90
$240
$1,800.00
$1,320.00
Amount to
From department:
be allocated
Steam generation
(S1)a …………………………………………………………
$ 210
84
21.00
105.00
18
90.00
27.00
40.50
67.50
variable (S3)d ……………………………………………..
215.47
117.53
c. If the company could realize $174,000 from the sale of the steam, then the relevant
costs would be:
11–53. (30 min.) (Appendix) Cost Allocations—Reciprocal Method (Computer
Required): Steamco.
The total costs of the two producing departments include their direct costs. The
allocated costs, therefore, are:
11–54. (30 min.) Cost Allocation— Step Method, Reciprocal Method: Great
Eastern Credit Union.
a. The key to this problem is to recognize that Administration provides no service to
either of the other two service departments and that Processing only provides
Allocated to:
Costs
Processing
Adminstration
Branches
Electronic
Maintenance
$220,000
$22,000
(10%)
$44,000
(20%)
$44,000
(20%)
$110,000
(50%)
Total
11–55. (30 min.) Cost Allocation— Step Method and Reciprocal Method: Midland
Resources.
The key to this problem is to write out the equations expressing the usage:
Substituting the equations for Engineering and Maintenance into the equation for
Administration yields:
Allocated to:
Costs
Fabrication
Assembly
Engineering
$81,000
Maintenance
Total
$8,100
$32,400
11–56. (35 min.) Allocate Service Department Costs: State Financial Corp.
11–57. (45 min.) Allocate Service Department Costs—Ethical Issues: FSP.
a. Direct Method:
Member
Department
Commercial
Department
Total
Accounting …………….
$8,000a
$8,000a
$16,000
Computer Services ….
12,320b
.40
.10
.40
d. Step Method:
Computer
Services
Accounting
Member
Department
Commercial
Department
Before allocation …………
$61,600
$16,000
$ –0–
$ –0–
Accounting …………………
(.50 + .10 + .40)
(.50 + .10 + .40)
11-57. (continued)
e. Reciprocal Method:
Set up the equations:
Total service
department costs
=
Direct costs of
the service
department
+
Cost Allocated
to the Service
Department
S1 (Accounting)
=
+
S2 (Computer Services)
=
+
Substituting, the first equation into the second yields,
S2
=
61,600 + 0.20 ($16,000 + 0.50 S2)
=
61,600 + 3,200 + 0.10 S2
=
S2
=
S1
=
=
Allocations
From:
Accounting
Computer
Service
Member
Commercial
Costs …………………………..…………………………….
department costs
=
department
+
Department
11–58. (45 min.) Reciprocal Cost Allocation – Outsourcing a Service Department:
BluStar Company.
a. To determine the avoidable cost, first determine the variable cost (including the
b. Using the same approach, the avoidable cost from outsourcing Accounting is
$69,000 (= $36,000 + $15,000 + $18,000 avoidable fixed costs).
Total service
department costs
=
Direct costs of
the service
department
+
Cost Allocated
to the Service
Department
11–59. (45 min.) Reciprocal Cost Allocation – Outsourcing a Service Department:
Great Eastern Credit Union.
To determine the avoidable cost, first determine the variable cost (including the
variable cost of reciprocal services for the Processing department). This is done by
11–60. (15 min.) Reciprocal Cost Allocation – Outsourcing a Service Department:
Great Eastern Credit Union.
11–61. (45 min.) Net Realizable Value of Joint Products: Davenport Company.
a. $375,000
Since there is no further processing for Beta-1 after split-off, the net realizable value
is simply the sales value of all units produced.
11–61. (continued)
Net realizable value of Beta-1 ……………………….
$375,000a
Net realizable value of Beta-2 ……………………….
225,000b
Net realizable value of Beta-3 ……………………….
Additional processing costs:
Direct labor ………………………………………………..
Overhead …………………………………………………..
Total cost of Beta-2 ………………………………….
$1,125,000
Cost per unit
=
=
$1.1667/unit
11–62. (40 min.) Estimated Net Realizable Value and Effects Of Processing
Further: Fletcher Fabrication, Inc.
a.
Departments
Production Costs
X
Y
Z
A diagram of the problem follows:
11–62. (continued)
Product A
Product B
Product C
Total
1.
Selling price per pound:
A: $45,000 20,000 …………………………………
$2.25
C: $367,500 70,000 ……………………………….
$5.25
Multiply by pounds produced:
A: 20,000 + 50,000 …………………………………..
C: 70,000 + 40,000…………………………………..
_______
Gross sales values ……………………………………..
Less costs of separate processing:
A: — ………………………………………………………
B: $121,350 + $31,650 ……………………………..
C: $287,625 + $109,875 …………………………...
Percentage of total ………………………………………
Allocation:
A: 35% x $270,000
=
$94,500
B: 25% x $270,000
=
C: 40% x $270,000
=
108,000
11–62. (continued)
3. and 4.
Total Costs
Cost of
Goods Sold
Ending
Inventory
Product A:
Joint costs allocated …………………………………
$ 94,500
Sold: (20,000 70,000) x $94,500 ……………..
$ 27,000
Inventory …………………………..……………………
$ 67,500
Product B:
Joint costs allocated …………………………………
Separate processing costs ………………………..
Total, all sold ………………………………………………
Product C:
Joint costs allocated …………………………………
Separate processing costs ………………………..
Total costs of Z ………………………………………..
$505,500
$505,500 …………………………………..
Inventory …………………………..……………………
________
Totals ………………………………………………………..
$820,500
$569,182
$251,318
Proof of total:
Raw material cost Dept. X …………………………
$168,000
Direct labor cost—X …………………………………
72,000
Direct labor cost—Y …………………………………
Direct labor cost—Z …………………………………
Manufacturing overhead—X …………………………
Manufacturing overhead—Y …………………………
Manufacturing overhead—Z …………………………
Total costs accounted for ……………………………..
$820,500
b.
Incremental revenue of further processing
A: ($12.90 – $2.25 forgone) x 70,000 ………….
Incremental costs of further processing
B: $6.00 x 70,000 …………………………………….
11–63.
(35 min.) Find Missing Data—Net Realizable Value: Spartan Chemicals.
Spartan must be using the net realizable value method because the ratio of G-1’s joint
costs to the total does not equal the ratio of G-1’s physical units to the total.
a. Allocate joint costs to G-3:
c and d. The ratio of sales value at split-off for each product to total sales value at split–
off equals the joint cost ratio:
11–64.
(35 min.) Find Missing Data—Net Realizable Value: Blaine, Inc.
Blaine must be using the net realizable value method because the ratio of Argon’s joint
costs to the total does not equal the ratio of Argon’s physical units to the total.
11–65. (50 min.) Joint Costing In A Process Costing Context—Estimated Net
Realizable Value Method: West Coast Designs.
It is helpful to diagram the flow of units before attempting to solve the problem.
a120,000 good output = 132,000 ÷ 110%
The next step is to determine the net realizable values of Super and Deluxe at the first
split-off.
Super
Deluxe
Sales value after completion …………………………
$1,386,000a
$2,880,000b
Separate processing costs:
11-65. (continued)
Cost allocation:
11–66. (35 min.) Find Maximum Input Price—Estimated Net Realizable Value
Method: Ticon Corporation.
a. A diagram of the operation appears as follows:
The total allowable materials costs would then be:
11–67. (30 min.) Effect Of By-Product versus Joint Cost Accounting: Fisher
Chemicals.
a. (1) Accounted for as a joint product.
(2) Allocated for as a by-product.
Allocation:
11–68. (30 min.) Joint Cost Allocation and Product Profitability: Prescott Lumber
a. Allocation on the basis of units of output
Grade A:
b. Allocation on the basis of market value
Grade A:
Grade B:
Allocated cost of logs ………………….
c. It is not possible to determine which product is more profitable. One cannot be
produced without the other—hence only the profitability of the total output is
relevant. Use of the physical quantities measured in Part (a) would suggest that
Solution to Integrative Case
11–69. (60 min.) Effect of Cost Allocation on Pricing and Make versus Buy
Decisions: Ag-Coop
a. Output:
Output Mix
Kwh per lb.
Kwh per 100 lbs. Input
Greenup …………………………………………………….
50
%
32
1,600
Maintane ……………………………………………………
30
20
Maximum processing:
750,000 kwh ÷ 3,000 kwh per 100 lbs.
25,000 lbs. of input
Fixed cost allocation ……………………………………
25,000
=
per lb.
11-69. (continued)
b. Total joint cost incurred in processing 25,000 lbs. of input =
Quantities of each product produced:
Greenup …………………………………………………….
25,000
x
.5
=
12,500
Maintane ……………………………………………………
25,000
x
.3
=
25,000
Greenup …………………………………………………….
12,500
$105,000
$118,750
x
($105,000 ÷ $200,600)
12,500 lbs.
11-69. (continued)
c. The profit under current production schedule A is:
Total net realizable value
=
$200,600
(from b above)
Outputs under alternative production schedule B:
Product
Output Mix
Unit kwh Usage
Usage per 100 Lbs. of Input
Maintane
Amount of Maintane produced
=
22,590
x
=