CHAPTER 7
SUPPORT-DEPARTMENT COST ALLOCATION
QUESTIONS FOR WRITING AND DISCUSSION
1. Stage one assigns support-department
costs to producing departments. Costs are
assigned using factors that reflect the con-
sumption of the services by each
producing department. Stage two allocates
the costs assigned to the producing
departments (in-cluding service costs and
direct costs) to the products passing
through the producing de-partments.
2. Support-department costs are part of the
cost of producing a product. Knowing the
in-dividual product costs is helpful for
develop-ing bids and cost-plus prices.
3. GAAP require that all manufacturing costs
be assigned to products for inventory
valua-tion.
4. Allocating support-department costs makes
users pay attention to the level of service
ac-tivity consumed and also provides an
incen-tive for them to monitor the efficiency
of the support departments.
5. Without any allocation of support-
department costs, users may view services
as a free good and consume more of the
service than is optimal. Allocating support-
department costs would encourage
manag-ers to use the service until such
time as the marginal cost of the service is
equal to the marginal benefit.
6. Since the user departments are charged
for the services provided, they will monitor
the performance of the support
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 support de-partment will exert effort to
maintain a com-petitive level of service.
7. The identification and use of causal factors
ensures that support-department costs are
accurately assigned to users. This
increases the legitimacy of the control
function and enhances product costing
accuracy.
8. a. Number of employees; b. Square foo-
tage; c. Pounds of laundry; d. Orders
processed; e. Maintenance hours worked;
f. Number of employees; and g. Number of
transactions processed.
189
9. Allocating actual costs passes on the effi-
ciencies or inefficiencies of the support de-
partment, something which the manager of
the producing department cannot control.
Al-locating budgeted costs avoids this
problem.
10. The direct method allocates the direct
costs of each support department directly
to the producing departments. No
consideration is given to the fact that other
support depart-ments may use services.
The sequential method allocates support-
department costs sequentially. First, the
costs of the center providing the greatest
service to all user de-partments, including
other support depart-ments, are allocated.
Next the costs of the second greatest
provider of services are al-located to all
user departments, excluding any
department(s) that has already allocated
costs. This continues until all support-
department costs have been allocated. The
principal difference in the two methods is
the fact that the sequential method
considers some interactions among
support depart-ments and the direct
method ignores inte-ractions.
11. Yes, the reciprocal method is more
accurate because it fully considers
interactions among support departments.
However, the reciprocal method is much
more complex and can be difficult for
managers to under-stand. If the results are
similar, the simpler method should be
used.
12. A joint cost is a cost incurred in the simulta-
neous 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.
13. Joint costs occur only in cases of joint pro-
duction. 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.
 7–4

1. Charging rate = ($80 × 100 hours)/400 units = $20 per apartment unit

2. Amount charged = ($80 × 130 hours) = $10,400

Amount actually charged apartment building owners:

Number of Charge Total

Units × per Unit = Charges
The Roost 130 $20 $ 2,600
Magnolia House 70 20 1,400
Oak Park 120 20 2,400
Wisteria Lane 50 20 1,000
Elm Street 30 20 600
Total 400 $ 8,000

Number of Charge Total

Hours × per Hour = Charges
The Roost 35 $80 $ 2,800
Magnolia House 10 80 800
Oak Park 45 80 3,600
Wisteria Lane 15 80 1,200
Elm Street 25 80 2,000
Total 130 $ 10,400

3. The use of number of legal hours as the charging base is much better than the number
of apartment units. The number of legal hours is directly associated with the attorney’s
charges. The number of units is, apparently, a poor proxy for the use of legal services.
Two problems are immediately evident. First, the use of the unit charge means that
Stewart will only be charging actual legal fees when the number of units times the per-
unit rate happens to equal the number of hours times the per-hour rate. In this case, he
will not recoup all of his spending on le-gal fees. That occurred here, where Stewart
charged the owners only $8,000 for legal fees, but paid the attorney $10,400. In other
years, the amount charged the apartment owners will be more than the amount charged
by the attorney. Second, it is possible for apartment owners to have a smaller or larger
proportion of units than of hours. Even in the example above, we can see that Elm Street
has a small percentage of units, but causes a larger proportion of legal fees.

7–5

1. Single charging rate = ($320,000 + $400,000)/24,000 = $30/DLH

2. Charge to the Used Car Sales Dept. = $517 + ($30 × 12 DLH) = $877

3. Actual DLH × Charging Rate + DM = Total Charges

New Car Sales 1,000 $30 $ 3,100 $ 33,100
Used Car Sales 4,700 30 7,860 148,860
Service 19,400 30 86,300 668,300
Total 25,100 $97,260 $850,260
7–6

1. Billing rate for maintenance = $193,200/4,200 = $46/maintenance hour

2. $46 × 370 = $17,020

3. Total charged ($46 × 4,110) $ 189,060

Actual cost 190,060
Maintenance cost undercharged $ 1,000

7–7

1. $460 = $46 × number of hours of maintenance

Number of hours of maintenance = 10 hours
The controller must have looked up the usage of maintenance by the Assembly
Department, found that it had used 10 hours, and multiplied those hours by the single
charging rate of $46. In that case, $460 would be correct.

2. Rate for routine maintenance = $48,000/2,000 = $24/routine maint. hour Rate

for technical maintenance = $145,200/2,200 = $66/tech. maint. hour New
charge for Assembly Department = $24 × 10 routine hours = $240

3. When single charging rates are used by companies, they must be aware that changes in
the way work is performed may require changes in the charging rate(s). In this case, the
additional complexity caused by the computer-controlled equipment means that a single
charging rate does not adequately control for the differences in cost caused by different
departments. Multiple charging rates do a better job of charging the using department
for the resources provided by the support departments.

7–8

1. Allocation ratios for S1 based on number of employees:

Cutting = 120/(120 + 80) = 0.60
Sewing = 80/(120 + 80) = 0.40
Allocation ratios for S2 based on number of maintenance hours:
Cutting = 15,000/(15,000 + 5,000) = 0.75
Sewing = 5,000/(15,000 + 5,000) = 0.25

2. Support Departments Producing Departments

S1 S2 Cutting Sewing
Direct costs $200,000 $ 140,000 $ 122,000 $ 90,500
Allocate:
S1 (200,000) — 120,000 80,000
S2 — (140,000) 105,000 35,000
Total $ 0 $ 0 $ 347,000 $ 205,500

7–9
1. Allocation ratios for S1 based on number of employees:
S2 = 50/(50 + 120 + 80) = 0.20 Cutting
= 120/(50 + 120 + 80) = 0.48 Sewing =
80/(50 + 120 + 80) = 0.32
Allocation ratios for S2 based on number of maintenance hours:
Cutting = 15,000/(15,000 + 5,000) = 0.75
Sewing = 5,000/(15,000 + 5,000) = 0.25

2.
Support Departments Producing Departments
S1 S2 Cutting Sewing
Direct costs $ 200,000 $ 140,000 $ 122,000 $ 90,500
Allocate:S1 (200,000) 40,000 96,000 64,000
S2 — (180,000) 135,000 45,000
Total $ 0 $ 0 $ 353,000 $ 199,500

7–10

1. Allocation ratios:
Proportion of Output Used by Department
S1 S2 Cutting Sewing
S1 — 0.2000 0.4800 0.3200
S2 0.0566 — 0.7075 0.2358

2. S1 = Direct costs + Share of S2 costs

S1 = $200,000 + 0.0566(S2)
S2 = Direct costs + Share of S1 costs
S2 = $140,000 + 0.200(S1)
S2 = $140,000 + 0.200 [$200,000 + 0.0566(S2)]
S2 = $140,000 + $40,000 + 0.0113(S2)
0.9887S2 = $180,000
S2 = $182,057
Substituting $180,057 for S2 into the S1 equation yields total S1 cost:
S1 = $200,000 + 0.0566($182,057)
= $200,000 + $10,304 = $210,304

3. Support Departments Producing Departments

S1 S2 Cutting Sewing
Direct costs $200,000 $140,000 $122,000 $ 90,500
Allocated from:
S1 (210,304) 42,061 100,946 67,297
S2 10,304 (182,057) 128,805 42,929

Total $ 0 $ (4)* $351,751 $200,726

*Difference due to rounding.
7–11

1. Baking Dept. overhead rate = $150,000/6,250 = $24 per MHr Decorating

Dept. overhead rate = $42,000/6,000 = $7 per DLH

2. Cost per batch:

Direct materials $55

Direct labor 42
Overhead:
Baking Dept. (2 × $24) 48
Total $145
Cost per loaf = $145/100 = $1.45

3. Cost of Dearman wedding cake:

Direct materials $ 20
Direct labor 50
Overhead:
Baking Dept. (1 × $24) 24
Decorating Dept. (8 × $7) 56
Total cost $150

Price = 3 × $150 = $450

7–12

1. Allocation ratios:
Shaping Firing
Kilowatt-hours1 0.20 0.80
Square feet2 0.75 0.25

Direct labor hours3 0.71 0.29

1
2
based on kilowatt hours: 20,000/(20,000+80,000); 80,000/(20,000+80,000)
based on square feet: 24,000/(24,000+8,000); 8,000/(24,000+8,000)
3
based on direct labor hours: 10,000/(10,000+4,000); 4,000/(10,000+4,000)

Cost assignment:
Power Gen. Factory HR Shaping Firing
Direct overhead costs $90,000 $$167,000 $84,000 $72,000 $230,000
Allocate:
Power ($90,000) - - 18,000 72,000
General Factory - (167,000) - 125,250 41,750
Human Resources - - 84,000 59,640 24,360
Total after allocation $0 $0 $0 $274,890 $ 368,110

2. Departmental overhead rates:

Shaping: $274,890/10,000 = $27.49 per DLH*
Firing: $368,110/4,000 = $92.03 per DLH*

*Rounded
7–13

1. Assume the support-department costs are allocated in order of highest to lowest cost:
General Factory, Power, and Human Resources.
Power GF HR Shaping Firing
Square feet 0.05 — 0.15 0.60 0.20
Kilowatt-hours — — 0.20 0.16 0.64
Labor hours — — — 0.71 0.29
Direct costs $ 90,000 $167,000 $84,000 $ 72,000 $230,000
General Factory1:
(0.05 × $167,000) 8,350 (8,350)
(0.15 × $167,000) (25,050) 25,050
(0.60 × $167,000) (100,200) 100,200
(0.20 × $167,000) (33,400) 33,400
Power2:
(0.20 × $98,350) (19,670) 19,670
(0.16 × $98,350) (15,736) 15,736
(0.64 × $98,350) (62,944) 62,944
Human Resources:
(0.71 × $128,720) (91,391) 91,391
(0.29 × $128,720) (37,329) 37,329
Total $ 0 $ 0 $ 0 $279,327 $363,673
1
based on square feet:
Power = 2,000/(2,000+6,000+24,000+8,000)
HR = 6,000/(2,000+6,000+24,000+8,000)
Shaping = 24,000/(2,000+6,000+24,000+8,000)
Firing = 8,000/(2,000+6,000+24,000+8,000)
2
based on kilowatt hours :
HR = 25,000/(25,000+20,000+80,000)
Shaping = 20,000/(25,000+20,000+80,000)
Firing = 80,000/(25,000+20,000+80,000)

Allocation Ratios for HR department based on direct labor hours :

Shaping 10,000/(10,000+4,000)
Firing 4,000/(10,000+4,000)

2. Shaping: $279,327/10,000 = $27.93 per DLH*

Firing: $403,576/4,000 = $90.92 per DLH*

*Rounded
7-14

Units Percent × Joint Cost = Allocated Joint Cost

Andol 1,000 0.1250 $100,000 $12,500
Incol 1,500 0.1875 100,000 18,750
Ordol 2,500 0.3125 100,000 31,250
Exsol 3,000 0.3750 100,000 37,500
Total 8,000 $ 100,000

7-15
Price at Market Value Joint Allocated
Units Split-off at Split-off Percent Cost Cost
Andol 1,000 $20.00 $ 20,000 0.0556 $100,000 $ 5,560
Incol 1,500 75.00 112,500 0.3125 100,000 31,250
Ordol 2,500 64.00 160,000 0.4444 100,000 44,440
Exsol 3,000 22.50 67,500 0.1875 100,000 18,750
Total 8,000 $ 360,000 $ 100,000

7-16
1. Eventual Separable Hypothetical
Units Price Market Value Costs Market Value Percent
Ups 39,000 $2.00 $78,000 $18,000 $60,000 0.60
Downs 21,000 2.18 45,780 5,780 40,000 0.40
Total $ 100,000

Ups Downs
Joint cost $42,000 $42,000
× Percent of hypothetical market value × 0.60 × 0.40
Allocated joint cost $ 25,200 $ 16,800

2. Value of ups at split-off (39,000 × $1.80) $70,200

Value of ups when processed further $78,000

Less: Further processing cost 18,000
Incremental value of further processing $60,000

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

7–17

1. HR Power Mixing Packaging

HR1 — 0.3000 0.3500 0.3500

Power2 0.0769 — 0.2308 0.6923

1
based on payroll:
90,000/(90,000+105,000+105,000)
105,000/(90,000+105,000+105,000)
105,000/(90,000+105,000+105,000)
2
based on kilowatt hours:
5,000/(5,000+15,000+45,000)
15,000/(5,000+15,000+45,000)
45,000/(5,000+15,000+45,000)
P = $150,000 + 0.3HR
P = $150,000 + 0.3($110,000 + 0.0769P)
P = $150,000 + $33,000 + 0.0231P
0.9769P = $183,000
P = $187,327
HR = $110,000 + 0.0769P
HR = $110,000 + 0.0769($187,327)
HR = $110,000 + $14,405
HR = $124,405
Human
Resources Power Mixing Packaging
Direct overhead costs $110,000 $150,000 $100,000 $280,000
Allocated from:
HR (124,405) 37,321 43,542 43,542
Power 14,409 (187,327) 43,235 129,686

Total $ 0 $ (5)* $186,777 $453,228

*Difference due to rounding.

2. Mixing: $186,777/20,000 = $9.34 per DLH

Packaging: $453,228/30,000 = $15.11 per DLH

7–18

1. Support Departments Producing Departments

HR Power Mixing Packaging
Direct overhead $110,000 $150,000 $100,000 $280,000
Allocate HR1 (110,000) - 55,000 55,000
Allocate Power - (150,000) 37,500 112,500
Total $ 0 $ 0 $ 192,500 $ 447,500

1based on payroll:
Mixing = 105,000/(105,000+105,000) = 0.50
Packaging = 105,000/(105,000+105,000) = 0.50
2 based on kilowatt hours:
Mixing = 15,000/(15,000+45,000) = 0.25
Packaging = 45,000/(15,000+45,000) = 0.75

2. Mixing: $192,500/20,000 = $9.63 per DLH

Packaging: $447,500/30,000 = $14.92 per DLH
The reciprocal method is more accurate because support-department costs are allocated
to other support departments. Using the direct method, Human Re-sources and Power
do not receive any other support department costs. How im-portant the increased
accuracy is for this example is not clear. Some might argue that the departmental rates
do not differ enough to justify using the more compli-cated reciprocal method.

7–19

1. Support Departments Producing Departments

HR Power Mixing Packaging
Direct overhead $110,000 $150,000 $100,000 $280,000
Allocate HR1 (110,000) 33,000 38,500 38,500
Allocate Power2 - (183,000) 45,750 137,250
Total $ 0 $ 0 $184,250 $ 455,750
 1based on payroll:
Power = 90,000/(90,000+105,000+105,000) = 0.30 Mixing =
105,000/(90,000 + 105,000+105,000) = 0.35 Packaging =
105,000/(90,000 + 105,000+105,000) = 0.35
2 based on kilowatt hours:
Mixing = 15,000/(15,000+45,000) = 0.25
Packaging = 45,000/(15,000+45,000) = 0.75

2. Mixing: $184,250/20,000 = $9.21 per DLH

Packaging: $455,750/30,000 = $15.19 per DLH
The sequential method is more accurate than the direct method and less accurate than
the reciprocal method. The reason is that at least some support-department reciprocity
is accounted for using the sequential method, while none is recog-nized under the direct
method.

7–20

A = $35,000 + 0.3B
B = $40,000 + 0.2A
A = $35,000 + 0.3($40,000 + 0.2A)
A = $47,000 + 0.06A
0.94A = $47,000
A = $50,000
B = $40,000 + 0.2($50,000) B =
$50,000
Allocation ratios (ratios for D obtained by “plugging”):
Dept. A Dept. B Dept. C Dept. D
Dept. A — 0.2 0.2 0.6*
Dept. B 0.3 — 0.4 0.3**
*(1.0 – 0.2 – 0.2)
**(1.0 – 0.3 – 0.4)

Dept. C Dept. D
Allocate A:
(0.2 × $50,000) $10,000
(0.6 × $50,000) $30,000
Allocate B:
(0.4 × $50,000) 20,000
(0.3 × $50,000) 15,000
7–21

1. General
HR Factory Grinding Assembly
Direct costs $ 70,000 $ 230,000 $ 63,900 $ 39,500
Allocate:
HR 1 (70,000) — 14,000 56,000
Gen. Factory2 — (230,000) 57,500 172,500

Total OH $ 0 $ 0 $135,400 $268,000

1 based on payroll: 20,000/(20,000+80,000)=20%; 80,000/(20,000+80,000)=80%
2 based on square feet: 2,000/(2,000+6,000)=25%; 6,000/(2,000+6,000)=75%

2. Grinding OH rate: $135,400/4,000 = $33.85 per MHr

Assembly OH rate: $268,000/80,000 = $3.35 per DLH

3. Prime costs $123.00

Grinding (1 × $33.85) 33.85
Assembly (12 × $3.35) 40.20
Unit product cost $197.05

7–22

1. General
HR Factory Grinding Assembly
Direct costs $ 70,000 $ 230,000 $ 63,900 $ 39,500
Allocate:
Gen. Factory1 76,667 (230,000) 38,333 115,000
HR 2 (146,667) — 29,333 117,334
Total OH $ 0 $ 0 $131,566 $271,834
1
HR = 4,000/(4,000+2,000+6,000)=33.33% Grinding =
2,000/(4,000+2,000+6,000)=16.67% Assembly = 6,000/
(4,000+2,000+6,000)=50% 2Grinding = 20,000/
(20,000+80,000)=20% Assembly = 80,000/
(20,000+80,000)=80%

2. Grinding OH rate: $131,566/4,000 = $32.89 per MHr (rounded)

Assembly OH rate: $271,834/80,000 = $3.40 per DLH (rounded)

3. Prime cost $123.00

Grinding (1 × $32.89) 32.89
Assembly (12 × $3.40) 40.80
Unit product cost $196.69

7–23

204
 1. HR GF Grinding Assembly

GF-square feet1 0.3333 — 0.1667 0.5000

HR-direct labor hrs2 — 0.0991 0.1802 0.7207

1
HR: 4,000/(4,000+2,000+6,000) = 0.3333 Grinding:
2,000/(4,000+2,000+6,000) = 0.1667 Assembly: 6,000/
(4,000+2,000+6,000) = 0.5000 2Allocation ratios for HR
based on payroll :
General Factory: 11,000/(11,000+20,000+80,000) = 0.0991
Grinding: 20,000/(11,000+20,000+80,000) = 0.1802
Assembly: 80,000/(11,000+20,000+80,000) = 0.7207

HR = $70,000 + 0.3333GF
GF = $230,000 + 0.0991HR
GF = $230,000 + 0.0991($70,000 + 0.3333GF)
0.967GF = $236,937
GF = $245,023
HR = $70,000 + 0.3333GF
HR = $70,000 + 0.3333($245,023)
HR = $151,666

General
HR Factory Grinding Assembly
Direct costs $ 70,000 $ 230,000 $ 63,900 $ 39,500
Allocate:
HR (151,666) 15,030 27,330 109,306
GF 81,666 (245,023) 40,845 122,512

Total OH $ 0 $ 7* $132,075 $271,318

*Difference due to rounding.

2. Grinding OH rate: $132,075/4,000 = $33.02 per MHr*

Assembly OH rate: $271,318/80,000 = $3.39 per DLH*
*Rounded

3. Prime costs $123.00

Grinding (1 × $33.02) 33.02
Assembly (12 × $3.39) 40.68
Unit product cost $196.70

205
7–24

1. Units Percent × Joint Cost = Allocated Joint Cost

Alpha 12,500 0.25 $125,000 $31,250
Beta 17,500 0.35 125,000 43,750
Gamma 20,000 0.40 125,000 50,000
Total 50,000 $ 125,000

2.
Price at Market Value Joint Allocated
Units Split-off at Split-off Percent Cost Cost
Alpha 12,500 $20 $ 250,000 0.1684 $125,000 $ 21,050
Beta 17,500 50 875,000 0.5892 125,000 73,650
Gamma 20,000 18 360,000 0.2424 125,000 30,300
Total 50,000 $ 1,485,000 $ 125,000

PROBLEMS

7–25

1. Direct method: Tissue

Delivery Accounting Laboratory Pathology

Direct costs $240,000 $270,000 $345,000 $456,000

Allocate:
Delivery1 (240,000) -- 144,000 96,000
Accounting2 -- (270,000) 175,500 94,500
Total $ 0 $ 0 $664,500 $646,500

1Laboratory: 70,200/(70,200+46,800) = 0.60

Tissue Pathology: 46,800/(70,200+46,800) = 0.40
2 Laboratory: 24,700/(24,700+13,300) = 0.65
Tissue Pathology: 1,3,300/(24,700+13,300) = 0.35

2. Sequential method
Tissue
Delivery Accounting Laboratory Pathology
Direct costs $ 240,000 $ 270,000 $345,000 $456,000
Allocate:
Accounting1 13,500 (270,000) 166,725 89,775
Delivery2 (253,500) 0 152,100 101,400

Total $ 0 $ 0 $ 663,825 $ 647,175

1
Delivery: 2,000/(2,000+24,700+13,300) = 0.050
Laboratory: 24,700/(2,000+24,700+13,300) = 0.6175
Tissue Pathology: 13,300/(2,000+24,700+13,300) = 0.3325
2
Laboratory: 70,200/(70,200+46,800) = 0.60
Tissue Pathology: 46,800/(70,200+46,800) = 0.40
7–26

1. a. Direct method
Maintenance Power Drilling Assembly
Direct costs $320,000 $400,000 $163,000 $ 90,000
Allocate:
Maintenance1 (320,000) 0 256,000 64,000
Power2 0 (400,000) 40,000 360,000

Total $ 0 $ 0 $ 459,000 $ 514,000

1
Drilling: 30,000/(30,000+7.500) = 0.80
Assembly: 7,500/(30,000+7,500) = 0.20
2
Drilling: 36,000/(36,000+324,000) = 0.10
Assembly: 324,000/(36,000+324,000) = 0.90

Drilling: $459,000/30,000 = $15.30 per MHr

Assembly: $514,000/40,000 = $12.85 per DLH
Prime costs $1,817.00
Drilling (2 × $15.30) 30.60
Assembly (50 × $12.85) 642.50
Total cost $2,490.10
Markup (15%) 373.52
Bid price $2,863.62

7–26 Continued

b. Reciprocal method
Maintenance Power Drilling Assembly
Machine hours1 — 0.375 0.500 0.125

Kilowatt-hours2 0.100 — 0.090 0.810

1
Power: 22,500/(22,500+30,000+7.500) = 0.375
Drilling: 30,000/(22,500+30,000+7.500) = 0.500
Assembly: 7,500/(22,500+30,000+7,500) = 0.125
2
Maintenance: 40,000/(40,000+36,000+324,000) = 0.100
Drilling: 36,000/(40,000+36,000+324,000) = 0.090
Assembly: 324,000/(40,000+36,000+324,000) = 0.810

M = $320,000 + 0.1P
P = $400,000 + 0.375M
M= $320,000 + 0.1($400,000 + 0.375M)
M = $320,000 + $40,000 + 0.0375M
0.9625M = $360,000
M = $374,026
P= $400,000 + 0.375M
P= $400,000 + 0.375($374,026)
P= $400,000 + $140,260
P= $540,260
Maintenance Power Drilling Assembly
Direct cost $320,000 $400,000 $163,000 $90,000
Allocate:
Maintenance ($374,026) 140,260 187,013 46,753
Power 54,026 (540,260) 48,623 437,611

Total $ 0 $ 0 $ 398,636 $ 574,364

 Drilling: $398,636/30,000 = $13.29 per MHr (rounded)
Assembly: $574,364/40,000 = $14.36 per DLH (rounded)
Prime costs $1,817.00
Drilling (2 × $13.29) 26.58
Assembly (50 × $14.36) 718.00
Total cost $2,561.58
Markup (15%) 384.24
Bid price $2,945.82
2. The reciprocal method is more accurate, as it takes into account the use of support
departments by other support departments.

7–27

1. a. Sequential method: Allocate Maintenance first, then Power

Maintenance Power Drilling Assembly

Direct costs $ 320,000 $ 400,000 $163,000 $ 90,000
Allocate:
Maintenance1 (320,000) 120,000 160,000 40,000
Power2 0 (520,000) 52,000 468,000

Total $ 0 $ 0 $ 375,000 $ 598,000

1
Power: 22,500/(22,500+30,000+7.500) = 0.375
Drilling: 30,000/(22,500+30,000+7.500) = 0.500
Assembly: 7,500/(22,500+30,000+7,500) = 0.125
2
Drilling: 36,000/(36,000+324,000) = 0.100
Assembly: 324,000/(36,000+324,000) = 0.900

Drilling: $375,000/30,000 = $12.50 per MHr

Assembly: $598,000/40,000 = $14.95 per DLH
Prime costs $1,817.00
Drilling (2 × $12.50) 25.00
Assembly (50 × $14.95) 747.50
Total cost $2,589.50
Markup (15%) 388.43
Bid price $2,977.93

7–27 Concluded

b. Sequential method: Allocate Power first, then Maintenance

Maintenance Power Drilling Assembly
Direct costs $ 320,000 $ 400,000 $163,000 $ 90,000
Allocate:
Power1 40,000 (400,000) 36,000 324,000
Maintenance2 (360,000) 0 288,000 72,000

Total $ 0 $ 0 $ 487,000 $ 486,000

1
Maintenance: 40,000/(40,000+36,000+324,000) = 0.10
Drilling: 36,000/(40,000+36,000+324,000) = 0.09
Assembly: 324,000/(40,000+36,000+324,000) = 0.81
2
Drilling: 30,000/(30,000+7.500) = 0.80
Assembly: 7,500/(30,000+7,500) = 0.20
 Drilling: $487,000/30,000 = $16.23 per MHr (rounded)
Assembly: $486,000/40,000 = $12.15 per DLH

Prime costs $1,817.00

Drilling (2 × $16.23) 32.46
Assembly (50 × $12.15) 607.50
Total cost $2,456.96
Markup (15%) 368.54
Bid price $2,825.50

2. Yes, there is a difference in the bids. Ranking Maintenance first results in a higher dollar
allocation to Power ($120,000) than the allocation from Power to Mainten-ance ($40,000). Then,
the greater usage of Power by Assembly results in a higher allocation to Assembly when
Maintenance is ranked first. Thus, the ranking of Maintenance first gives a greater chance for
support-department interaction to be reflected in the ultimate overhead rates. (These results
can be compared with the results using the reciprocal method in Problem 7–26.)

7–28

1.
Units Percent × Joint Cost = Allocated Joint Cost

Two Oil 300,000 0.4545 $10,000,000 $4,545,000

Six Oil 240,000 0.3636 10,000,000 3,636,000
Distillates 120,000 0.1818 10,000,000 1,818,000
Total 660,000 $9,999,000

2.
Price at Market Value Joint Allocated
Units Split-off at Split-off Percent Cost Cost

Two Oil 300,000 $20 $6,000,000 0.4000 $10,000,000 $4,000,000

Six Oil 240,000 30 7,200,000 0.4800 10,000,000 4,800,000

Distillates 120,000 15 1,800,000 0.1200 10,000,000 1,200,000
Total 660,000 $15,000,000 $10,000,000
7–30

1. Baton Rouge ($781,000/$4,641,000)($146,500)* = $24,653

Kilgore ($750,000/$4,641,000)($146,500) = $23,675
Longview ($912,000/$4,641,000)($146,500) = $28,789
Paris ($1,098,000/$4,641,000)($146,500) = $34,660
Shreveport ($1,100,000/$4,641,000)($146,500) = $34,723
*($18)(4,250) + $70,000 = $146,500

2. Share of Purchasing Department fixed costs based on 2005 revenues:

Baton Rouge ($675,000/$4,500,000)($70,000) = $10,500

Kilgore ($720,000/$4,500,000)($70,000) = $11,200
Longview ($900,000/$4,500,000)($70,000) = $14,000
Paris ($1,125,000/$4,500,000)($70,000) = $17,500
Shreveport ($1,080,000/$4,500,000)($70,000) = $16,800
Variable Cost + Fixed Cost = Total
Baton Rouge ($18)(1,475) = $26,550 + $10,500 = $37,050
Kilgore ($18)(1,188) = $21,384 + $11,200 = $32,584
Longview ($18)(500) = $9,000 + $14,000 = $23,000
Paris ($18)(525) = $9,450 + $17,500 = $26,950
Shreveport ($18)(562) = $10,116 + $16,800 = $26,916

3. Method 2 allocates cost on the basis of the cost driver which causes it and would be more
likely to encourage managers to use Purchasing Department time effi-ciently. Method 1 assigns
purchasing costs according to a base that may not be causally related. Therefore, an apartment
complex with stable rentals from one year to the next may still experience wild fluctuations in
allocated cost due to changing rental patterns of other apartment complexes.

7–31

1. Department A Department B
Direct overhead $200,000 $ 800,000
Maintenance:
(1/8)($500,000) 62,500
(7/8)($500,000) 437,500
Power:
(1/6)($225,000) 37,500
(5/6)($225,000) 187,500
Setups:
(40/200)($150,000) 30,000
(160/200)($150,000) 120,000
General Factory:
(0.272)($625,000) 170,000
(0.728)($625,000) 455,000
Total $500,000 $ 2,000,000
Dept. A overhead rate: $500,000/200,000 = $2.50 per DLH
Dept. B overhead rate: $2,000,000/120,000 = $16.67 per MHr (rounded)
7–31 Continued

2. Allocation order: General Factory, Maintenance, Power, Setups, A, and B

Allocation Ratios
Alloc. from: G.F. Maint. Power Setups Dept. A Dept. B
G.F. — 0.125 0.200 0.025 0.177 0.473
Maint. — — 0.150 0.050 0.100 0.700
Power — — — — 0.167 0.833
Setups — — — — 0.200 0.800
G.F. Maint. Power Setups Dept. A Dept. B
Direct $ 625,000 $ 500,000 $ 225,000 $ 150,000 $200,000 $ 800,000
G.F. (625,000) 78,125 125,000 15,625 110,625 295,625
Maint. — (578,125) 86,719 28,906 57,813 404,687
Power — — (436,719) — 72,932 363,787
Setups — — — (194,531) 38,906 155,625
Total $ 0 $ 0 $ 0 $ 0 $480,276 $ 2,019,724
Dept. A overhead rate: ($480,276/200,000) = $2.40 per DLH*
Dept. B overhead rate: ($2,019,724/120,000) = $16.83 per MHr*
*Rounded

Job SS Job TT
Prime cost $120,000 $ 50,000
Overhead:
($2.40 × 5,000) 12,000
($16.83 × 500) 8,415
($2.40 × 400) 960
($16.83 × 3,000) 50,490
$140,415 $101,450
Markup (50%) 70,208 50,725
Total bid revenue $210,623 $152,175
Units ÷ 14,400 ÷ 1,500
Bid price $ 14.63 $ 101.45
Although the difference is small, it appears to make the bids more attractive.

3. The use of the sequential method to allocate support-department costs to produc-ing

departments gives more accurate overhead rates.

4. If the best competing bid was $4.10 lower than the original bid, then it would be $14.65. In this
case, the sequential method of allocating overhead costs would provide a bid ($14.63) that is
just below the competing bid. Since the sequential method is more accurate, the $14.63 bid is a
good one.