SMChap017 (1)

CHAPTER 1

Chapter 17 - Allocation of Support Activity Costs and Joint CostsChapter 17 - Allocation of Support Activity Costs and Joint Costs

CHAPTER 17 Allocation of Support Activity Costs and Joint Costs Answers to Review Questions 17-1A service department is a unit in an organization that is not involved directly in producing the organizations goods or services. However, a service department does provide a service that enables the organizations production process to take place. Production departments, on the other hand, are units that are directly involved in producing the organizations goods and services. An example of a service department in a bank would be the computer department or the human resources department. An example of a production department in a bank would be the consumer loan department.

17-2The term reciprocal services refers to the situation in which two or more service departments provide services to each other.

17-3 (a)Under the direct method of service department cost allocation, all service department costs are allocated directly to the production departments, and none of these costs are allocated to other service departments.

(b) Under the step-down method, a sequence is first established for allocation of service department costs. Then the costs incurred in the first service department in the sequence are allocated among all other departments that use that service departments services, including other service departments. The method proceeds in a similar fashion through the sequence of service departments.

(c) Under the reciprocal-services method, a system of simultaneous equations is established to reflect the reciprocal provision of services among service departments. Then all of the service departments costs are allocated among all of the departments that use the various service departments output of services. The reciprocal-services method of service department cost allocation is the only method that fully accounts for the reciprocal provision of services among departments.

17-4The first department in the sequence under the step-down method is the service department that serves the largest number of other service departments. The second department in the sequence is the service department that serves the second-largest number of service departments, and so forth. The sequence among tied service departments usually is an arbitrary choice.

17-5The dual-allocation approach improves the resulting cost allocations because variable costs are allocated in accordance with short-run usage, and fixed costs are allocated in accordance with long-run service requirements.

17-6A potential behavioral problem that can result from the dual approach to service department cost allocation is that service department managers may have a disincentive to provide correct predictions for their departments long-run service department needs.

17-7Budgeted service department costs should be allocated rather than actual service department costs. Allocating actual costs would reduce the incentive for cost control in the service departments.

17-8Under two-stage allocation with departmental overhead rates, costs first are distributed to departments; then they are allocated from service departments to production departments. Finally, they are assigned from production departments to products or services. Departments play a key role as intermediate cost objects under this approach. In an activity-based costing (ABC) system, on the other hand, the key role is played by activities, not departments. First, the costs of various activities are assigned to activity-cost pools; then these costs are assigned to products or services. The breakdown of costs by activity in an ABC system is much finer then a breakdown by departments. The ABC approach generally will provide a much more accurate cost for each of the organizations products or services.

17-9 (a)Joint-production process: A production process in which the processing of a common input results in two or more outputs called joint products.

(b) Joint costs: The costs incurred in a joint production process before the joint products become identifiable as separate products.

(c) Joint products: The output of a joint production process.

(d) Split-off point: The point in a joint production process at which the joint products become identifiable as separate products.

(e) Separable costs: Costs incurred to process joint products further after they pass the split-off point in a joint production process.

(f) By-product: A joint product with very little value relative to the other joint products.

17-10Under the physical-units method of joint cost allocation, joint production costs are allocated among the joint products in proportion to a physical characteristic of those products, such as weight or volume.

17-11Under the relative-sales-value method of joint cost allocation, joint production costs are allocated to the joint products in proportion to their sales value at the split-off point.

17-12The net realizable value of a joint product is equal to its ultimate sales value minus the separable costs incurred between the split-off point and the products final form. Under the net-realizable-value method of joint cost allocation, joint production costs are allocated among the joint products in proportion to their net realizable values.

17-13Joint cost allocations are useful for product-costing purposes. Product costing is useful for income determination, for inventory valuation, for third-party reimbursement situations, and various other purposes.

17-14The managerial accountant generally should be careful not to use joint cost allocations for making decisions.Solutions to exercises

Exercise 17-15 (15 minutes)

Direct Customer ServiceDepartments Using Services

DepositLoan

Provider of ServiceCost to BeAllocatedProportionAmountProportionAmount

HR$ 459,000(6/9)$306,000(3/9)$153,000

Computing 688,500(50/85)405,000(35/85)283,500

Total$1,147,500$711,000$436,500

Grand total$1,147,500


Direct Customer ServiceDepartments Using Services

HRComputingDepositLoan

Costs prior to allocation$459,000$688,500

Allocation of HRDepartment costs$459,00045,900(1/10)$275,400(6/10)$137,700(3/10)

Allocation of ComputingDepartment costs$734,400432,000(50/85) 302,400(35/85)

Total costs allocated toeach department$707,400$440,100

Total cost allocated todirect customer servicedepartments$1,147,500


Answers will vary widely, depending on the organization chosen. Support departments at the Mayo Clinic, for example, include Admissions, Patient Records, and Housekeeping, among others. At Sheraton Hotels, support departments include Registration, Maintenance, and the Concierge, among others.


1. Cost allocation using direct method:

Academic Departments Using Services

Liberal ArtsSciences


Library$ 900,000(3/5)$540,000(2/5)$360,000

Computing Services 360,000(3/8)135,000(5/8)225,000

Total$1,260,000$675,000$585,000

Grand total$1,260,000

2.In the electronic version of the solutions manual, press the CTRL key and click on the following link: 10E - Build a Spreadsheet 17-18.xlsExercise 17-19 (15 minutes)

1. Cost allocation using step-down method:Service DepartmentsAcademic DepartmentsUsing Services

ComputingServicesLibraryLiberalArtsSciences

Costs prior to allocation$360,000$900,000

Allocation of ComputingService costs*$360,00072,000(2/10)$108,000(3/10)$180,000(5/10)

Allocation of Librarycosts$972,000583,200(3/5)388,800(2/5)

Total costs allocated toeach department$691,200$568,800

Total cost allocated toacademic departments$1,260,000

*Allocated first because Computing Services provides service to the Library, but not vice versa.

2.In the electronic version of the solutions manual, press the CTRL key and click on the following link: 10E - Build a Spreadsheet 17-19.xlsExercise 17-20 (10 minutes)

JointCostJointProductsQuantity atSplit-Off PointRelativeProportionAllocationofJoint Cost

Yummies12,000 kilograms.60$54,000*

$90,000

Crummies8,000 kilograms.4036,000

Total20,000 kilograms$90,000

*$54,000 = $90,000 ( .60

$36,000 = $90,000 ( .40


JointCostJointProductsQuantity atSplit-OffSalesPriceSales Value atSplit-Off PointRelativeProportionAllocationofJoint Cost

Yummies12,000 kg$6.00$ 72,000.545*$49,050

$90,000

Crummies8,000 kg7.50 60,000.455*40,950**

Total$132,000$90,000

*Rounded$49,050 = $90,000 ( .545

**$40,950 = $90,000 ( .455


1. Decision analysis:

Incremental revenue per kilogram:

Sales price of mulch

$10.50

Sales price of Crummies

7.50

Incremental revenue

$3.00

Incremental processing cost per kilogram

1.50

Incremental revenue less incremental cost

$1.50

The Crummies should be processed further into the mulch.

Exercise 17-22 (Continued)

2. Joint cost allocation using net-realizable-value method:

JointCostJointProductsSales Value ofFinal ProductSeparable Costof ProcessingNetRealizableValue*RelativeProportionAllocationofJoint Cost

Yummies$72,000 (12,000 ( $6.00)-0-$ 72,000.50$45,000

$90,000

Mulch84,000 (8,000 ( $10.50)$12,000 72,000.5045,000

(8,000 ( $1.50)

$144,000$90,000

*Net realizable value = sales value of final product separable cost of processing$45,000 = $90,000 ( .50


(a) First, specify equations to express the relationships between the service departments.

Notation: H denotes the total cost of Human Resources

C denotes the total cost of Computing

Equations:H=459,000 + .15C(1)

C=688,500 + .10H(2)

Solution of equations: Substitute from equation (2) into equation (1).

H=459,000 + .15(688,500 + .10H)

.985H=562,275

H=570,838 (rounded)

Substitute the value of H into equation (2).

C=688,500 + .10(570,838)

C=745,584 (rounded)

Exercise 17-23 (Continued)

(b)Cost allocation using the reciprocal-services method:

Service DepartmentsDirect Customer ServiceDepartments

Human Resources (HR)ComputingDepositLoan

Traceable costs$459,000$688,500

Allocation of HRDepartment costs (570,838)57,084*(.1)$342,503*(.6)$171,251*(.3)

Allocation of ComputingDepartment costs111,838*(.15) (745,584)372,792(.50) 260,954*(.35)

Total cost allocated toeach direct customerservice department$715,295$432,205

Total costs allocated$1,147,500

*Roundedsolutions to Problems

Problem 17-24 (40 minutes)

1. Direct method:

Production Department

EtchingFinishing


Maintenance$96,000(1/9) $ 10,667*(8/9) $85,333*

Computing500,000(7/8)437,500(1/8)62,500

Total service department costs allocated

$448,167$147,833

Overhead costs traceable toproduction departments

400,000640,000

Total overhead cost

$848,167$787,833

Direct-labor hours (DLH)

(20 ( 2,000)

40,000

(80 ( 2,000)

160,000

Overhead rate per hour(total overhead DLH)

$21.204*$4.924*

Check on allocation procedure:

Service department costs allocated to Etching

$448,167

Service department costs allocated to Finishing

147,833

Total costs to be allocated ($96,000 + $500,000)

$596,000

*Rounded

Problem 17-24 (Continued)

2.Step-down method:

Service DepartmentsProduction Departments

ComputingMaintenanceEtchingFinishing

Costs prior to allocation$500,000$ 96,000

Allocation of ComputingDepartment costs$500,000 100,000(2/10)$350,000(7/10)$50,000(1/10)

Allocation of MaintenanceDepartment costs$196,00021,778 (1/9)174,222(8/9)

Total service department cost allocated

$371,778$224,222

Overhead costs traceable toproduction departments

400,000640,000

Total overhead cost

$771,778$864,222


(20 ( 2,000)

40,000

(80 ( 2,000)

160,000

Overhead rate per hour(total overhead DLH)

$19.294*$5.401*



$371,778


224,222

Total costs to be allocated ($96,000 + $500,000)

$596,000

*Rounded


1. Direct method:

Production Departments

MachiningFinishing


HR$250,000(4/9)$111,111*(5/9)$138,889*

Maintenance230,000(35/75)107,333*(40/75)122,667*

Design350,000(45/60)262,500(15/60)87,500

Total$830,000$480,944$349,056

Grand total$830,000

*Rounded

2. Sequence for step-down method:

1st:HR (serves 2 other service departments)2nd:Maintenance (serves 1 other service department)3rd:Design (serves no other service departments)


3. Step-down method:


HRMaintenanceDesignMachiningFinishing

Costs prior toallocation$250,000$230,000$350,000

Allocation of HRDepartment costs$250,00012,500(5/100)12,500(5/100)$100,000(40/100)$125,000(50/100)

Allocation ofMaintenanceDepartment costs$242,50015,156*(5/80)106,094*(35/80)121,250(40/80)

Allocation of DesignDepartment costs$377,656283,242(45/60)94,414(15/60)

Total costallocated to eachdepartment$489,336$340,664

Total cost allocated to production departments$830,000

*Rounded4.In the electronic version of the solutions manual, press the CTRL key and click on the following link: 10E - Build a Spreadsheet 17-25.xls


1. Direct method combined with dual allocation:

(a)Variable costs:


MachiningFinishing

Provider of ServiceCost to BeAllocatedProportion*AmountProportion*Amount

HR$50,000(4/9)$22,222(5/9)$27,778

Maintenance80,000(35/75)37,333(40/75)42,667

Design50,000(45/60)37,500(15/60)12,500

Total variable cost**$180,000$97,055$82,945

*Short-run usage proportions (from preceding problem) Rounded**$97,055 + $82,945 = $180,000

(b)Fixed costs:


MachiningFinishing

Provider of ServiceCost to BeAllocatedProportion*AmountProportion*Amount

HR$200,000(35/85)$82,353(50/85)$117,647

Maintenance150,000(48/72)100,000(24/72)50,000

Design300,000(48/60)240,000(12/60)60,000

Total fixed cost**$650,000$422,353$227,647

*Long-run proportions (from this problem)Rounded**$422,353 + $227,647 = $650,000Problem 17-26 (Continued)

(c) Total costs allocated:

MachiningFinishing

Variable costs

$97,055$82,945

Fixed costs

422,353227,647

Total costs

$519,408$310,592

Grand total

$830,000

2. Step-down method combined with dual allocation:

As in the preceding problem, the sequence of allocation is HR, Maintenance, and Design, respectively.


(a)Variable costs:




Allocation of HRDepartment costs$50,0002,500(5/100)*2,500(5/100)$20,000(40/100)$25,000(50/100)

Allocation ofMaintenanceDepartment costs$82,5005,156 (5/80)36,094 (35/80)41,250(40/80)


Total variable costallocated to eachdepartment$99,336**$80,664**

*Short-run usage proportions are used (from preceding problem).

Rounded.

**$99,336 + $80,664 = $180,000


(b)Fixed costs:




Allocation of HRDepartment costs$200,00010,000(5/100)*20,000(10/100)$70,000(35/100)$100,000(50/100)

Allocation ofMaintenanceDepartment costs$160,00016,000(8/80)96,000(48/80)48,000(24/80)


Total fixed costallocated to eachdepartment$434,800$215,200

*Long-run usage proportions are used (from this problem).

$434,800 + $215,200 = $650,000


(c)Total costs allocated:

MachiningFinishing

Variable costs

$99,336$80,664

Fixed costs

434,800215,200

Total costs

$534,136$295,864

Grand total

$830,000


1. Plantwide overhead rates:

Departments (numbers in thousands)

MoldingComponentAssemblyTotal

Manufacturing departments:

Variable overhead

$7,000$20,000$33,000$ 60,000

Fixed overhead

35,000 12,400 12,200 59,600

Total manufacturingdepartment overhead

$42,000$32,400$45,200$119,600

Service departments:

Power

36,800

Maintenance

8,000

Total estimated overhead

$164,400

Estimated direct-labor hours (DLH):

Molding

500

Component

2,000

Assembly

1,500

Total estimateddirect-labor hours

4,000

Plantwide overhead rate=

=

=$41.10 per direct-labor hour


2. Departmental overhead rates:

Departments (numbers in thousands)

ServiceManufacturing

PowerMaintenanceMoldingComponentAssembly

Departmental overheadcosts

$36,800$ 8,000$42,000$32,400$45,200

a.Allocation of mainten-ance costs (direct method) Proportions: 90/125, 25/125, 10/125

(8,000)5,760 1,600 640

b.Allocation of power costs (dual, direct method)Fixed costs($24,000):

Proportions:500/1,000, 350/1,000, 150/1,000

(24,000)12,0008,4003,600

Variable costs ($12,800):

Proportions: 360/800, 320/800,120/800(12,800)5,7605,1201,920

Total allocateddepartmentaloverhead costs

$0$0$65,520$47,520$51,360

c.Cost driver

875 MH2,000DLH1,500DLH

Rate (departmental overhead units of cost driver)

$74.88perMH$23.76perDLH$34.24perDLH


3.Memorandum

Date:Today

To:President, Travelcraft, Inc.

From:I.M. Student

Subject:Use of departmental overhead rates

Travelcraft should use departmental rates to assign overhead to its products. The criterion for choosing an allocation base is a close relationship between cost incurrence and use of the base. This relationship exists with different bases in different departments, necessitating the use of departmental rates. The companys production departments are dissimilar in that the Molding Department is machine-intensive while the other two departments are labor-intensive.


1. Net-realizable-value method of allocation:

JointCostper RunJointProductsSales Value ofFinal Product*Additional Cost of ProcessingNetRealizableValueRelative ProportionAllocation of Joint Cost

HTP-3

$2,240,000

$699,200

$1,540,800

48.15%

$ 654,840

$1,360,000 PST-4

1,680,000

652,800

1,027,200

32.10%

436,560

RJ-5

680,000

48,000

632,000

19.75%

268,600

Total$3,200,000$1,360,000

*Sales price ( quantity produced

Net realizable value $3,200,000, which is the sum of the net realizable values of the three joint products

Problem 17-28 (continued)

2. October production cost per gallon:

ProductHTP-3PST-4RJ-5

Joint cost allocation

$ 654,840$ 436,560$268,600

Additional processing costs

699,200652,80048,000

Total cost$1,354,040$1,089,360$316,600

Quantity produced (gallons)

700,000350,000170,000

Cost per gallon (rounded)

$1.93$3.11$1.86

Inventory valuation:

Product HTP-3PST-4 RJ-5

October 1 inventory (gallons)

18,00052,0003,000

October production (gallons)

700,000350,000170,000

Quantity available (gallons)

718,000402,000173,000

October sales (gallons)

650,000325,000150,000

October 31 inventory (gallons)

68,00077,00023,000

( Cost per gallon

($1.93($3.11($1.86

October 31 inventory (dollars)

$131,240$239,470$ 42,780

3.LeMonde Company should sell PST-4 at the split-off point. The incremental revenue of sales beyond the split-off point is less than the incremental cost of further processing.

Per gallon sales value beyond the split-off point

$4.80

Per gallon sales value at the split-off point

3.04

Incremental sales value

$1.76

Less: Additional processing costs per gallon($652,800 350,000 gallons)

1.87(rounded)

Per gallon gain (loss) of further processing

$ (.11)


1. Joint cost allocations using the relative-sales-value method:

Gamma: joint cost allocation= ( joint cost

= ( $78,000 = $11,700

Beta: joint cost allocation=total joint cost Alphas allocation

Gammas allocation

=$78,000 $46,800 $11,700 = $19,500

Summary of joint cost allocations:

Alpha

$46,800(given)

Beta

19,500

Gamma

11,700

Total

$78,000

2.Alphas joint cost allocation= ( joint cost

$46,800= ( $78,000

X=$46,800 (

X=$78,000

Alphas sales value at split-off=$78,000

Problem 17-29 (continued)

3. Joint cost allocation using the net-realizable-value method:

JointCostJointProductsSales Value ofFinal ProductSeparableCost of ProcessingNet RealizableValueRelative ProportionAllocation of Joint Cost

$78,000

$91,000$9,100$81,900.63$49,140

32,5006,50026,000.2015,600

26,0003,90022,100.1713,260

Total$149,500$19,500$130,000$78,000


1. Physical-units method of allocation:

JointCostJointProductsQuantity atSplit-Off PointRelativeProportionAllocation of Joint Cost

$750,000MSB

60,000

40%

$300,000

CBL

90,000

60%

450,000

Total

150,000$750,000

The joint cost allocated to CBL is $450,000.

2.Relative-sales-value method of allocation:

JointCostJointProductsSales Value atSplit-Off PointRelativeProportionAllocation of Joint Cost

$750,000MSB

$ 300,000

25%

$187,500

CBL

900,000

75%

562,500

Total

$1,200,000$750,000

The joint cost allocated to MSB is $187,500.


3. Net-realizable-value method of allocation:

JointCostJointProductsSales Value ofFinal ProductAdditional Cost of ProcessingNet RealizableValueRelative Proportion Allocation of Joint Cost

$750,000 MSB

$ 750,000*

$ 250,000

$ 500,0001/3

$250,000

CBL

2,000,000

1,000,000

1,000,0002/3

500,000

Total

$1,500,000$750,000

*$12.50 ( 60,000

$25 ( (90,000 10,000)

The unit cost of CBL is computed as follows:


$ 500,000


1,000,000

Total cost

$1,500,000

Quantity (good units)

80,000

Cost per unit ($1,500,000 80,000)

$18.75

4.Sales value if coated (60,000 ( $12.50)

$ 750,000

Additional cost of coating

250,000

Incremental contribution if coated

$ 500,000

Sales value if uncoated (60,000 ( $5)

300,000

Decline in contribution if uncoated

$ 200,000

The contribution would decrease by $200,000 if the mine support braces are not processed further.

5.The allocation of joint costs is irrelevant to the decision about coating the mine support braces. The decision should be based entirely on information pertaining to events from the split-off point forward. Thus, the joint cost allocation results were not used in making this production decision.

PROBLEM 17-31 (40 MINUTES)

1.Joint costs arise from the simultaneous processing or manufacturing of two or more products made from the same process. These joint costs are not traceable to any single product.

The split-off point is the stage in the manufacturing process at which joint products can be identified as individual units. Future costs are then accounted for separately.

2.The dollar value of the finished-goods inventories on November 30 for products MJ-4 and HD-10 are calculated as follows:

Joint costs to be allocated:

Total joint costs incurred

$3,136,000

Less: Net realizable value (NRV) of FT-5*

136,000

Joint costs to be allocated

$3,000,000

*NRV = 85,000 gal. ( ($1.80($.20)

Allocation of joint costs:

MJ-4HD-10

November production (in gallons)

600,000 320,000

Final sales value per gallon

( $8.00( $12.75Total sales value

$4,800,000$4,080,000

Less: Separable-costs

1,440,000 1,840,000 NRV at split-off

$3,360,000$2,240,000

Divided by total NRV at split-off

( 5,600,000( 5,600,000*

Percentage allocation

.60 .40

Joint cost to be allocated

( $3,000,000( $3,000,000Joint cost allocation

$1,800,000$1,200,000

*Total NRV at split-off equals $5,600,000 ($3,360,000 + $2,240,000).

PROBLEM 17-31 (CONTINUED)

Inventory values on November 30:

MJ-4HD-10


$1,800,000$1,200,000


1,440,000 1,840,000 Total cost

$3,240,000$3,040,000

Gallons produced

( 600,000( 320,000Cost per gallon

$ 5.40 $ 9.50

Finished-goods inventory (gallons)

( 9,000( 26,000 Inventory value

$ 48,600$ 247,0003.Wyalusing Chemicals should continue to process HD-10 beyond the split-off point, since the incremental revenue is $1.00 greater per gallon than the incremental cost. The joint cost is irrelevant to the decision because it will not change regardless of the decision to sell as is or process further. The analysis follows:

Per UnitTotal

Per-gallon sales value after split-off

$12.75

Per-gallon sales value at split-off

6.00Incremental sales value

$ 6.75$2,160,000*

Additional processing cost

5.75 1,840,000Incremental revenue

$ 1.00$ 320,000

*320,000 gal. ( $6.75

$1,840,000/320,000 gal.


1. Physical-units method:

JointCostper RunJointProductsQuantity atSplit-Off PointRelativeProportionAllocation of Joint Cost

$750,000 Compod ..

120,000 gallons

60%

$450,000

Ultrasene

80,000 gallons

40%

300,000

Total.200,000 gallons..$750,000

The joint cost allocated to Compod is $450,000.

2. Relative-sales-value method:

JointCostper RunJointProductsSales Value atSplit-Off PointRelativeProportionAllocation of Joint Cost

$750,000 Compod

$ 720,000

48%

$360,000

Ultrasene

780,000

52%

390,000

Total.. $1,500,000$750,000

The joint cost allocated to Ultrasene is $390,000.

3. Now there are additional processing costs beyond the split-off point.

a. Additional processing costs have no effect on the physical-units method of allocation. The joint cost allocated to Ultrasene is $300,000, as calculated in requirement (1).

b. Net-realizable-value method:

JointCostper RunJointProductsSales Value ofFinal ProductSeparable Cost of ProcessingNet RealizableValueRelative ProportionAllocation of Joint Cost

$750,000Compod

$720,000

$ 36,000

$ 684,00057%

$427,500

Ultrasene

780,000

264,000

516,00043%

322,500

Total$1,200,000$750,000

The joint cost allocated to Compod is $427,500.


4.Incremental revenue per gallon from further processing into Compodalene ($7.80 $6.00)

$1.80

Incremental cost per gallon from further processing:

Processing cost

$1.20

Sales commission ($7.80 ( 10%)

.78 1.98

Incremental loss per gallon from further processinginto Compodalene

$(.18)

Conclusion: Do not process Compod into Compodalene. The firm should sell Compod. (Note that the $.30 per gallon separable processing cost to obtain Compod is irrelevant. The question is what to do with the Compod after it has been obtained. The relevant data are the incremental costs and benefits associated with turning Compod into Compodalene.)

5. The director of research, Jack Turner, acted improperly in asking the assistant controller to alter her analysis in favor of producing Compodalene. If he believes the further processing of Compod is in Chemcos best interests, he should try to back up his claim with some projected cost reductions and the potential impact on the companys market. He could present his own estimates to Christine Dalton, or directly to the managers responsible for making the final decision.

The assistant controller, Christine Dalton, should not alter her analysis to support the production of Compodalene. In the absence of any further information, she should recommend against the further processing of Compod. Several ethical standards for management accountants (listed in Chapter 1) are relevant, including the following:

Competence

Prepare complete and clear reports and recommendations after appropriate analyses of relevant and reliable information.

Credibility Communicate information fairly and objectively.

Disclose fully all relevant information that could reasonably be expected to influence an intended users understanding of the reports, comments, and recommendations presented.


6. It is preferable to sell Compod than to sell Compodalene, as the solution to requirement (4) showed. Nevertheless, it is preferable to sell Compodalene than to sell nothing, since each gallon of Compodalene makes a positive contribution toward covering the joint production cost, fixed costs, and profit.

Incremental revenue from sale of a gallon of Compodalene (if the alternative is no sale)

$7.80

Incremental cost (if the alternative is to stopproduction at the split-off point):

Separable processing to produce Compod afterthe split-off point

$.30

Further processing cost to turn Compod into Compodalene

1.20

Sales commission

.78

Total

2.28

Contribution to the joint production cost, fixed costs,and profit

$5.52


1. Reciprocal-services method:

Equations:M = 96,000 + .2C

C = 500,000 + .1MWhere M denotes the total cost of the Maintenance Department

C denotes the total cost of the Computing Department

problem 17-33 (continued)

Solution of equations:

M = 96,000 + .2 (500,000 + .1M)

M = 96,000 + 100,000 + .02M

.98 M = 196,000

M = 200,000

C = 500,000 + .1 (200,000)

C = 520,000

Allocation:


MaintenanceComputing EtchingFinishing

Traceable costs

$96,000$500,000

Allocation of MaintenanceDepartment costs

(200,000)20,000(.1)$20,000(.1)$160,000(.8)

Allocation of ComputingDepartment costs

104,000(.2)(520,000)364,000(.7)52,000(.1)

Total service department costs allocated

$384,000$212,000

Overhead costs traceable to production departments

400,000640,000

Total overhead cost

$784,000$852,000


(20 ( 2,000)

40,000

(80 ( 2,000)

160,000

Overhead rate per hour (total overhead DLH)

$19.60$5.325



$384,000


212,000

Total

$596,000

2.The direct allocation method ignores any service rendered by one service department to another. Allocation of each service departments total cost is made directly to the production departments. The step-down method recognizes one service departments usage of services, but ignores the others usage of services. The reciprocal services allocation method recognizes all service department support to other service departments through the use of simultaneous equations. This allocation procedure should lead to more accurate results that would be of greater value to management.


1. Variable costs:

Notation:

R denotes the total variable cost of Patient RecordsH denotes the total variable cost of Human ResourcesA denotes the total variable cost of Administration and Accounting

Equations:R = 24,000 + .05P(1)H = 15,000 + .05A(2)A = 47,500 + .20P(3)

These equations are based on the variable costs and short-run usage proportions given in Exhibit 18-2.


H=15,000 + .05(47,500 + .20H).99H=17,375 H=17,551 (rounded)

Substitute the value of H into equations (1) and (3).

R=24,000 + .05(17,551)R=24,878 (rounded)A=47,500 + .20(17,551)A=51,010 (rounded)


Allocation of variable costs:

Service DepartmentsDirect-Patient-Care Departments

HumanResourcesAdministrationandAccountingPatientRecordsOrthopedicsInternal Medicine

Traceable costs

$15,000$47,500$24,000

Allocation of Human ResourcesDepartment costs

(17,551)3,510(.20)878*(.05)$4,388*(.25)$8,776*(.50)

Allocation of Administration and Accounting Department costs

2,551*(.05)(51,010)-0-(0)17,854*(.35)30,606(.60)

Allocation of PatientRecords Department costs

(0)(0)(24,878)7,463*(.30)17,415*(.70)

Total variable cost allocated to each direct-patient-care department

$29,705$56,797

*Rounded$29,705 + $56,797 = $86,502; differs from the total variable cost ($86,500) because of cumulative rounding.Problem 17-34 (Continued)

2. Fixed costs:

Notation:

R denotes the total fixed cost of Patient RecordsH denotes the total fixed cost of Human ResourcesA denotes the total fixed cost of Administration and Accounting

Equations:R = 76,000 + .10P(4)H = 45,000 + .10A(5)A = 142,500 + .10P(6)

These equations are based on the fixed costs given in Exhibit 18-2 and the long-run usage proportions given in Exhibit 18-5.


H=45,000 + .10(142,500 + .10H).99H=59,250 H=59,848 (rounded)

Substitute the value of H into equations (4) and (5).

R=76,000 + .10(59,848)R=81,985 (rounded)A=142,500 + .10(59,848)A=148,485 (rounded)


Allocation of fixed costs:

Service DepartmentsDirect-Patient-Care Departments

HumanResourcesAdministrationandAccountingPatientRecordsOrthopedicsInternal Medicine

Traceable costs

$45,000$142,500$76,000

Allocation of Human

Resources Department costs

(59,848)5,985*(.10)5,985*(.10)$11,970*(.20)$35,909*(.60)

Allocation of Administration and Accounting Department costs

14,849*(.10)(148,485)-0-(0)66,818*(.45)66,818*(.45)

Allocation of PatientRecords Department costs

-0-(0)-0-(0)(81,985)32,794(.40)49,191(.60)

Total fixed cost allocated to each direct-patient-care department

$111,582$151,918

*Rounded$111,582 + $151,918 = $263,500


Total costs allocated:

OrthopedicsInternalMedicine

Variable costs

$29,705$56,797

Fixed costs

111,582151,918

Total costs

$141,287$208,715

Grand total

$350,002*

*Differs from the total cost to be allocated ($350,000) due to cumulative rounding in the allocation of the variable costs.

solutions to cases

Case 17-35 (40 minutes)

1.Product output in pounds:

ProductProportionTotalPoundsPoundsLost inProcessingNet Pounds

Slices.35189,000189,000

Crushed.28151,200151,200

Juice.27145,80010,800*135,000*

Animal feed.10 54,00054,000

Total540,00010,800529,200

*Evaporation loss is 8% of the remaining good output. Let X denote the remaining quantity of juice:

145,800 .08X=X

145,800=1.08 X

135,000=X

Check: evaporation loss = (8%)(135,000) = 10,800

2.Net realizable value at the split-off point:

ProductPounds ofProductionSellingPriceSalesRevenueSeparableCostNet Realizable Value

AmountPercent

Slices189,0001.20$226,800$18,800$208,00052%

Crushed151,2001.10 166,320 42,320 124,00031%

Juice135,000 .6081,00013,000 68,00017%

Total$474,120$74,120$400,000100%

Case 17-35 (Continued)

3. Allocation of joint costs:

Cutting department costs

$240,000

Less net realizable value of by-product

Sales value (10% ( 540,000 ( $.20)

$10,800

Separable cost

(2,800)

Net realizable value of animal feed

8,000

Balance of joint cost to be allocated to main productsin proportion to net realizable value

$232,000

Allocation of joint cost:

Slices52%

$120,640

Crushed31%

71,920

Juice17%

39,440

Total

$232,000

CASE 17-36 (50 minutes)

1. Diagram of joint production process:

Case 17-36 (continued)

2. Allocation of joint costs:

a. Physical-units method:

JointCostJointProductsQuantity atSplit-Off PointRelativeProportionAllocation of Joint Cost

$630,000Resoline8,000 pounds8/10$504,000

Krypto2,000 pounds2/10126,000

Total10,000 pounds$630,000

b.Relative-sales-value method:

JointCostJointProductsSales Value atSplit-Off PointRelativeProportionAllocation of Joint Cost

$630,000Resoline$600,0002/3$420,000

Krypto300,0001/3210,000

Total$900,000$630,000

c.Net-realizable-value method:

JointCostJointProductsSalesValue of

Final ProductSeparableCost of ProcessingNet RealizableValueRelative ProportionAllocation of Joint Cost

$630,000

$840,000$120,000$ 720,000.60$378,000

570,000 90,000 480,000.40252,000

Total$1,200,000$630,000

Case 17-36 (continued)

3.Decision analysis:

Incremental revenue per pound:

Sales price of Omega

$390

Sales price of Kryptite

285

Incremental revenue

$105

Incremental cost per pound:*

Separable processing

$120

Packaging

18

Incremental cost

138

Incremental loss per pound

$(33)

Conclusion: The Kryptite should not be processed further into Omega.

*Notice that these are the separable costs incurred after Kryptite has already been produced. The separable costs of processing Krypto into Kryptite are properly excluded.

4.The joint cost allocation should not be used in the decision analysis. The total joint cost will not be affected by the decision.

5.

In the electronic version of the solutions manual, press the CTRL key and click on the following link: 10E - Build a Spreadsheet 17-36.xlsResolite,

sales value: $840,000

(8,000 x $105)

Separable process costing: $120,000

(8,000 x $15)

Resoline,


(8,000 x $75)

Joint

production process costing $450,000

10,000 gallons of input costing $180,000

Split-off point

Kryptite,


(2,000 x $285)

Krypto,


(2,000 x $150)

Separable process costing: $90,000

(2,000 x $45)

Total joint cost:

$630,000 for

a 10,000 gallon

batch

17-40Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 17-1Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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