Chapter 17 – Allocation of Support Activity Costs and Joint Costs
CHAPTER 17
Allocation of Support Activity Costs and Joint
Costs
ANSWERS TO REVIEW QUESTIONS
17-1 A service department is a unit in an organization that is not involved directly in
producing the organization’s goods or services. However, a service department does
of these costs are allocated to other service departments.
(b) Under the step-down method, a sequence is first established for allocation of
(c) Under the reciprocal-services method, a system of simultaneous equations is
17-4 The first department in the sequence under the step-down method is the service
department that serves the largest number of other service departments. The second
Chapter 17 – Allocation of Support Activity Costs and Joint Costs
17-5 The dual-allocation approach improves the resulting cost allocations because
17-6 A potential behavioral problem that can result from the dual approach to service
17-7 Budgeted service department costs should be allocated rather than actual service
17-8 Under two-stage allocation with departmental overhead rates, costs first are
distributed to departments; then they are allocated from service departments to
production departments. Finally, they are assigned from production departments to
17-9 (a) Joint-production process: A production process in which the processing of a
17–10 Under the physical-units method of joint cost allocation, joint production costs are
17–11 Under the relative-sales-value method of joint cost allocation, joint production costs
17–12 The net realizable value of a joint product is equal to its ultimate sales value minus
17–13 Joint cost allocations are useful for product-costing purposes. Product costing is
Chapter 17 – Allocation of Support Activity Costs and Joint Costs
SOLUTIONS TO EXERCISES
EXERCISE 17-15 (15 MINUTES)
Direct Customer Service
Departments Using Services
Deposit
Loan
Provider of Service
Cost to Be
Allocated
Amount
Proportion
Amount
HR
$ 459,000
$306,000
(3/9)
$153,000
Computing
Total
$1,147,500
$436,500
EXERCISE 17-16 (15 MINUTES)
Direct Customer Service
Departments Using Services
HR
Computing
Deposit
Loan
Costs prior to allocation
$459,000
$688,500
Department costs
(6/10)
(3/10)
Allocation of Computing
$734,400
(50/85)
(35/85)
Allocation of HR
EXERCISE 17-17 (30 MINUTES)
Answers will vary widely, depending on the organization chosen. Support departments at
EXERCISE 17-18 (15 MINUTES)
1. Cost allocation using direct method:
Academic Departments Using Services
Liberal Arts
Sciences
Provider of Service
Cost to Be
Allocated
Amount
Proportion
Amount
Library
$ 900,000
$540,000
(2/5)
$360,000
Computing Services
(5/8)
Total
$1,260,000
$675,000
$585,000
EXERCISE 17-19 (15 MINUTES)
1. Cost allocation using step-down method:
Service Departments
Academic Departments
Using Services
Computing
Services
Library
Liberal
Arts
Sciences
Costs prior to allocation
$360,000
$900,000
$360,000
(3/10)
(5/10)
$972,000
(3/5)
(2/5)
Chapter 17 – Allocation of Support Activity Costs and Joint Costs
EXERCISE 17-20 (10 MINUTES)
Joint
Cost
Joint
Products
Quantity at
Split-Off Point
Relative
Proportion
Allocation
of
Joint Cost
Yummies
12,000 kilograms
.60
$54,000
*
$90,000
Crummies
.40
EXERCISE 17-21 (15 MINUTES)
Joint
Cost
Joint
Products
Quantity at
Split-Off
Sales
Price
Sales Value at
Split-Off Point
Relative
Proportion
Allocation
of
Joint Cost
Yummies
12,000 kg
$6.00
$ 72,000
.545*
$49,050
†
.455*
EXERCISE 17-22 (25 MINUTES)
1. Decision analysis:
Incremental revenue per kilogram:
Sales price of mulch …………………………………………………………
$10.50
Sales price of Crummies …………………………..………………………
Incremental revenue …………………………………………………………
$3.00
Incremental processing cost per kilogram …………………………
Incremental revenue less incremental cost ………………………..
$1.50
Chapter 17 – Allocation of Support Activity Costs and Joint Costs
EXERCISE 17-22 (CONTINUED)
2. Joint cost allocation using net-realizable-value method:
Joint
Cost
Joint
Products
Sales Value of
Final Product
Separable Cost
of Processing
Net
Realizable
Value*
Relative
Proportion
Allocation
of
Joint Cost
Yummies
$72,000 (12,000 $6.00)
-0-
$ 72,000
.50
$45,000
†
.50
†
EXERCISE 17-23 (25 MINUTES)
(a) First, specify equations to express the relationships between the service
departments.
Notation: H denotes the total cost of Human Resources
C denotes the total cost of Computing
Solution of equations: Substitute from equation (2) into equation (1).
H
=
459,000 + .15(688,500 + .10H)
=
562,275
C
=
688,500 + .10(570,838)
Chapter 17 – Allocation of Support Activity Costs and Joint Costs
EXERCISE 17-23 (CONTINUED)
(b) Cost allocation using the reciprocal-services method:
Service Departments
Direct Customer Service
Departments
Human
Resources
(HR)
Deposit
Loan
Traceable costs
$459,000
(570,838)
*(.6)
*(.3)
(.50)
*(.35)
Chapter 17 – Allocation of Support Activity Costs and Joint Costs
SOLUTIONS TO PROBLEMS
PROBLEM 17-24 (40 MINUTES)
1. Direct method:
Production Department
Etching
Finishing
Provider of Service
Cost to Be
Allocated
Amount
Proportion
Amount
Maintenance
$ 96,000
$ 10,667*
(8/9)
$ 85,333*
Computing
(1/8)
Total service department costs allocated ………………….
Overhead costs traceable to
640,000
Total overhead cost …………………………………………………
Direct-labor hours (DLH)
(20 2,000) ………………………………………………………….
40,000
(80 2,000) ………………………………………………………….
160,000
Check on allocation procedure:
$448,167
147,833
Overhead rate per hour
Chapter 17 – Allocation of Support Activity Costs and Joint Costs
PROBLEM 17-24 (CONTINUED)
2. Step-down method:
Service Departments
Production Departments
Computing
Maintenance
Etching
Finishing
Costs prior to allocation
$500,000
$ 96,000
$500,000
(2/10)
(7/10)
(1/10)
$196,000
(1/9)
(8/9)
Total service department cost allocated ………………………….
Total overhead cost ……………………………………………………….
Direct-labor hours (DLH)
(20 2,000) ………………………………………………………………..
40,000
(80 2,000) ………………………………………………………………..
160,000
$19.294*
Check on allocation procedure:
Chapter 17 – Allocation of Support Activity Costs and Joint Costs
PROBLEM 17-25 (40 MINUTES)
1. Direct method:
Production Departments
Machining
Finishing
Provider of Service
Cost to Be
Allocated
Amount
Proportion
Amount
HR
$250,000
$111,111
*
(5/9)
$138,889
*
Maintenance
*
*
Design
Total
$830,000
$480,944
2. Sequence for step-down method:
Chapter 17 – Allocation of Support Activity Costs and Joint Costs
PROBLEM 17-25 (CONTINUED)
3. Step-down method:
Service Departments
Production Departments
HR
Maintenance
Design
Machining
Finishing
Costs prior to
allocation
$250,000
$230,000
$350,000
Allocation of HR
Department costs
$250,000
(5/100)
(5/100)
$100,000
(40/100)
$242,500
*(5/80)
*(35/80)
(40/80)
Allocation of Design
Department costs
$377,656
(45/60)
(15/60)
$340,664
PROBLEM 17-26 (70 MINUTES)
1. Direct method combined with dual allocation:
(a) Variable costs:
Production Departments
Machining
Finishing
Provider of Service
Cost to Be
Allocated
Amount
Proportion*
Amount
HR
$ 50,000
$ 22,222
†
(5/9)
$ 27,778
†
Maintenance
†
(40/75)
†
Design
(15/60)
(b) Fixed costs:
Production Departments
Machining
Finishing
Provider of Service
Cost to Be
Allocated
Amount
Proportion*
Amount
HR
$200,000
(35/85)
$82,353
†
(50/85)
$117,647
†
Maintenance
(48/72)
100,000
(24/72)
Design
(48/60)
(12/60)
PROBLEM 17-26 (CONTINUED)
(c) Total costs allocated:
Machining
Finishing
Variable costs ………………………………………………………………….
$ 97,055
$ 82,945
Fixed costs ………………………………………………………………………
Total costs ……………………………………………………………………….
2. Step-down method combined with dual allocation:
Chapter 17 – Allocation of Support Activity Costs and Joint Costs
PROBLEM 17-26 (CONTINUED)
(a) Variable costs:
Service Departments
Production Departments
HR
Maintenance
Design
Machining
Finishing
Costs prior to
allocation
$50,000
$80,000
$50,000
Allocation of HR
Department costs
$50,000
(5/100)*
(5/100)
$20,000
(40/100)
(50/100)
$82,500
(40/80)
Allocation of Design
Department costs
$57,656
(45/60)
(15/60)
PROBLEM 17-26 (CONTINUED)
(b) Fixed costs:
Service Departments
Production Departments
HR
Maintenance
Design
Machining
Finishing
Costs prior to
allocation
$200,000
$150,000
$300,000
Allocation of HR
Department costs
$200,000
(5/100)*
(10/100)
(35/100)
(50/100)
$160,000
(8/80)
(48/80)
(24/80)
Allocation of Design
Department costs
$336,000
(48/60)
(12/60)
Chapter 17 – Allocation of Support Activity Costs and Joint Costs
PROBLEM 17-26 (CONTINUED)
(c) Total costs allocated:
Machining
Finishing
Variable costs ………………………………………………………………….
$ 99,336
$ 80,664
Fixed costs ………………………………………………………………………
Total costs ……………………………………………………………………….
PROBLEM 17-27 (50 MINUTES)
1. Plantwide overhead rates:
Departments (numbers in thousands)
Component
Assembly
Total
Manufacturing departments:
Variable overhead ………………….
$20,000
$33,000
$ 60,000
Fixed overhead ……………………..
$32,400
$45,200
$119,600
Service departments:
Power ……………………………………
36,800
Maintenance ………………………….
8,000
$164,400
Estimated direct-labor hours (DLH):
Molding …………………………………
500
Component …………………………..
Assembly ……………………………..
=
Chapter 17 – Allocation of Support Activity Costs and Joint Costs
PROBLEM 17-27 (CONTINUED)
2. Departmental overhead rates:
Departments (numbers in thousands)
Service
Manufacturing
Power
Maintenance
Molding
Component
Assembly
Departmental overhead
costs ……………………………..
$36,800
$ 8,000
$42,000
$32,400
$45,200
a. Allocation of mainten-
$65,520
$47,520
$51,360
b. Allocation of power
costs (dual, direct
method)
Fixed costs
($24,000):
c. Cost driver ………………….
875
MH
2,000
DLH
1,500
DLH
Rate (departmental overhead
Chapter 17 – Allocation of Support Activity Costs and Joint Costs
PROBLEM 17-27 (CONTINUED)
3.
Memorandum
Date:
Today
To:
President, Travelcraft, Inc.
From:
I.M. Student
Subject:
Use of departmental overhead rates
Travelcraft should use departmental rates to assign overhead to its products. The
PROBLEM 17-28 (40 MINUTES)
1. Net-realizable-value method of allocation:
Joint
Cost
per Run
Joint
Products
Sales Value of
Final Product*
Additional
Cost of
Processing
Net
Realizable
Value
Relative
Proportion†
Allocation
of Joint
Cost
HTP-3 ………………….
$2,240,000
……………………
$699,200
……
$1,540,800
…………………..
48.15%
…..
$ 654,840
PST-4 ………………….
……………………
652,800
……
…………………..
32.10%
…..
RJ–5 …………………….
……………………
……
…………………..
19.75%
…..