CHAPTER 7

ALLOCATING COSTS OF SUPPORT DEPARTMENTS

AND JOINT PRODUCTS
QUESTIONS FOR WRITING AND DISCUSSION
1. Stage one assigns service costs to
producing departments. Costs are assigned
using factors that reflect the consumption of
the services by each producing department.
Stage two allocates the costs assigned to
the producing departments (including
service costs and direct costs) to the
products passing through the producing
departments.

fixed costs were originally set by the user

departments capacities to use the service.
Thus, each department should receive its
share of fixed costs as originally conceived
(to do otherwise allows one departments
performance to affect the amount of cost
assigned to another department).

2. Without any allocation of service costs,

users may view services as a free good and
consume more of the service than is
optimal. Allocating service costs would
encourage managers to use the service until
such time as the marginal cost of the
service is equal to the marginal benefit.

7.

Using variable bases to allocate fixed costs

allows one departments performance to
affect the costs allocated to other
departments. Variable bases also fail to
reflect the original consumption levels that
essentially caused the level of fixed costs.

8.

The dual-rate method separates the fixed

and variable costs of providing services and
charges them separately. In effect, a single
rate treats all service costs as variable. This
can give faulty signals regarding the
marginal cost of the service. If all costs of
the service department were variable, there
would be no need for a dual rate. In
addition, if original capacity equaled actual
usage, the dual-rate method and the singlerate method would give the same allocation.

9.

The direct method allocates the direct costs

of each service department directly to the
producing departments. No consideration is
given to the fact that other service centers
may use services. The sequential method
allocates service costs sequentially. First,
the costs of the center providing the
greatest service are allocated to all user
departments,
including
other service
departments. Next, the costs of the second
greatest provider of services are allocated
to all user departments, excluding any
department(s) that have already allocated
costs. This continues until all service center
costs have been allocated. The principal
difference in the two methods is the fact that
the sequential method considers some
interactions among service centers and the
direct method ignores interactions.

3. Since the user departments are charged for

the services provided, they will monitor the
performance of the service department. If
the service can be obtained more cheaply
externally, then the user departments will be
likely to point this out to management.
Knowing this, a manager of a service
department will exert effort to maintain a
competitive level of service.
4. The identification and use of causal factors
ensures that service costs are accurately
assigned to users. This increases the
legitimacy of the control function and
enhances product costing accuracy.
5. Allocating actual costs passes on the
efficiencies or inefficiencies of the service
department, something that the manager of
the producing department cannot control.
Allocating budgeted costs avoids this
problem.
6. Variable costs should be allocated
according to usage, whereas fixed costs
should be allocated according to capacity.
Variable costs are based on usage because,
as a departments usage of a service
increases, the variable costs of the service
department
increase.
A
service
departments capacity and the associated

133

10. The reciprocal method is more accurate

because it fully considers interactions
among service centers.

11. A joint cost is a cost incurred in the

simultaneous production of two or more
products. At least one of these joint products
must be a main product. It is possible for the
joint production process to produce a
product of relatively little sales value
relative to the main product(s); this product
is known as a by-product.
12.

134

Joint costs occur only in cases of joint

production. A joint cost is a common cost,
but a common cost is not necessarily a joint
cost. Many overhead costs are common to
the products manufactured in a factory but
do not signify a joint production process.

EXERCISES
71
a.
b.
c.
d.
e.

support
producing
support
producing
support

f.
g.
h.
i.
j.

support
support
producing
producing
producing

k.
l.
m.
n.
o.

support
support
support
support
support

support
support
producing
producing

e.
f.
g.
h.

producing
support
support
producing

i.
j.

producing
support

72
a.
b.
c.
d.

73
a.
b.
c.
d.
e.
f.
g.
h.
i.

Number of employees
Square footage
Pounds of laundry
Orders processed
Maintenance hours worked
Number of employees
Number of transactions processed
Machine hours
Square footage

135

74
1.

Single charging rate = ($3,000/1,000) + $1.50

= $4.50 per gift
Number
of Gifts
= Total
170
310
240
10
50
200
450
1,430

Store
Rate
The Paper Chase............................
Reservation Art...............................
Kid-Sports.......................................
Sugar Shack....................................
Designer Shoes..............................
Boutique de Donatessa.................
Alans Drug and Sundries.............
Total..........................................
2.

Number
Store
The Paper Chase............................
Reservation Art...............................
Kid-Sports.......................................
Sugar Shack....................................
Designer Shoes..............................
Boutique de Donatessa.................
Alans Drug and Sundries.............
Total..........................................

of Gifts
175
400
100
75
20
130
100
1,000

Charging
$4.50
4.50
4.50
4.50
4.50
4.50
4.50

Allocated
Percent
17.50
40.00
10.00
7.50
2.00
13.00
10.00
100.00

$ 765
1,395
1,080
45
225
900
2,025
$6,435

Fixed Amount*
$ 525
1,200
300
225
60
390
300
$3,000

*Allocated fixed amount = Percent $3,000.

Variable rate = $1.50 per gift
Number
Store
of Gifts
The Paper Chase...................
170
Reservation Art.....................
310
Kid-Sports.............................
240
Sugar Shack..........................
10
Designer Shoes.....................
50
Boutique de Donatessa........
200
Alans Drug and Sundries....
450
Total................................ 1,430

74

Concluded

136

Variable
Amount
$ 255
465
360
15
75
300
675
$2,145

Fixed
Total
Amount = Charge
$ 525
$ 780
1,200
1,665
300
660
225
240
60
135
390
690
300
975
$3,000
$5,145

3.

The shops that actually use the gift-wrapping service less than anticipated
would like the single charging rate. The single charging rate assigns less of
the fixed cost to the shops using less of the service. The Sugar Shack
originally anticipated having 75 gifts wrapped per month but actually had
only 10 gifts wrapped. Under the single charging rate, The Sugar Shack pays
$45; under the dual charging rate, it pays $240.
The dual charging rate method is preferred by shops that use the service as
much as or more than anticipated. Alans Drug and Sundries had a much
greater use for the service and would be charged $975 under the dual rate
but $2,025 under the single rate.

4.

Irrespective of the charging rate method, James may be overcharging by

overestimating his fixed costs. The space used by the gift-wrapping service
is one of three vacant spaces. The opportunity cost of using it to wrap gifts
is zero. Until the ninth space is rented and there is an occupant for the tenth,
perhaps the fixed cost should include only the wages paid to the gift
wrappers.

75
1.

Allocation ratios:
Traditional
Machine hours
Square feet
No. of employees
Cost assignment:
Power:
(0.2500 $90,000)
(0.7500 $90,000)
General Factory:
(0.6000 $300,000)
(0.4000 $300,000)
Personnel:
(0.5625 $120,000)
(0.4375 $120,000)
Direct costs
Total

2.

0.2500
0.6000
0.5625

Gel
0.7500
0.4000
0.4375

$ 22,500
$ 67,500
180,000
120,000
67,500
137,500
$407,500

Departmental overhead rates:

Traditional: $407,500/8,000 = $50.94* per MHr
Gel:
$462,500/24,000 = $19.27* per MHr
*Rounded

76
137

52,500
222,500
$462,500

1.

Assume the support department costs are allocated in order of highest to

lowest cost: General Factory, Personnel, and Maintenance.
General
Power
Factory Personnel Traditional
Gel
Square feet
0.15

0.10
0.45
0.30
No. employees
0.20

0.45
0.35
Machine hours

0.25
0.75

Power
Direct costs
General Factory:
(0.15)($300,000)
(0.10)($300,000)
(0.45)($300,000)
(0.30)($300,000)
Personnel:
(0.20)($150,000)
(0.45)($150,000)
(0.35)($150,000)
Power:
(0.25)($165,000)
(0.75)($165,000)
Total
2.

General
Factory Personnel Traditional
$ 90,000 $ 300,000 $120,000
45,000

(45,000)
(30,000)
(135,000)
(90,000)

Gel
$222,500

30,000
135,000
90,000

30,000

(30,000)
(67,500)
(52,500)

(41,250)
(123,750)
$
0 $

$137,500

67,500
52,500
41,250

$381,250

123,750
$488,750

Traditional: $381,250/8,000 = $47.66* per MHr

Gel:
$488,750/24,000 = $20.36* per MHr
*Rounded

77
1.
Square footage...............
Number of employees. . .

Maintenance

0.10

P = 60,000 + 0.2M
P = 60,000 + 0.2(200,000 + 0.1P)
P = 60,000 + 40,000 + 0.02P
0.98P = 100,000
P = 102,041

138

Personnel
0.20

Assembly
0.40
0.24

Painting
0.40
0.66

M = 200,000 + 0.1P
M = 200,000 + 0.1(102,041)
M = 200,000 + 10,204
M = 210,204

77

Concluded
after
Maintenance...........
Personnel................
Assembly................
Painting...................

Direct Cost
$200,000
60,000
43,000
74,000
$ 377,000
377,001*

Allocate

Allocate

Maintenancea
$(210,204)
42,041
84,082
84,082

Personnelb
$ 10,204
(102,041)
24,490
67,347

*Difference due to rounding error.

a

2.

(0.20 $210,204) = $42,041

(0.40 $210,204) = $84,082
(0.40 $210,204) = $84,082

(0.10 $102,041) = $10,204

(0.24 $102,041) = $24,490
(0.66 $102,041) = $67,347

Departmental rates:
Assembly: $151,572/25,000 = $6.06 per direct labor hour
Painting:
$225,429/40,000 = $5.64 per direct labor hour

78
1.
Square footage.......................
Number of employees............
Maintenance:
(0.5000 $200,000).........
(0.5000 $200,000).........
Personnel:
(0.2667 $60,000)...........
(0.7333 $60,000)...........
Direct costs.............................
2.

Assembly
0.5000
0.2667

Painting
0.5000
0.7333

$100,000
$100,000
16,002
43,000
$159,002

43,998
74,000
$217,998

Assembly: $159,002/25,000 = $6.36 per direct labor hour

Painting: $217,998/40,000 = $5.45 per direct labor hour

139

Total
Allocation
$
0
0
151,572
225,429
$

79
1.

Allocation:
Personnel
Square footage..................................
0.2000
Number of employees......................
Maintenance:
(0.2000 $200,000)...........................
(0.4000 $200,000)...........................
(0.4000 $200,000)...........................
Personnel:
[0.2667 ($60,000 + $40,000)]. .
(0.7333 $100,000)....................
Direct costs........................................
Total....................................................

2.

Assembly
0.4000
0.2667

Painting
0.4000
0.7333

$40,000
$ 80,000
$ 80,000
26,670
$40,000

43,000
$149,670

73,330
74,000
$ 227,330

Assembly: $149,670/25,000 = $5.99 per direct labor hour

Painting: $227,330/40,000 = $5.68 per direct labor hour

710
1.
Units
Andol.......... 1,000
Incol............ 1,500
Ordol.......... 2,500
Exsol.......... 3,000
Total...... 8,000
2.
Andol........
Incol..........
Ordol.........
Exsol.........
Total. .

Units
1,000
1,500
2,500
3,000

Percent Joint Cost

0.1250
$100,000
0.1875
100,000
0.3125
100,000
0.3750
100,000
Weight
Factor
3.0
2.0
0.4
1.0

Weighted
Units
3,000
3,000
1,000
3,000
10,000

140

Allocated Joint Cost

$ 12,500
18,750
31,250
37,500
$ 100,000

Joint
Percent
Cost
0.30
$100,000
0.30
100,000
0.10
100,000
0.30
100,000

Allocated
Joint Cost
$ 30,000
30,000
10,000
30,000
$ 100,000

711
Andol........
Incol..........
Ordol.........
Exsol.........
Total....

Units
1,000
1,500
2,500
3,000
5,000

Price at
Split-Off
$20.00
75.00
64.00
22.50

Market Value
at Split-Off
$ 20,000
112,500
160,000
67,500
$360,000

Joint
Percent
Cost
0.0556 $100,000
0.3125
100,000
0.4444
100,000
0.1875
100,000

Allocated
Cost
$ 5,560
31,250
44,440
18,750
$100,000

712
1.
Units
Ups............ 39,000
Downs....... 21,000
Total....

Price
$2.00
2.18

Eventual
Separable
Market Value
Costs
$78,000
$18,000
45,780
5,780

Joint cost...................................................................
Percent of hypothetical market value..................
Allocated joint cost..................................................

Hypothetical
Market Value
$ 60,000
40,000
$ 100,000

Ups
$42,000
0.60
$ 25,200

2. Value of ups at split-off (39,000 $1.80).........

$70,200

Value of ups when processed further.............

Less: Further processing cost........................
Incremental value of further processing.........

$78,000
18,000
$60,000

Percent
0.60
0.40

Downs
$42,000
0.40
$ 16,800

Ups should not be processed further as there will $10,200 more profit if sold
at split-off.

141

PROBLEMS
713
1.
Ratio for fixed costs*..........
Fixed costs...........................
Variable costs**...................

Tulsa
0.65

Ames
0.35

$ 39,000
65,000
$104,000

$21,000
35,000
$56,000

*Tulsa = 1,625/2,500 = 0.65; Ames = 875/2,500 = 0.35.

**$40 1,625 and $40 875.
2.

Costing out services serves the same purposes as costing out tangible
products, e.g., pricing, profitability analysis, and performance evaluation.
Once the costs are allocated to each revenue-producing center, then the
costs must be assigned to individual products through the use of an
overhead rate or rates.

3.

If the purpose is to cost out individual services, then the allocation is

identical to that given in Requirement 1.
If the purpose is for performance evaluation, then variable costs equal the
predetermined rate multiplied by the actual usage. The fixed costs are
allocated the same way as before.
Tulsa
Variable costs:
$40 1,200....................
$40 1,100....................
Fixed costs..........................

4.

Ames

$48,000
39,000
$87,000

$44,000
21,000
$65,000

The allocated costs of $152,000 were $1,500 higher than the actual costs of
$150,500, because the producing departments are charged an allocation
based on budgeted costs rather than actual costs. Budgeted costs are
allocated so that the efficiencies or inefficiencies of the service center are
not assigned to the user departments.

142

714
1.

Allocation ratios for fixed costs (uses normal levels):

SLC
Hours of flight time............. 0.2500
Number of passengers....... 0.3333

Reno
0.5000
0.5000

Portland
0.2500
0.1667

Variable rates:
Maintenance: $30,000/8,000 = $3.75 per flight hour
Baggage:
$64,000/30,000 = $2.1333 per passenger
SLC
Maintenancefixed:
(0.2500 $240,000)...............
(0.5000 $240,000)...............
(0.2500 $240,000)...............
Maintenancevariable:
($3.75 2,000).......................
($3.75 4,000).......................
($3.75 2,000).......................
Baggagefixed:
(0.3333 $150,000)...............
(0.5000 $150,000)...............
(0.1667 $150,000)...............
Baggagevariable:
($2.1333 10,000).................
($2.1333 15,000).................
($2.1333 5,000)...................

Reno

Portland

$ 60,000
$120,000
$ 60,000
7,500
15,000
7,500
49,995
75,000
25,005
21,333
32,000
$138,828

143

$242,000

10,667
$ 103,172

714
2.

Concluded

The allocations are the same as in Requirement 1, except variable costs are
assigned using actual instead of budgeted activity.
Maintenancefixed.....................
Maintenancevariable:
($3.75 1,800).......................
($3.75 4,200).......................
($3.75 2,500).......................
Baggagefixed...........................
Baggagevariable:
($2.1333 8,000)...................
($2.1333 16,000).................
($2.1333 6,000)...................

SLC
$ 60,000

Reno
$120,000

Portland
$ 60,000

6,750
15,750
49,995

75,000

9,375
25,005

17,066
34,133
$133,811

$244,883

12,800
$107,180

Yes, maintenance actually cost $315,000, but only $271,875 was allocated.
Baggage actually cost $189,000, but $213,999 was allocated (no costs
remain). Actual costs are not allocated so that inefficiencies or efficiencies of
support centers will not be passed on.

715
1.

Direct method:
Proportion of:
Machine hours......................................................
Number of employees.........................................
Power:
(0.375 $100,000)................................................
(0.625 $100,000)................................................
Human resources:
(0.429 $205,000)................................................
(0.571 $205,000)................................................
Direct costs................................................................
229,555

144

Pottery
0.375
0.429

Retail
0.625
0.571

$ 37,500
$ 62,500
87,945
80,000
$ 205,445

117,055
50,000
$

715
2.

Concluded

Sequential method:
Machine hours.................
Number of employees.....
Direct costs......................
Human resources:
(0.125 $205,000)......
(0.375 $205,000)......
(0.500 $205,000)......
Power:
(0.375 $125,625)......
(0.625 $125,625)......

Power

0.125

Human
Resources

Pottery
0.375
0.375

Retail
0.625
0.500

$100,000

$ 205,000

$ 80,000

$ 50,000

25,625

(47,109)
(78,516)
$
0

(25,625)
(76,875)
(102,500)

76,875
102,500
47,109
78,516

$ 203,984

231,016
3.

Reciprocal method:
Machine hours...................
Number of employees......

HR
HR
HR
0.975HR
HR

Human
Resources
0.200

Power

0.125

= $205,000 + 0.200P
= $205,000 + 0.200($100,000 + 0.125HR)
= $205,000 + $20,000 + 0.025HR
= $225,000
= $230,769

Pottery
0.300
0.375

Retail
0.500
0.500

P = $100,000 + 0.125HR
P = $100,000 + 0.125($230,769)
P = $100,000 + 28,846
P = $128,846
Pottery

Human resources:
(0.375 $230,769)........................
(0.500 $230,769)........................
115,385
Power:
(0.300 $128,846)........................
(0.500 $128,846)........................
Direct costs........................................

Retail

$ 86,538
$
38,654
80,000
$ 205,192

229,808

145

64,423
50,000
$

716
1.
Department costs............
Allocation of:
Repair (1/9, 8/9)........
Power (7/8, 1/8).........
Total overhead cost........
Direct labor hours...........
Overhead rate per DLH...
2.

Repair
$ 48,000

Power
$ 250,000

Molding
$200,000

Assembly
$320,000

(48,000)
0
$
0

0
(250,000)
$
0

5,333
218,750
$424,083
40,000
$ 10.60

42,667
31,250
$393,917
160,000
$ 2.462

Algebraic equations for relationship between service departments

(R = Repair department; P = Power department):
R = $48,000 + 0.2P
P = $250,000 + 0.1R
R=
R=
0.98R =
R=

$48,000 + 0.2($250,000 + 0.1R)

$48,000 + $50,000 + 0.02R
$98,000
$100,000

P = $250,000 + 0.1($100,000)
P = $260,000
Repair
Department costs............. $ 48,000
Allocation of:
Repair (0.1, 0.1, 0.8).... (100,000)
Power (0.2, 0.7, 0.1). .
52,000
Total overhead cost......... $
0
Direct labor hours.............
Overhead rate per DLH....
3.

Power
$ 250,000

Molding
$200,000

Assembly
$320,000

10,000
(260,000)
$
0

10,000
182,000
$392,000
40,000
$
9.80

80,000
26,000
$426,000
160,000
$ 2.6625

The direct allocation method ignores any service rendered by one support
department to another. Allocation of each support departments total cost is
made directly to the production departments. The reciprocal allocation
method recognizes all support department support to one another through
the use of simultaneous equations or linear algebra. This allocation
procedure is more accurate and should lead to better results, which would be
of greater value to management. However, the method is infrequently used in
actual practice because of the problems associated with developing a more
complex or difficult model to recognize the interrelationships between
support departments.

146

717
1.
Two Oil.............
Six Oil...............
Distillates.........
Total............

Units
150,000
120,000
60,000
330,000

Percent
0.4545
0.3636
0.1818

Joint Cost
$5,000,000
5,000,000
5,000,000

Allocated Joint Cost

$2,272,500
1,818,000
909,000
$4,999,500*

* Rounding error.
2.
Price at Market Value
Split-Off at Split-Off
$40
$ 6,000,000
60
7,200,000
30
1,800,000

Units
Two Oil.... 150,000
Six Oil...... 120,000
Distillates.... 60,000
Total....... 330,000
................
$10,000,000

Percent
0.4000
0.4800
0.1200

Joint
Allocated
Cost
Cost
$5,000,000 $ 2,000,000
5,000,000
2,400,000
5,000,000
600,000
$ 5,000,000

718
1.

Henderson
Boulder City
Kingman
Flagstaff
Glendale

($431,800/$2,540,000)($182,500)*
($508,000/$2,540,000)($182,500)
($381,000/$2,540,000)($182,500)
($635,000/$2,540,000)($182,500)
($584,200/$2,540,000)($182,500)

= $31,025
= 36,500
= 27,375
= 45,625
= 41,975

*($26)(3,750) + $85,000 = $182,500.

2.

Share of accounting department fixed costs based on 2006 sales:

Henderson
Boulder City
Kingman
Flagstaff
Glendale

($337,500/$2,250,000)($85,000)
($450,000/$2,250,000)($85,000)
($360,000/$2,250,000)($85,000)
($540,000/$2,250,000)($85,000)
($562,500/$2,250,000)($85,000)

= $12,750
= 17,000
= 13,600
= 20,400
= 21,250

Henderson
Boulder City
Kingman
Flagstaff
Glendale

Variable Cost
($26)(1,475) = $38,350
($26)(400) = 10,400
($26)(938) = 24,388
($26)(562) = 14,612
($26)(375) =
9,750

Fixed Cost
$12,750
17,000
13,600
20,400
21,250

147

+
+
+
+
+
+

=
=
=
=
=
=

Total
$51,100
27,400
37,988
35,012
31,000

718
3.

Concluded

The method in Requirement 2 is better because it ties cost allocated to the

driver that causes the cost. Thus, managers would be more likely to use
accounting department time efficiently. The method in Requirement 1
assigns accounting costs on the basis of a variable, which may not be
causally related. Also, a motel with stable sales from year to year may still
experience wild fluctuations in allocated cost due to changing sales patterns
of other motels.

719
1.
a.

Relative sales-value-at-split-off method:

Studs............................
Decorative pieces .....
Posts............................
Total........................
1,000,000
b.

Sales
Price
per Unit
$ 8
60
20

Relative
Sales Value Percent of
at Split-Off
Sales
$ 600,000
46.15%
300,000
23.08
400,000
30.77
$ 1,300,000
100.00%

Allocated
Joint
Costs
$ 461,500
230,800
307,700
$

Physical units (volume) method at split-off:

Studs..........................
Decorative pieces.....
Posts..........................
Total......................
c.

Monthly
Unit
Output
75,000
5,000
20,000

Units
75,000
5,000
20,000
100,000

Percent Joint Cost

0.750
$1,000,000
0.050
1,000,000
0.200
1,000,000

Allocated Joint Cost

$ 750,000
50,000
200,000
$1,000,000

Estimated net realizable value method:

Studs..........................
Decorative pieces.....
Posts..........................
Total......................

Fully
Processed
Monthly
Sales
Net
Unit
Price
Realizable Percent of
Output
per Unit
Value
Value
75,000
$ 8
$ 600,000
44.44%
4,500*
100
350,000**
25.93
20,000
20
400,000
29.63
$ 1,350,000
100.00%

Estimated
Allocated
Joint
Costs
$ 444,400
259,300
296,300
$ 1,000,000

*5,000 monthly units of output 10% normal spoilage = 4,500 good units.
**4,500 good units $100 = $450,000 Further processing cost of $100,000 =
$350,000.

719

Concluded
148

2.

Monthly unit output.........................................................

Less: Normal further processing shrinkage................
Units available for sale...................................................

5,000
500
4,500

Final sales value (4,500 units @ $100 per unit)............

Less: Sales value at split-off..........................................
Differential revenue.........................................................
Less: Further processing costs.....................................
Additional contribution from further processing.........

$450,000
300,000
$150,000
100,000
$ 50,000

720
1.

Clearly, some expenses pertain to women living in the house, while others
pertain to all members. In-house members use the second floor, most of the
food, and most of the variable expenses. All members use the first floor
facilities, food for Monday night dinners, and cereal and milk for snacks. HCB
must determine a fair method of allocating the costs since the sorority is a
nonprofit entity and house bills in total must equal house costs. It is difficult
to allocate the costs precisely to the two types of members given the sketchy
nature of the data.

2.

Using a benefits-received approach, the following charging rates might be

applied.
In-house members:
Use of second floor ($240,000 $40,000)/2..................
Use of first floor [($240,000 $40,000)/2]0.6................
Food* ($1.01)(60)(20)(32)................................................
Variable expenses...........................................................
Total.............................................................................

$100,000
60,000
38,784
34,800
$233,584

Charging rate per in-house member per year: $233,584/60 = $3,893

*Cost per meal: $40,000/{[40 + (60 20)] 32} = $1.01
Out-of-house members:
Use of first floor [($240,000 $40,000)/2]0.4................
Food ($1.01)(32)(40)......................................................
Total.............................................................................

$ 40,000
1,293
$ 41,293

Charging rate per out-of-house member per year: $41,293/40 = $1,032

COLLABORATIVE LEARNING EXERCISE

721
149

1.

a.

Direct method
Machine hours.........................
Kilowatt-hours.........................
Maintenance:
(0.6667 $340,000)............
(0.3333 $340,000)............
Power:
(0.5556 $200,000)............
(0.4444 $200,000)............
Direct costs.............................

Packaging
and Freezing
0.3333
0.4444

Cooking
0.6667
0.5556
$ 226,678

$113,322
111,120
88,880
55,000
$ 257,202

75,000
$ 412,798

Cooking: $412,798/40,000 = $10.32 per machine hour

Packaging and freezing: $257,202/30,000 = $8.57 per direct labor hour
Prime costs...............................................
Cooking ($10.32 2).................................
Packaging and freezing ($8.57 0.5).....
Total cost..............................................
Markup (20%).............................................
Bid price................................................
b.

$16.00
20.64
4.29
$40.93
8.19
$ 49.12

Sequential method:

Machine hours.................
Kilowatt hours.................
Direct costs......................
Maintenance:
(0.4000 $340,000).....
(0.4000 $340,000).....
(0.2000 $340,000).....
Power:
(0.5556 $336,000).....
(0.4444 $336,000).....

Maintenance

Power
0.4000

Cooking
0.4000
0.5556

Packaging
and
Freezing
0.2000
0.4444

$ 340,000

$ 200,000

$ 75,000

$ 55,000

(136,000)
(136,000)
(68,000)

150

136,000
136,000
68,000
(186,682)
$ (149,318)
$
0

186,682
$397,682

149,318
$272,318

721

Continued
Cooking: $397,682/40,000 = $9.94 per machine hour
Packaging and freezing: $272,318/30,000 = $9.08 per direct labor hour
Prime costs...............................................
Cooking ($9.94 2)...................................
Packaging and freezing ($9.08 0.5). . .
Total cost..............................................
Markup (20%)...........................................
Bid price................................................

c.

$16.00
19.88
4.54
$40.42
8.08
$ 48.50

Reciprocal method:

Machine hours.................
Kilowatt-hours.................
M
M
M
0.96M
M

Maintenance

0.1

Power
0.4

= $340,000 + 0.1P
= $340,000 + 0.1($200,000 + 0.4M)
= $340,000 + $20,000 + 0.04M
= $360,000
= $375,000
Total

Cooking
0.4
0.5

Packaging
and
Freezing
0.2
0.4

P = $200,000 + 0.4M
P = $200,000 + 0.4($375,000)
P = $200,000 + $150,000
P = $350,000

Cooking

Packaging
and Freezing

From:
Maintenance:
(0.4 $375,000)....................
(0.2 $375,000)....................
Power:
(0.5 $350,000)....................
(0.4 $350,000)....................
Direct costs...............................

$375,000
$150,000
$ 75,000
350,000
175,000
75,000
$ 400,000

Cooking: $400,000/40,000 = $10 per machine hour

Packaging and freezing: $270,000/30,000 = $9 per direct labor hour
Prime cost..................................................
Cooking ($10 2)......................................
Pack/freeze ($9 0.5).............................
Total cost..............................................
Markup (20%)...........................................
Bid price................................................

721

Concluded

151

$16.00
20.00
4.50
$40.50
8.10
$ 48.60

140,000
55,000
$ 270,000

2.

No, the direct method did not produce a winning bid. The direct method fails
to consider the interrelationships of the support centers and, as a
consequence, assigns too much of the support center costs to the cooking
department. Since the job spends more time in the cooking department than
in the packaging and freezing department, it receives too much overhead and
is overpriced. The reciprocal method is the most accurate as it takes into
account the use of support departments by other support departments.

CYBER RESEARCH CASE

722
Answers will vary.

152