Exam 12: Cost Allocation

Products arising from a joint process that have relatively insignificant total sales value

The traditional approach to cost allocation assumes that all costs are caused by a single cost driver.

Collie Company manufactures three products from a joint process. Joint costs for the year amounted to $250,000. The following data are also available: Sales V alue at Product Units Produced Split- off X 5,000 \ 70,000 Y 3,000 \ 30,000 Z 2,000 \ 100,000 Assuming the relative- sales- value method of allocating joint costs, the amount of joint costs allocated to product Z would be:

Sunshine Company has two service departments, Maintenance and Cafeteria, as well as two production departments, Mixing and Bottling. Maintenance costs are allocated based on square footage, while cafeteria costs are allocated based on number of employees. The following information is also available: Maintenance Cafeteria Mixing Bottling Direct dept.costs \ 210,000 \ 180,000 \ 76,000 \ 85,000 Square footage 1,000 2,000 4,000 3,000 Number of employees 30 20 50 40 Direct labor hours 8,000 6,000 Required: a. Assuming the direct method is used to allocate costs, determine the amount of each service department's costs allocated to each production department. b. Determine the cost per direct labor hour for the mixing and bottling departments.

Sizzling Salsa Company manufactures three products from a joint process. Joint costs for the year amounted to $200,000. The following data are also available: Product Units Produced S ales Price per Unit A 5,000 \ 6 B 4,000 \ 9 C 1,000 \ 10 Required: Using the relative- sales- value method of allocating joint costs, determine the amount of joint cost allocated to each product.

Joint costs are allocated to main products but not to by- products.

relate to more than one product and cannot be separately identified with an individual product.

Robin Company processes copper ore into two products, C and U. The ore costs $5 per pound and conversion costs are $15 per pound. Robin Company plans to produce 40,000 pounds of C and 20,000 pounds of U from 60,000 pounds of ore. C sells for $30 per pound and U sells for $40 per pound. Suppose that C cannot be sold at the split- off point. Instead it must be processed further at a cost of $100,000, after which it can be sold for $45 per pound. The amount of joint cost allocated to product C would be:

The direct method is generally better because it recognizes the effects of the most significant support provided by service departments to other service departments.

Mel Company has two production departments, Mixing and Finishing, served by one maintenance department. Budgeted fixed costs for the maintenance department were $30,000, and the variable cost per labor hour was $4.00. Other relevant data are as follows: Mixing Finishing Long-run capacity available 18,000 12,000 12,000 10,500 15,000 9,000 *in labor hours Actual maintenance department costs were $36,000 fixed and $100,000 variable. The amount of fixed maintenance costs allocated to the Mixing Department should be:

Parma College recently leased a photocopy machine for $1,500 per month plus $0.04 per copy. Additional variable operating costs were $0.02 per copy. Parma College estimated it would produce a total of 30,000 copies per month. The Physics Department estimated it would produce 6,000 copies, but actually produced only 4,000 copies. If Parma College uses a predetermined rate per copy, then would be allocated to the Physics Department.

Kurt Company manufactures two models of pens-a standard and a deluxe model. Three activities have been identified as cost drivers and the related overhead costs ($60,000) pooled together to arrive at the following information: Number of Number of Number of Product Setups Components DLH Standard 20 15 375 Deluxe 30 45 225 Costs per pool \ 25,000 \ 36,000 \ 9,000 If activity- based costing is used, the cost assigned to the deluxe model using the number of components would be:

should be used to allocate variable costs.

Cerveza Company has two service departments, Maintenance and Personnel, as well as two production departments, Mixing and Finishing. Maintenance costs are allocated based on square footage while personnel costs are allocated based on number of employees. The following information has been gathered for the current year: Maintenance Personnel Mixing Finishing Direct dept.costs \ 50,400 \ 33,600 \ 42,000 \ 70,000 Square footage 1,600 800 3,200 2,400 Number of employees 16 24 48 64 If the step- down method of allocating costs is used and the Personnel Department is allocated first, then the amount of overhead that would be allocated from Personnel to Maintenance is:

Joint costs include all inputs of material, labor, and overhead costs that are incurred after the split- off point.

In general, allocating fixed cost is less challenging than allocating variable cost.

Truman Company has two departments, Hot and Cold. Relevant information is presented below: Hot Cold Square footage 1,500 4,500 Number of employees 280 120 If total payroll processing costs are $24,000 and they are allocated on the basis of number of employees, then the amount allocated to the Cold Department should be:

Allocating fixed costs on the basis of long- range plans may inadvertently encourage managers to:

Robert Company has two service departments, Maintenance and Personnel, as well as two production departments, Mixing and Finishing. Maintenance costs are allocated based on square footage while personnel costs are allocated based on number of employees. The following information has been gathered for the current year: Maintenance Personnel Mixing Finishing Direct dept.costs \1 26,000 \1 05,000 \1 75,000 \8 4,000 Square footage 800 400 1,600 1,200 Number of employees 8 12 24 32 If the step- down method is used to allocate costs and the Maintenance Department is allocated first, the amount of overhead that would be allocated from Maintenance to Mixing is:

Doberman Company manufactures three products from a joint process. Joint costs for the year amounted to $250,000. The following data are also available: Sales V alue at Product Units Produced Split- off \ 70,000 3,000 \ 30,000 2,000 \ 100,000 Assuming the relative- sales- value method of allocating joint costs, the amount of joint costs allocated to product Y would be: