Expected copies for the year 5,000,000
Budgeted annual costs:
Salaries (fixed) 100,000$
Employee benefits (fixed) 12,500
Depreciation of copy machines (fixed) 10,000
Utilities (fixed) 5,000
Paper (variable) 50,000
Toner (variable) 50,000
Budgeted paper cost per copy 0.01$
Budgeted toner cost per copy 0.01$
Fixed costs to Sales 40%
Fixed costs to Administration 60%
The variable costs are assigned at the following:
Variable costs per copy 0.02$
The number of copies made during the year are:
Total copies made 4,800,000
Copies made for Sales 2,500,000
Copies made for Administration 2,300,000
Required
Calculate the Copy Department costs allocated to Sales and Administration.
Total fixed costs to be allocated
Sales Administration
Fixed costs allocated
Variable costs allocated
Total costs allocated
The costs are assigned to two pools, one for fixed and one for variable costs. The costs are then
assigned to the Sales Department and the Administrative Department. Fixed costs are assigned on a
lump-sum basis, as follows:
Exercise 6-6 Cost Allocation Process
Apex Company‘s Copy Department, which does all of the photocopying for the Sales Department and
the Administration Department, budgets the following costs for the year, based on the expected
activity indicated:
Problem data follow:
Expected copies for the year 5,000,000
Budgeted annual costs:
Salaries (fixed) 100,000$
Employee benefits (fixed) 12,500
Depreciation of copy machines (fixed) 10,000
Utilities (fixed) 5,000
Paper (variable) 50,000
Toner (variable) 50,000
Budgeted paper cost per copy 0.01$
Budgeted toner cost per copy 0.01$
Fixed costs to Sales 40%
Fixed costs to Administration 60%
Variable costs per copy 0.02$
Total copies made 4,800,000
Copies made for Sales 2,500,000
Copies made for Administration 2,300,000
Required
Calculate the Copy Department costs allocated to Sales and Administration.
Solution: Exercise 6-6 Cost Allocation Process
Budgeted
Costs
Number of
Employees
S1 $4,500,000 90
S2 3,000,000 60
S3 2,700,000 40
P1 200
P2 300
Required
a. Allocate service department costs to production departments.
Portion of employees in P1
Portion of employees in P2
P1 P2
b. Calculate the total service department cost allocated to each production department.
Cost allocated to P1
Cost allocated to P2
What-if?
Consider the following after you have completed the requirements of E6-8.
P1 P2
The manager of department P2 thinks he is being charged more than his ‘fair share’ of service
department costs from department S2. He argues that department S2 costs have been less than
budget by $80,000 for each of the past few months. He requests that the allocation be based on
actual instead of budgeted costs.
1. Determine the costs to be allocated to department P2 from department S2 if actual costs are
allocated rather than budgeted costs.
Allocated
Costs
Cost Allocated to
Marvin Company has three service departments (S1, S2, and S3) and two production departments
(P1 and P2). The following data relate to Marvin’s allocation of service department costs:
Exercise 6-8 Cost Allocation Process
S3
Service department costs are allocated by the direct method. The number of employees is used as
the allocation base for all service department costs.
Service
Department
Service
Department
Costs
Cost Allocated to
S1
S2
Allocated of budgeted costs
Allocation of actual costs
2. Which allocation basis appears to be more ‘fair’ to the departments receiving the allocations?
Problem data follow:
Budgeted
Costs
Number of
Employees
S1 $4,500,000 90
S2 3,000,000 60
S3 2,700,000 40
P1 200
P2 300
Required
a. Allocate service department costs to production departments.
P1 P2
b. Calculate the total service department cost allocated to each production department.
What-if?
P1 P2
budgeted costs so that managers can plan on a fixed amount of cost being allocated.
Allocated
1. Determine the costs to be allocated to department P2 from department S2 if actual costs are
allocated rather than budgeted costs.
Cost Allocated to
Solution: Exercise 6-8 Cost Allocation Process
Cost Allocated to
Service
Department
Costs
Service Department
Managers receive a smaller allocation of costs under actual cost allocation during periods
when actual costs are less than budgeted costs. The amount allocated to department P2
dropped from $1,800,000 to $1,752,000. However, in periods in which the service
Financial
Planning
Business
Consulting
Total
Expected personnel costs
1,500,000$
Salaries 15,000,000$ 5,000,000$
Headcount 200 50
Required
a. Prepare a schedule showing the allocations to the two divisions using each allocation base.
Allocation
Base
Amount To Be
Allocated
Financial
Planning
Proportion
Financial Planning
Allocation
Business
Consulting
Proportion
Business
Consulting
Allocation
Salaries
Headcount
b. Referring to your answer to a, explain why allocations are sometimes considered arbitrary.
Problem 6-9 Choice of Allocation Based, Problems with Cost Allocation
Tilden Financial Services has two divisions, Financial Planning and Business Consulting. The firm’s
accountants are in the process of selecting an allocation base to allocate centrally provided
personnel costs to the divisions. Two allocation bases have been proposed: salary and headcount
(number of employees). Expected costs and data relating to the allocation follow:
Problem data follow:
Financial
Planning
Business
Consulting
Total
Expected personnel costs
1,500,000$
Salaries 15,000,000$ 5,000,000$
Headcount 200 50
Required
a. Prepare a schedule showing the allocations to the two divisions using each allocation base.
Allocation
Base
Amount To Be
Allocated
Financial
Planning
Proportion
Financial Planning
Allocation
Business
Consulting
Proportion
Business
Consulting
Allocation
Solution: Problem 6-9 Choice of Allocation Based, Problems with Cost Allocation