ACCOUNTING 342 Chapter 15 Homework Solutions 15-1 Operating departments are the units in an organization within which the central purposes of the organization are carried out; these departments usually generate revenue. By contrast, service departments provide support or assistance to the operating departments. Examples of service departments include laundry services, internal auditing, airport maintenance services (ground crews), cafeteria, personnel, cost accounting, and so on.
how much of the service department s capacity is acquired to serve each of the other departments. Two general guidelines also govern the allocation of variable service department costs to other departments: (1) allocate at budgeted rates, and (2) allocate the costs according to whatever activity (direct labor-hours, pounds of laundry, etc.) causes their incurrence.
15-2 Service department costs are allocated to products and services in two stages. Service department costs are first allocated to the operating departments. These allocated costs are then included in the operating departments overhead rates, which are used to cost products and services.
15-7 If a variable base is used to allocate fixed costs, the costs allocated to one department will depend in large part on what is happening in other departments. As a consequence, the amount of service department cost allocated to a department will increase or decrease depending on the activity in other departments.
15-3 Interdepartmental service costs exist whenever two service departments perform services for each other. Under the step method, the costs of the service department performing the greatest amount of service for the other service departments are allocated first, the costs of the service department performing the next greatest amount of service are allocated next, and so forth through all the service departments. Once a service department s costs have been allocated, costs are not reallocated back to it under the step method. 15-4 Under the direct method, costs are not allocated from one service department to another. Rather, all service department costs are allocated directly to operating departments. 15-5 If a service department generates revenues, these revenues should be offset against the department s costs and only the net amount of cost remaining after this offset should be allocated to other departments. 15-6 Two general guidelines govern the allocation of fixed service department costs to other departments: (1) allocate only budgeted costs, and (2) allocate fixed costs in predetermined, lump-sum amounts, according to
Problem 15- 10 1.
(Thousands of ¥) Factory Administration
Custodial Services Personnel
Maintenance
Machining Assembly
Step method Operating department costs ...... ¥376,300 Costs to be allocated ................ ¥270,000 ¥ 68,760 ¥ 28,840 ¥ 45,200 Allocations: Factory Administration @ ¥1,800 per labor-hour ..... (270,000) 5,400 9,000 39,600 54,000 Custodial Services @ ¥720 per square foot. ...... (74,160) 2,160 7,200 50,400 Personnel @ ¥320,000 per employee ... (40,000) 8,000 12,800 Maintenance @ ¥1,250 per machinehour................................... (100,000) 87,500 Total overhead after allocations............................. ¥ 0 ¥ 0 ¥ 0 ¥ 0 ¥581,000 Divide by machine-hours (thousands) .......................... 70 Divide by direct labor-hours (thousands) .......................... Overhead rate.......................... ¥ 8,300
¥175,900
162,000 14,400 19,200
12,500 ¥384,000
80 ¥ 4,800
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Problem 15- 10 (continued) 2.
(Thousands of ¥) Factory Administration Direct method Operating department costs ...... Costs to be allocated ................ ¥270,000 Allocations: Factory Administration (1/4, 3/4) ........................... (270,000) Custodial Services (7/9, 2/9)... Personnel (2/5, 3/5)............... Maintenance (7/8, 1/8) .......... Total overhead after allocations............................. ¥ 0 Divide by machine-hours (thousands) .......................... Divide by direct labor-hours (thousands) .......................... Overhead rate..........................
Custodial Services Personnel
¥68,760
¥28,840
Maintenance
Machining Assembly
(28,840) (45,200) 0
¥
0
¥175,900
67,500 53,480 11,536 39,550
202,500 15,280 17,304 5,650
¥548,366
¥416,634
¥45,200
(68,760)
¥
¥376,300
¥
0
70
¥ 7,834 ¥
80 5,208
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3
Problem 15- 10 (continued) 3. Plantwide rate
Overhead rate= =
Total overhead cost Total direct labor-hours ¥965,000,000 = ¥9,650 per DLH 100,000 DLHs
4. The amount of overhead cost assigned to the job would be: Step method: Machining Department: ¥8,300 per machine-hour × 190 machine-hours................................................. ¥1,577,000 Assembly Department: ¥4,800 per direct labor-hour × 75 direct labor-hours ........................................... 360,000 Total overhead cost ..................................................... ¥1,937,000 Direct method: Machining Department: ¥7,834 per machine-hour × 190 machine-hours................................................. ¥1,488,460 Assembly department: ¥5,208 per direct labor-hour × 75 direct labor-hours .............................................. 390,600 Total overhead cost ..................................................... ¥1,879,060 Plantwide method: ¥9,650 per direct labor-hour × 100 direct labor-hours.. ¥ 965,000 The plantwide method, which is based on direct-labor hours, assigns very little overhead cost to the job since it requires little labor time. Assuming that Factory Administrative costs really do vary in proportion to labor-hours, Custodial Services with square feet occupied, and so on, the company will tend to undercost such jobs if a plantwide overhead rate is used (and it will tend to overcost jobs requiring large amounts of labor time). The direct method is better than the plantwide method, but the step method will generally provide the most accurate overhead rates of the three methods.
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Problem 15- 11 1.
Auto Division Variable costs: $3 per meal × 35,000 meals..... $105,000 $3 per meal × 20,000 meals..... Fixed costs: 65% × $40,000....................... 26,000 35% × $40,000....................... Total cost allocated..................... $131,000
Truck Division
$60,000
14,000 $74,000
The variable costs are allocated by multiplying the budgeted rate per meal by the budgeted number of meals that will be served in each division during the month. The fixed costs are allocated in predetermined, lump-sum amounts based on the peak-period need for meals in each division. 2.
Auto Division Variable costs: $3 per meal × 20,000 meals..... $3 per meal × 20,000 meals..... Fixed costs: 65% × $40,000....................... 35% × $40,000....................... Total cost allocated.....................
Truck Division
$60,000 $60,000 26,000 $86,000
14,000 $74,000
The variable costs are allocated according to the budgeted rate per meal and not according to the actual rate. The fixed costs are again allocated in predetermined, lump-sum amounts, based on budgeted fixed costs. Any difference between budgeted and actual costs is not allocated, but rather is treated as a spending variance of the cafeteria: Total actual costs for the month................ Total cost allocated above ........................ Spending variance not allocated .............
Variable $128,000 120,000 $ 8,000
Fixed $42,000 40,000 $ 2,000
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Problem 15- 11 (continued) 3. Actual variable costs.............. Actual f ixed costs.................. Total actual costs ..................
$128,000 42,000 $170,000
One-half of the cost, or $85,000, would be allocated to each division, since an equal number of meals were served in each division during the month. 4. This method has two major problems. First, the spending variances should not be allocated, since this forces the inefficiencies of the service department onto the using departments. Second, the fixed costs should not be allocated according to month-by-month usage of services, since this causes the allocation to one division to be affected by what happens in another division. 5. Their strategy probably will be to underestimate their peak period requirements in order to force a greater proportion of any allocation onto other departments. Top management can control ploys of this type by careful follow-up, with rewards being given to those managers who estimate accurately, and severe penalties assessed against those managers who underestimate their peak period requirements. For example, departments whose managers underestimate their peak period requirements may be denied access to the cafeteria once their estimates have been exceeded.
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Problem 15- 12 1. Yes, there is merit to the complaint. The company is using a variable base (hours of hangar use) to allocate costs that are largely fixed. Thus, the amount of cost that is charged to a division during a given month will depend to a large extent on usage in other divisions. A reduction in usage in one division can result in shifts of costs from it onto the other divisions, even though the other divisions receive no more service. 2. 1st quarter activity ............... 2nd quarter activity .............. Difference............................
Variable cost element = =
Hours of Use 3,000 2,000 1,000
Total Cost $172,000 168,000 $ 4,000
Change in cost Change in activity $4,000 = $4 per hour 1,000 hours
Fixed cost per quarter: Total cost, 1st quarter................................................ Less variable cost ($4 per hour × 3,000 hours)............ Fixed cost .................................................................
$172,000 12,000 $160,000
Thus, the cost formula is $160,000 f ixed cost plus $4 per hour variable cost.
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Problem 15- 12 (continued) 3. Even though the peak-period level of activity will not be reached until the fourth quarter, it should still be used to allocate the fixed costs of the hangar. The reason is that peak-period requirements determine the present level of fixed costs. The fact that the divisions do not need a peak-period level of servicing every quarter is immaterial. If the divisions require such servicing at certain times, then the capacity to deliver it must be available, and it is the responsibility of the divisions to bear the cost of that capacity. Domestic Overseas Freight Passenger Passenger 1st quarter allocation: Variable cost: $4 per hour × 900 hours ................. $ 3,600 $4 per hour × 1,800 hours............... $4 per hour × 300 hours ................. Fixed cost: 30% × $160,000 ............................ 48,000 50% × $160,000 ............................ 20% × $160,000 ............................ Total cost allocation ........................... $51,600 2nd quarter allocation: Variable cost: $4 per hour × 800 hours ................. $ 3,200 $4 per hour × 700 hours ................. $4 per hour × 500 hours ................. Fixed cost: 30% × $160,000 ............................ 48,000 50% × $160,000 ............................ 20% × $160,000 ............................ Total cost allocation ........................... $51,200
$ 7,200 $ 1,200
80,000 $87,200
32,000 $33,200
$ 2,800 $ 2,000
80,000 $82,800
32,000 $34,000
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Problem 15- 14 1. Beginning-of-year allocations of variable costs are computed by multiplying the budgeted rate by the budgeted level of activity. Fixed costs are allocated in lump-sum amounts based on the peak-period needs of the using departments. The computations are: Forming Assembly Department Department Variable costs: $0.40 per machine-hour × 160,000 machine-hours ....... $0.40 per machine-hour × 80,000 machine-hours ......... Fixed costs: 70% × $150,000 ................... 30% × $150,000 ................... Total cost allocated...................
Total
$ 64,000 $32,000
$ 96,000
45,000 $77,000
150,000 $246,000
105,000 $169,000
2. a. End-of-year allocations of variable costs are computed by multiplying the budgeted rate by the actual level of activity. Fixed costs are again allocated in predetermined lump-sum amounts based on budgeted costs. The computations are: Forming Assembly Department Department Variable costs: $0.40 per machine-hour × 190,000 machine-hours ....... $0.40 per machine-hour × 70,000 machine-hours ......... Fixed costs: 70% × $150,000 ................... 30% × $150,000 ................... Total cost allocated...................
Total
$ 76,000 $28,000
$104,000
45,000 $73,000
150,000 $254,000
105,000 $181,000
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Problem 15- 14 (continued) b. Any difference between the budgeted and actual variable cost per machine-hour or between the budgeted and actual total fixed cost would not be allocated to the other departments. The amount not allocated would be:
Actual cost incurred during the year... Cost allocated (above) ...................... Cost not allocated (spending variance).......................................
Variable Fixed Cost Cost Total $110,000 $153,000 $263,000 104,000 150,000 254,000 $ 6,000 $ 3,000 $ 9,000
The costs not allocated are spending variances of the Maintenance Department and are the responsibility of the Maintenance Department s manager.
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