Exam 8: Cost Allocation: Practices

Beck Manufacturing is a contract manufacturer that assembles products for other companies. Beck has two service departments, Maintenance and Administration, and two operating divisions, Small Components and Large Components. The following data summarize the utilization of each service department: Square feet of floor space required by each user is the allocation base for allocating the Maintenance department cost of $950,000. Number of employees is used to allocate the Administration department cost of $567,000. Beck uses the step-down method of allocating service department costs to the two operating divisions. The $950,000 and $567,000 amounts represent the operating costs of the Maintenance and Administration departments, respectively, and they do not include any cost allocations from the other service departments. Required: a. Allocate the two service department costs to the two operating divisions using the step-down method where Maintenance is the first service department allocated and Administration is the second service department allocated. b. Allocate the two service department costs to the two operating divisions using the step-down method where Administration is the first service department allocated and Maintenance is the second service department allocated. c. Calculate the allocated cost per square foot and the allocated cost per employee resulting from using the step-down method where Maintenance is the first service department allocated and Administration is the second service department allocated (as in part [a]). d. Calculate the allocated cost per square foot and the allocated cost per employee resulting from using the step-down method where Administration is the first service department allocated and Maintenance is the second service department allocated (as in part [b]). e. Describe why the costs per square foot and the costs per employee vary in parts (c) and (d) above.

Williams manufactures a variety of iron products, made to customer specifications, in small batches. Willie Williams, owner, is concerned that he does not have an accurate understanding of the costs of production. You, a newly-minted MBA, have researched his business and identified various costs and cost drivers. Janitorial Welding DR Data Assembly Total Own costs \ 12,000 \ 90,000 \ 37,200\ 32,400 \ 54,000 225,600 Square feet 500 3.000 1.500 2,000 4,500 11 \# employees 7 25 8 10 75 \# transactions (thou) 30 100 180 600 140 1,050 Power usage 22 730 11 17 220 1,000 The service departments (Janitorial, HR, and Data Services) are allocated to the two production departments (Welding and Assembly). Janitorial costs are allocated using square feet, HR using number of employees, and Data Services using number of transactions. You recall that there are several approaches to the allocation of service department costs, direct, step-down and reciprocal methods. If the reciprocal method is applied, which is true?

Critically evaluate the statement: The step-down method is better than the direct allocation method because at least the step-down method captures on average half of the service flows between service departments. By comparison, the direct allocation method ignores all the service flows.

Donovan Steel has two profit centers: Ingots and Stainless Steel. These profit centers rely on services supplied by two service departments: electricity and water. The profit centers' consumption of the service departments' outputs (in millions) is given in the following table: Service Departments Profit Centers Service Depts Electricity Water Ingots Stainless Steel Total Electricity 2,500 2,500 3,000 2,000 10,000 Water 1,000 gal. 800 gal. 1,000 gal. 2,000 gal. 4,800 gal. The total operating costs of the two service departments are: Electricity \ 80 million Water 60 million Total cost \ 140 million Required: a. Service department costs are allocated to profit centers using the step-down method. Water is the first service department allocated. Compute the cost of electricity per kilowatt-hour using the step-down allocation method. b. Critically evaluate this allocation method.

Barry's Fashions operates a Downtown Store and a Mall Store. Both stores use three centralized, corporate service departments (human resources, maintenance, and information management). The following table summarizes the allocation bases used to allocate each service department, the operating expenses (in millions) incurred by each service department, and the amount of each allocation base used by the three service departments and the two stores. Allocation Base Operating expenses Human Resources Maint Info.Mgmt. Downtown Store Mall Store Total HR Employees \ 0.4 20 110 30 850 1.200 2.210 Maint Square footage thousands) 0.9 12 18 20 80 130 260 Info Mgmnt Lines Printed (Millions) 1.5 6 2 5 120 90 223 Required: (Round all fractions to three significant digits.) a. Using the direct allocation method for allocating service department costs, calculate the amount of information management expense allocated to the Mall Store. b. Using the direct allocation method for allocating service department costs, calculate the allocated cost per line printed for information management services. c. Using the step-down allocation method for allocating service department costs, calculate the amount of information management expense allocated to the Mall Store. Note that the order of the service departments is as indicated in the table. d. Using the step-down allocation method for allocating service department costs, calculate the allocated cost per line printed for information management services. Note that the order of the service departments is as indicated in the table. e. Compare and contrast your answers in parts (b) and (d). First, describe why you get different answers. Second, which number would you recommend management use?

The Doe Company sells three products: sliced pineapples, crushed pineapples, and pineapple juice. The pineapple juice is a by-product of sliced pineapple, while crushed pineapples and sliced pineapples are produced simultaneously from the same pineapple. Some pineapple slices break, and these are used to make crushed pineapple. The production process is as follows: • A total of 100,000 pounds of pineapples is processed at a cost of $120,000 in Department 1. Twenty percent of the pineapples' weight is scrap and is discarded during processing. Twenty percent of the processed pineapple is crushed and transferred to Department 2. The remaining is transferred to Department 3. • In Department 2, a further cost outlay of $15,000 is required to pack the crushed pineapple. Here a further 10 percent is lost in processing. The packed product is sold at $3 a pound. • In Department 3, the material is processed at a total additional cost of $40,000. Thirty percent of the processed pineapple turns into juice and is sold at $0.50 a pound after $3,500 is incurred as selling costs. The remaining 70 percent is transferred to Department 4. • Department 4 packs the sliced pineapple into tins. Costs incurred here total $25,000. The cans are then ready for sale at $4.00 a pound. Required: Prepare a schedule showing the allocation of the processing cost of $120,000 between crushed and sliced pineapple using the net realizable value method. The net realizable value of the juice is to be added to the sales value of the sliced pineapples.