Académique Documents
Professionnel Documents
Culture Documents
13.2
13.3
A direct cost is one that firms can identify specifically with a particular
product, department, or process. An indirect cost, in contrast, results
from the joint use of a facility or a service by several products,
departments, or processes.
13.4
13.5
13.6
13.7
Common Cost
Building Utilities
Payroll Accounting
Insurance
Allocation Base
Space Occupied
Number of Employees
Value of Equipment and
Inventories
Number of Service Calls
Number of Units Produced
Equipment Repair
Quality Control Inspection
13.8
13-1
Solutions
13.9
Direct and indirect are defined as such with respect to cost objects. In
this case, there are two cost objectsthe product and the department.
Consider the paint used to paint cars in the paint department of a car
assembly plant. The paint is direct to the cars and to the department.
The solvent used to clean the paint machines at the end of each work
shift is direct to the department but indirect to each car because it cannot
be traced to each car.
13.10
The different methods give the same results when service departments do
not provide services to other service departments.
13.11
13.12
This problem relates to the distinction between resources used
and resources supplied that we discussed in Chapter 3.
The
company should separate
use of service department resources from the capacity to supply the
resources. For example, suppose a repair department has 10 employees.
There
may be times when all 10 employees are providing repair services; at
other
times, some of the 10 employees are simply waiting to get repair calls.
Production department should be charged with the use of repair
personnel,
that part is clear. But what about the cost of repair personnel who are
waiting idly for production departments to call for repair help. This latter
case is an example of excess capacity (which the company might want
to be sure that repair people are available to help as soon as neededmuch like
a fire
station has firefighters waiting to be called for help). Excess capacity
either
should not be allocated to production departments or should be allocated
using
some base other than usage (e.g., evenly to all departments).
Solutions
13-2
13.13
13.14
13.15
13-3
Solutions
13.16
Costs
Benefits
Cost of decommissioning and disposing of physical assets (inventories, plant, property and equipment)
Solutions
13-4
13.18
Filming
Department
Editing
Printing
Department Department
Filming
Dept.
Editing
Dept.
$ 1,200
3,000
3,000
$ 7,200
-$ 4,000
6,400
$10,400
Printing
Dept.
160
400
760
$ 1,320
$ 1,360
7,400
10,160
$18,920
(Allocating overhead.)
Department
No. 1
No. 2
Maintenance
General
Plant
Charged Directly to
Department:
Indirect Labor................ $ 56,000 $ 28,000 $ 45,000 $ 40,000
Indirect Material............
18,000
14,000
1,800
16,000
Miscellaneous................
6,000
10,000
3,200
10,000
$ 80,000 $ 52,000 $ 50,000 $ 66,000
Allocations:
General Planta...............
33,000
19,800
13,200
(66,000)
Maintenanceb................
25,280
37,920 (63,200)
c
Total Overhead ................... $ 138,280 $ 109,720
0
0
aTotal costs for the General Plant ($66,000) are allocated 50% to
Department 1, 30% to Department 2, and 20% to Maintenance.
bTotal costs for Maintenance ($63,200) are allocated based on
maintenance hours.
c$138,280 + $109,720 = $80,000 + $52,000 + $50,000 + $66,000.
13-5
Solutions
HAMILTON, INC.
Job Order Production Record
Month
of
Job
Jobs in
Order Process
Direct
ProcessCompleted
No.
1/1
Dept. A
788
$2,400
$ 600
--789
1,700
1,200
$
6,050
790
--1,600
5,600
791
--2,000
7,200
792
--2,400
--Total $4,100
$7,800
$
18,850
Labor
Direct Material
Dept. B
$ 400
Dept. A
$ 500
Applied Overhead
Jobs in
Total
Costs
1/31
$ 4,800 $ 4,800
600
900
600
600
450
6,050
---
800
1,100
700
800
600
5,600
---
1,200
1,200
900
1,000
900
7,200
---
1,600
1,800
800
1,200
1,200
9,000
9,000
$4,600
$5,500
$3,300
$3,900
$3,450
Solutions
January
13-6
Dept. A
$3,900
4,600 a
$ (700)
Dept. B
$3,450
3,400 b
$ 50
Total
$7,350
8,000
$ (650)
$32,650 $13,800
Jobs
13-7
Solutions
13.21
Maintenance
Cutting Assembly
Service Department
Costs................................. $ 2,400
$4,800
NA
NA
a
Maintenance Allocation ......
960 (1/5) (4,800) $ 960 (1/5) $ 2,880 (3/5)
General Factory Administration Allocation............ (3,360)
1,344 (2/5) 2,016 (3/5)
Total Costs Allocated............
$ 2,304
$ 4,896
aAllocated first according to the problem.
13.22
Department B
Number of Parts
$4,000 40 parts
= $100 per part
$800 10 parts
= $80 per part
Machine Hours
hours
$60,000
Setup Hours
hours
$8,000
$15,600.
Total:
Solutions
$8,960.
13-8
1,500
100
13.23
Department B
Number of Parts
$8,000 40 parts
= $200 per part
$1,600 10 parts
= $160 per part
Machine Hours
hours
$60,000
$20
3,000
per
machine
hour
Setup Hours
hours
hour
$8,000
100
$10,100.
Total:
$9,440.
13-9
Solutions
Solutions
13-10
13.24
13.25
13-11
Solutions
13.26
Total Units of X
Total Units Produced
Joint Product Costs
= 14,000 Units
= 28,000 Units
=$63,000
Solutions
13-12
= $70,000
=$200,000
= $63,000
13-13
Solutions
13.27
Solutions
The focus should be on differential revenues and costs (and, therefore, differential profits) as they apply to
alternative uses of the counter space. If the differential profits for selling peanuts are higher than any other
alternative, then Joe is taking the correct course of action. Note that opportunity costs are important. Does putting
the peanut stand on the counter mean foregoing other uses of the space (e.g., candy machine)? If so, then those
opportunity costs should be considered versus the benefits of the peanut stand. Also, consider long-run costs.
13-14
13.28
(Allocating overhead.)
Indirect Labor..............................
Supplies.......................................
Taxes:
Machinery and Equipmenta.....
Buildingb..................................
Compensation Insurancec...........
Powerd.........................................
Heat and Lightb...........................
Depreciation:
Buildingb..................................
Machinery and Equipmenta.....
Total ..................................
Machining
$ 6,600
1,500
Assembly
$ 3,600
900
Total
$ 10,200
2,400
42
58
351
120
192
30
87
555
180
288
72
145
906
300
480
156
210
$ 9,229
234
150
$ 6,024
390
360
$ 15,253
13-15
Solutions
Machining
Assembly......
$ 8,600
13,600
$22,200
38.7 X $906 =
Solutions
13-16
$351
13.29
Accessories
Total
$ 78,240
3,800
1,600
3,726
1,000
$ 88,366
$ 69,360
3,200
4,800
8,586
800
$ 86,746
$ 147,600
7,000
6,400
12,312
1,800
$ 175,112
$ 24,000
840
2,333
7,600
6,433
$ 24,000
560
1,555
11,400
5,867
$ 48,000
1,400
3,888
19,000
12,300
1,088
403
1,080
240
$ 44,017
$ 132,383
992
597
720
360
$ 46,051
$ 132,797
2,080
1,000
1,800
600
$ 90,068
$ 265,180
Accessories
Total
Clothing
13-17
Solutions
Calculation of Allocation
Percentages:
Sales..................................... $ 600,000
Cost of Goods Sold................
440,000
Gross Margin......................... $ 160,000
Percent of Gross Margin...........
Sales........................................
Floor Space..............................
50%
60%
40%
Clothing
Salaries:
Direct.................................
AllocatedOther...............
Total Salaries.................
Percent of Total Salaries........
Cost of Equipment and
Inventory:
Equipment.........................
Inventory (Average)...........
Total...............................
Percent of Equipment and
Inventory...........................
Number of Employees...........
b.
Solutions
$ 78,240
24,000
$ 102,240
52.3%
$ 10,080
100,800
$ 110,880
40.3%
40%
$ 400,000
240,000
$ 160,000
50%
40%
60%
100%
100%
100%
Accessories
$ 69,360
24,000
$ 93,360
47.7%
$ 24,960
139,200
$ 164,160
59.7%
60%
13-18
$1,000,000
680,000
$ 320,000
$ 147,600
48,000
$ 195,600
100%
$ 35,040
240,000
$ 275,040
100%
100%
Sales.....................................
Cost of Goods Sold................
Gross Margin on Sales...........
Other Operating Expenses....
Net Income........................
Clothing
$ 600,000
440,000
$ 160,000
132,383
$ 27,617
13-19
Accessories
Total
$ 400,000
$1,000,000
240,000
680,000
$ 160,000
$ 320,000
132,797
265,180
$ 27,203
$
54,820
Solutions
.
13.30
...............................
Meyers Company
Allocation of Service Department Costs to Production DepartmentsStep
Method
$60,000
Total
$220,000
Allocation of Department S1
to S2, P1 and P2
(30,000
)
$220,000
Allocation of Department S2
to P1 and P2
Total Production Department Costs
(64,000
)
$220,000
Solutions
13-20
24,000
$64,000
10%
10%
3,000
$93,000
3,000
$63,000
37.5%
62.5%
24,000
$117,000
40,000
$103,000
13-21
Solutions
13.31
Solutions
13-22
13.32
Packing
Quality
Control
Maintenance
55%
Packing
2,750
38%
Quality
Control
1,900
7%
Maintenance
350
Hours of Service...................
Percent of Total....................
13.33
Tubing
1,047
60%
Packing
698
40%
Total for
Allocation
Purposes
1,745
13-23
Solutions
5,000
a.
$111,760. The direct method is being used here, and total costs of the maintenance department would be
allocated to the production departments in proportion to the square footage they occupied.
Costs of Maintenance Department:
Direct Material.................................................................
Direct Labor.....................................................................
Overhead.........................................................................
Total.............................................................................
$ 65,000
82,100
56,100
$ 203,200
88,000
72,000
160,000
Allocation:
b.
$70,000. Using the direct method, total costs of the administration department would be allocated to the
production departments in proportion to the direct labor hours they used.
Costs of Administration Department:
Direct Material.................................................................
Direct Labor.....................................................................
Overhead.........................................................................
Total.............................................................................
Direct Labor Hours Used by Production Departments:
Creative...........................................................................
Assembly.........................................................................
Total.............................................................................
Solutions
13-24
-090,000
70,000
$ 160,000
56,250
43,750
100,000
13.34
c.
$3,840 = (8/(12 + 8 + 280 + 200 computers) X $240,000. The step method is being used here, and computer
support department costs ($91,000 + $87,000 + $62,000 = $240,000) would be allocated first. The computer
support department costs would be allocated to the production departments and the other two service
departments in proportion to the number of computers they have.
d.
$0. When using the step method, once a service department's costs have been allocated, no subsequent service
department costs are allocated back to it. Since computer support department costs would be allocated first (for
an explanation see Part c.), none of the maintenance department's costs would be allocated to the computer
support department.
13-25
Solutions
a.
$124,300. The direct method is being used here, and total costs of the maintenance department would be
allocated to the production departments in proportion to the square footage they occupied.
Costs of Maintenance Department:
Direct Material.................................................................
Direct Labor.....................................................................
Overhead.........................................................................
Total.............................................................................
$ 80,000
90,000
56,000
$ 226,000
88,000
72,000
160,000
Allocation:
b.
$78,750. Using the direct method, total costs of the administration department would be allocated to the
production departments in proportion to the direct labor hours they used.
Costs of Administration Department:
Direct Material.................................................................
Direct Labor.....................................................................
Overhead.........................................................................
Total.............................................................................
Direct Labor Hours Used by Production Departments:
Creative...........................................................................
Output.............................................................................
Total.............................................................................
Allocation: 87,500/200,000 X $180,000 = $78,750.
Solutions
13-26
-0100,000
80,000
$ 180,000
112,500
87,500
200,000
c.
$3,840 = (16/(24 + 16 + 560 + 400 computers) X ($91,000 + $87,000 + $62,000). The step method is being
used here, and technology support department costs would be allocated first. The technology support
department costs would be allocated to the production departments and the other two service departments in
proportion to the number of computers they have.
d.
$0. When using the step method, once a service department's costs have been allocated, no subsequent service
department costs are allocated back to it. Since technology support department costs would be allocated first
(see part c), none of the maintenance department's costs would be allocated to the technology support
department.
13-27
Solutions
13.35
b.
c.
13.36
Solutions
$ 64,200
Chips
15,000/(15,000 + 45,0000 X $85,600..........................
21,400
Total.................................................................................
$ 85,600
$ 10,700
Chips
$140,000/($20,000 + $140,000) X $85,600.................
74,900
Total.................................................................................
$ 85,600
It is not possible to determine which product is more profitable because costs are joint. One product cannot be
produced without the otherhence only the profitability of the total output is relevant. In total the company has
combined revenue of $160,000 and costs of $85,600, making this a profitable joint product.
13-28
Joint cost = $300 (= $200 cost of timber + $100 joint process costs).
a.
b.
75
225
Total.................................................................................
300
180
120
$
300
It is not possible to determine how much profit is made on either product or which product is more profitable.
One product cannot be produced without the otherhence only the profitability of the total output is relevant. In
total, the company sells lumber for a combined $400 per board feet and incurs a cost of $300 per 1,000 board
feet, making the joint products profitable.
13.37
13-29
Solutions
a.
1. In terms of ease of use, the predetermined rate is the simplest method of allocation. The budgeted
department costs are known and distributed to the stores each month. Less paper work is involved than if
actual costs were tabulated and allocated each month.
2. In terms of controlling costs, the actual method of allocation would be most effective here. This way, savings
and overruns are charged to the stores which can pressure the department to keep the costs down and can
decide what level of service they (the stores) want from the department.
A centralized organization is more conducive to a predetermined rate allocation method. Since top management
is deciding on the usage of service departments, the problem of cost control is up to them, not the individual
stores. With decentralized organizations, the stores are going to want to see actual costs. In this way the stores
pressure the departments about using costs, leaving top management free to do other things.
b.
1. Total sales dollars. The following conditions would be required for the base to be suitable:
the proportion of credit sales to cash sales must be the same at each store;
the customer credit risk level must be the same for each store;
To the extent that the above conditions are not present or could be affected by store managers, charges to
stores will be inequitable. This may cause some managers to take actions which, while increasing their
sales, increases company collection costs (more credit sales, higher risk credit sales, smaller receivables) by
a greater percentage causing other stores to bear an inappropriate portion of the costs.
Solutions
13-30
13.37 b. continued.
2. Average number of past due accounts. The following conditions would be required for this base to be
suitable:
collection costs based on the number of accounts or average account size are identical;
all stores use the same criteria to submit accounts to the collection department for collection effort;
the collection department makes collection efforts in proportion to the past due accounts from each store.
If these conditions are not present or could be affected by the store managers, charges to stores may be
inequitable. If collection costs vary by account size, the manager could encourage more large credit sales
and discourage small credit sales to increase sales and decrease his/her share of the collection charges. If
past due criteria are not consistent, a manager could report fewer accounts, thus reducing costs. The focus
on past due accounts may cause a manager to tighten credit standards and reduce credit risks. However,
this method of assignment is the best of the four presented because it relates to accounts which are likely to
require collection and is the least likely to result in inequitable cost assignments due to manager
manipulation.
3. Number of uncollectible accounts written of. The following conditions would be required for the base
to be suitable:
the proportion of uncollectible accounts to accounts requiring collection effort should be the same for each
store;
the same conditions listed for the average number of accounts past due base apply.
To the extent that such conditions are not present or can be affected by the store manager, the charges to
stores might be inequitable. As with the past due account method, a manager might seek higher average
13-31
Solutions
credit sales and change the criteria used for submitting accounts for collection. The focus on uncollectible
accounts may cause managers to tighten credit standards and reduce credit risks.
Solutions
13-32
13.37 b. continued.
4. One twenty-sixth of the cost of each of the stores. This basis of allocation would be inappropriate
because it is not tied directly to the activity for which costs are being allocated. Store managers would have
very little incentive to monitor customer credit, because they would know that the number of bad customers
or the amounts of uncollectible accounts or write-offs would have no effect on the allocation. The managers
might even accept customers with very marginal credit ratings just to increase the dollar volume of sales.
Additionally, stores with a small volume would be penalized because their equal share of the allocated credit
and collection department cost would be applied to a smaller margin.
13-33
Solutions
13.38
The ten cost items can be categorized into four basic groups for purposes of discussion.
Item
I. All items in this category
should be distributed.
1. Salaries and benefits
2. Supplies
Allocation
Yes
Yes
Allocation
Method
Direct
Direct
Justification
The costs of these two
items are directly
incurred by the activity centers and
can be controlled by
the supervisor. A
part of the salaries
and benefits might
be excluded from a
marginal cost
charging rate.
II.
Solutions
Equipment maintenance
Insurance
Yes
Yes
13-34
Direct
Direct
III.
7.
Item
Equipment, furniture,
and depreciation
Yes
5.
8.
Building improvements
and depreciation
Allocation
Direct
Method
Justification
The costs of these
items are directly incurred by the activity
centers.
Yes
Direct
(one
center
only)
Yes
Direct
(one
center
only)
Yes
Equipment
usage and
wattage
ratings
13-35
Solutions
b.
Yes
(only
for full
cost
charging
rate)
Square
feet
Yes
(only
for full
cost
charging
rate)
Number of
employees
or some
other
general
basis
There is no cost
control benefit from
allocation of these
costs. The only reason to allocate is for
a full cost charging
rate.
The number of hours selected for determining the charging rate depends upon the purpose of establishing the
rate. If the objective is to charge user departments for all of the costs of Computer Operations, the actual hours
which can be identified with the user departments will be included in the base hours. This amounts to 3,500
hours as shown below:
In order to promote cost control, Bonn Company might consider a dual charging rate whereby the marginal costs
would be charged over actual user time (3,500 hours) and fixed costs over available time (4,242 hours).
Actual User Time
Testing and debugging..... 250
Set-up.............................. 500
Processing........................ 2,750
Total............................... 3,500
Available Time
Testing and debugging....... 250
Set-up................................. 500
Processing.......................... 2,750
Idle time............................. 742
Total................................. 4,242
Downtime for maintenance is excluded because the computer is not available for use during that time.
Solutions
13-36