FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
expand_more
expand_more
format_list_bulleted
Related questions
Concept explainers
Question
Best Practices, Inc., is a management consulting firm. Its Corporate Division advises private firms on the adoption and use of cost management systems. Government Division consults with state and local governments. Government Division has a client that is interested in implementing an activity-based costing system in its public works department. The division’s head approached the head of Corporate Division about using one of its associates. Corporate Division charges clients $645 per hour for associate services, the same rate other consulting companies charge. The Government Division head complained that it could hire its own associate at an estimated variable cost of $245 per hour, which is what Corporate pays its associates.
Suppose that Government Division will charge the client interested in implementing an activity-based costing system by the hour based on cost plus a fixed fee, where the cost is primarily the consultant’s hourly pay. Assume also that Government Division cannot hire additional consultants. That is, if it is to do this job, it will need to use a consultant from Corporate Division.
Required:
a-1. What is the minimum transfer price that Corporate Division should obtain for its services, assuming that it is operating at capacity?
a-2. Would this be an ethical price to charge the Government client?
b-1. What is the transfer price you would recommend if Corporate Division was not operating at capacity?
b-2. Would this be an ethical price to charge the Government client?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution
Trending nowThis is a popular solution!
Step by stepSolved in 2 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Similar questions
- Tim Johnson is a news reporter and feature writer for The Wall Street Review, an important daily newspaper for financial managers. Tim’s assignment is to develop two feature articles: one on life-cycle costing and one on business analytics, including interviews with chief financial officers and operating managers. Tim has a generous travel budget for research into company history, operations, and market analysis for the firms he selects for the article. Tim has asked you to recommend industries and firms that would be good candidates for the article. What would you advise? Explain your recommendations.arrow_forwardCost allocation and decision making. Reidland Manufacturing has four divisions: Acme, Dune, Stark, and Brothers. Corporate headquarters is in Minnesota. Reidland corporate headquarters incurs costs of $16,800,000 per period, which is an indirect cost of the divisions. Corporate headquarters currently allocates this cost to the divisions based on the revenues of each division. The CEO has asked each division manager to suggest an allocation base for the indirect headquarters costs from among revenues, segment margin, direct costs, and number of employees. The following is relevant information about each division:arrow_forwardThe Riverbed Brokerage firm is organized into two major sales divisions: institutional clients and retail clients. The firm also has two support departments: research and administration. The research department’s costs are allocated to the other departments based on a log of hours spent on tasks for each user. The administration department’s costs are allocated based on the number of employees in each department. Records are available for last period as follows: Support departments Operating departments Research Administration Institutional RetailPayroll costs $ 338,400 $ 289,700 $ 366,600 $ 585,200Other costs $ 231,370 $ 163,800 $ 112,830 $ 238,870Research hours 100 200 500 300Number of employees 7 10…arrow_forward
- The Sunland Company makes wheels and wings for ground transport vehicles and drones. In addition to the key manufacturing departments, Sunland needs two key support services, provided by its Maintenance and IT departments. The Maintenance costs are allocated to other departments based on the square footage of space each department occupies. The IT department allocates its costs to other departments based on the amount of time the IT employees spend assisting the other departments. The cost information of all four departments, along with their usage information for both allocation bases, is as follows. Initial cost Square feet occupied IT labor hours used Support Departments Maintenance IT $136,000 $75,000 1,200 2,000 900 Operating Departments Wheels Wings $413,000 $702,000 2,400 2,565 5,600 1,935 Totals $1,326,000 11,200 5,400arrow_forwardYou are the managerial accountant at Reliable Company and are part of the organization's budgeting committee. You have been assigned to support the marketing department and manage its master budget. The marketing department is responsible for the following: Managing the firm's marketing Hiring subcontractors Selling the consulting expertise to smaller outside firms The department's expenses are as follows: Salaries and benefits of $48,000/month Web site operations of $21,000/ month Online advertising expenses of $15,000/month Miscellaneous expenses of $3,500/month The sales forecast for its consulting services are as follows: April: $190,000 May: $200,000 June: $205,000 The department pays a sales commission of 5%, and this is paid in the following month. Subcontractor expenses are estimated at 45% of sales and are paid the month after they are billed. Consulting fees are collected 20% in the month of sale, 70% in the following month, and 10% in the second month following…arrow_forwardMartin and Beasley, an accounting firm, provides consulting and tax planning services. A recent analysis found that 55% of the firm's billable hours to clients resulted from tax planning and for many years, the firm's total administrative cost (currently $270,000) has been allocated to services on this basis. The firm, contemplating a change to activity-based costing, has identified three components of administrative cost, as follows: Staff support $200,000 In-House Computing Charges $50,000 Misc. Office Cost 20,000 Total Cost: 270,000 A recent analysis of staff support found a strong correlation with the number of clients served. In contrast, in-house computing and miscellaneous office cost varied directly with the number of computer hours logged and number of client transactions, respectively. Consulting clients served totaled 35% of the total client base, consumed 30% of the firm's computer hours, and accounted for 20% of the total client transactions. If Martin and Beasley switched…arrow_forward
- Kentfield Advisory Services (KAS) is a large management consulting firm organized into two groups: Governmental Services (GS) and Commercial Support (CS). Corporate information technology (IT) services support both groups. The cost of computer support is $47 million. The following information is given: Governmental Services Commercial Support Utilization Revenues ($000) $ 241,400 438,600 Required A Required: a. What is the cost charged to each group if the allocation is based on the utilization? b. What is the cost charged to each group if revenue is the allocation basis? c. Most of the business in Commercial Support is priced on a fixed fee basis, and most of the work in the Governmental Services Department is priced on a cost-plus fixed fee basis. Will the allocation base selected affect the amount of revenue? Complete this question by entering your answers in the tabs below. Required B Required C 43% Governmental services Commercial Support 57 What is the cost charged to each group…arrow_forwardDetermine the total costs that each operating segment would be accountable for if the step method is used to allocate support costs; assume support departments are ranked according to their original cost. (Round intermediate calculations to 4 decimal places, e.g. 15.2516 and final answers to 2 decimal places, e.g. 15.25.) Total costs $ Operating Segments Institutional Taythank and Media. 776887.5 Retail 468712.5arrow_forwardBaldwin Enterprises has two service departments, Personnel and Legal, and two operating divisions, Eastern and Western. Personnel costs are allocated on the basis of employees and Legal costs are allocated on the basis of hours. A summary of Baldwin operations follows: Employees Hours Department direct costs Costs Personnel Legal Complete this question by entering your answers in the tabs below. Total Personnel $ Personnel $ 10,800 $ 320,000 Required: a. Allocate the cost of the service departments to the operating divisions using the direct method. b. Allocate the cost of the service departments to the operating divisions using the step method. Start with Legal. c. Allocate the cost of the service departments to the operating divisions using the reciprocal method. 320,000 $ 320,000 $ Required A Required B Required C Allocate the cost of the service departments to the operating divisions using the reciprocal method. Note: Do not round intermediate calculations. Round your final answers…arrow_forward
- Founder Consulting Corporation has its headquarters in Memphis and operates from three branch offices in Nashville, Atlanta, and Louisville. Two of the company's activity cost pools are Administrative Service and Development Service. These costs are allocated to the three branch offices using an activity-based costing system. Information for next year follows: Activity Cost Pool Activity Measure Estimated Cost Administrative service % of time devoted to branch $ 1,680,000 Development service Computer time $ 630,000 Estimated branch data for next year is as follows: Time to branch Computer time Nashville 70 % 1,600,000 minutes Atlanta 20 % 1,200,000 minutes Louisville 10 % 400,000 minutes Total 100 % 3,200,000 minutes How much of the headquarters cost allocation should Nashville expect to receive next year?arrow_forwardhaving trouble figuring out the Cost of Services? any advice? The Fly Company provides advertising services for clients across the nation. The Fly Company is presently working on four projects, each for a different client. The Fly Company accumulates costs for each account (client) on the basis of both direct costs and allocated indirect costs. The direct costs include the charged time of professional personnel and media purchases (air time and ad space). Overhead is allocated to each project as a percentage of media purchases. The predetermined overhead rate is 65% of media purchases. On August 1, the four advertising projects had the following accumulated costs: August 1 Balances Vault Bank $270,000 Take Off Airlines 80,000 Sleepy Tired Hotels 210,000 Tastee Beverages 115,000 Total $675,000 During August, The Fly Company incurred the following direct labor and media purchase costs related to preparing advertising for each of the four accounts: Direct…arrow_forwardR.p Within a company there is a (micro)economy that is monitored by the accounting procedures. In terms of the accounts, the various departments "produce" costs, some of which are internal and some of which are direct costs. This problem shows how an open Leontief model can be used to determine departmental costs. The sales department of an auto dealership charges 10% of its total monthly costs to the service department, and the service department charges 20% of its total monthly costs to the sales department. During a given month, the direct costs are $68,600 for sales and $49,000 for service. Find the total costs of each department. (Round your answers to the nearest whole number.) sales department $service department $arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,
Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis...AccountingISBN:9780134475585Author:Srikant M. Datar, Madhav V. RajanPublisher:PEARSON
Intermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill Education
Financial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education
Accounting
Accounting
ISBN:9781337272094
Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:Cengage Learning,
Accounting Information Systems
Accounting
ISBN:9781337619202
Author:Hall, James A.
Publisher:Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis...
Accounting
ISBN:9780134475585
Author:Srikant M. Datar, Madhav V. Rajan
Publisher:PEARSON
Intermediate Accounting
Accounting
ISBN:9781259722660
Author:J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:9781259726705
Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:McGraw-Hill Education