Concept explainers
Support activity cost allocation
Kizzle’s Crepes Co. produces world famous crepes. The company’s crepes are produced via its Mixing and Cooking activities, which both rely on the Janitorial and Maintenance activities. Kizzle’s management knows the most practical driver of Janitorial costs is square feet, but is uncertain whether to allocate Maintenance costs based on asset value of production equipment, number of service calls, or machine hours. Kizz1e’s management estimates that the Cooking and Mixing activities each require about twice as much space as the Maintenance activity.
Instructions
1. What factors should Kizzle’s management consider in choosing the driver to use for the allocation of Maintenance costs? Of the three potential drivers mentioned in the problem, which one(s) should Kizz1e’s most likely not use?
2. Assume that Kizzle’s management allocates Maintenance costs based on the number of service calls. Further assume that in a given period, the Janitorial, Mixing, and Cooking activities incur 16, 40, and 24 service calls, respectively, and that the Janitorial and Maintenance costs of that period are $3,000 and $4,200, respectively. Determine the total costs allocated from each support activity to the other three activities using the reciprocal services method.
3. Kizz1e’s Crepes Co. is expanding rapidly due to its exponentially growing sales and popularity. Kizzle’s management is worried that as the company expands, its current method of support activity cost allocation, the reciprocal services method, may become too burdensome. Is this true? If so, what alternative method should Kizzle’s Crepes Co. use as it expands?
a.
Identify the cost driver to allocate maintenance costs and whether or not to use the machine hours as the cost driver.
Explanation of Solution
Cost Driver: The cost driver refers to the all the activities on which the money is spent to produce the product or the service. It has a cause-effect relationship with the resources utilized in production. The cost drivers are used to form the activity cost pools.
The support department costs in the production are the indirect costs that difficult to identify and be associated to the concerned cost drivers. Hence, it is difficult to apply support department costs to the products.
Asset value is not an accurate cost driver and must not be used. Square footage must be used as it a more appropriate cost driver as maintenance department is associated more with the usage and repair rather than the asset value.
b.
Compute the total cost of each production department after allocating all support costs to the production departments using the cost driver chosen in part a.
Explanation of Solution
Maintenance Department Cost to be allocated:
The total Maintenance Department costs include 20% of the Janitorial department costs as,
Therefore, the Janitorial Department cost is,
Janitorial Department Cost to be allocated:
The total Janitorial Department costs include 20% of the Maintenance department costs as,
Therefore, the Janitorial Department cost is,
Substitute the equation for M into the J equation:
Substitute the value of J into the M equation:
Maintenance Department Cost Allocation:
Compute the allocation of costs from Maintenance Department to Janitorial Department:
The cost allocated from Maintenance Department to Janitorial Department is $1,000.
Compute the allocation of costs from Maintenance Department to Mixing Department:
The cost allocated from Maintenance Department to Mixing Department is $2,500.
Compute the allocation of costs from Maintenance Department to Cooking Department:
The cost allocated from Maintenance Department to Cooking Department is $1,500.
Janitorial Department Cost Allocation:
Compute the allocation of costs from Janitorial Department to Maintenance Department:
The cost allocated from Janitorial Department to Maintenance Department is $800.
Compute the allocation of costs from Janitorial Department to Mixing Department:
The cost allocated from Janitorial Department to Mixing Department is $1,600.
Compute the allocation of costs from Janitorial Department to Cooking Department:
The cost allocated from Janitorial Department to Cooking Department is $1,600.
c.
Suggest the need to change the cost allocation method and the best method, if the existing method needs to be changed during expansion.
Explanation of Solution
The switch from the existing method of sequential method to other methods is not recommended as this is the most accurate method of allocating the costs. When there is a plan for expansion, this method would be the most recommended as it is efficient in allocating the costs to the various departments.
Want to see more full solutions like this?
Chapter 5 Solutions
Managerial Accounting
- Variable and Fixed Costs What follows are a number of resources that are used by a manufacturer of futons. Assume that the output measure or cost driver is the number of futons produced. All direct labor is paid on an hourly basis, and hours worked can be easily changed by management. All other factory workers are salaried. a. Power to operate a drill (to drill holes in the wooden frames of the futons) b. Cloth to cover the futon mattress c. Salary of the factory receptionist d. Cost of food and decorations for the annual Fourth of July party for all factory employees e. Fuel for a forklift used to move materials in a factory f. Depreciation on the factory g. Depreciation on a forklift used to move partially completed goods h. Wages paid to workers who assemble the futon frame i. Wages paid to workers who maintain the factory equipment j. Cloth rags used to wipe the excess stain off the wooden frames Required: Classify the resource costs as variable or fixed.arrow_forwardSupport department cost allocation Blue Mountain Masterpieces produces pictures, paintings, and other home decor. The Printing and Framing production departments are supported by the Janitorial and Security departments. Janitorial costs are allocated to the production departments based on square feet, and security costs are allocated based on asset value. Information about these departments is detailed in the following table: Management has experimented with different support department cost allocation methods in the past. The different allocation methods did not yield large differences of cost allocation to the production departments. Instructions 1. Determine which support department cost allocation method Blue Mountain Masterpieces would most likely use to allocate its support department costs to the production departments. 2. Determine the total costs allocated from each support department to each production department using the method you determined in part (1). 3. Without doing calculations, consider and answer the following: If Blue Mountain Masterpieces decided to use square feet instead of asset value as the cost driver for security services, how would this change the allocation of Security Department costs?arrow_forwardActivity-based costing and product cost distortion The management of Four Finger Appliance Company in Exercise 14 has asked you to use activity-based costing instead of direct labor hours to allocate factory overhead costs to the two products. You have determined that 81,000 of factory overhead from each of the production departments can be associated with setup activity (162,000 in total). Company records indicate that blenders required 135 setups, while the toaster ovens required only 45 setups. Each product has a production volume of 7,500 units. Determine the three activity rates (assembly, test and pack, and setup). Determine the total factory overhead and factory overhead per unit allocated to each product using the activity rates in (A).arrow_forward
- (Appendix 3A) Separating Fixed and Variable Costs, Service Setting Louise McDermott, controller for the Galvin plant of Veromar Inc., wanted to determine the cost behavior of moving materials throughout the plant. She accumulated the following data on the number of moves (from 100 to 800 in increments of 100) and the total cost of moving materials at those levels of moves: Required: 1. Prepare a scattergraph based on these data. Use cost for the vertical axis and number of moves for the horizontal axis. Based on an examination of the scattergraph, does there appear to be a linear relationship between the total cost of moving materials and the number of moves? 2. Compute the cost formula for moving materials by using the high-low method. Calculate the predicted cost for a month with 550 moves by using the high-low formula. (Note: Round the answer for the variable rate to three decimal places and the answer for total fixed cost and total cost to the nearest dollar.) 3. CONCEPTUAL CONNECTION Compute the cost formula for moving materials using the method of least squares. (Note: For the method of least squares, round the variable rate to two decimal places and total fixed cost and total cost to the nearest dollar.) Using the regression cost formula, what is the predicted cost for a month with 550 moves? What does the coefficient of determination tell you about the cost formula computed by regression? 4. CONCEPTUAL CONNECTION Evaluate the cost formula using the least squares coefficients. Could it be improved? Try dropping the third data point (300, 3,400), and rerun the regression.arrow_forwardAssigning Costs to a Cost Object, Direct and Indirect Costs Hummer Company uses manufacturing cells to produce its products (a cell is a manufacturing unit dedicated to the production of subassemblies or products). One manufacturing cell produces small motors for lawn mowers. Suppose that the motor manufacturing cell is the cost object. Assume that all or a portion of the following costs must be assigned to the cell. a. Salary of cell supervisor b. Power to heat and cool the plant in which the cell is located c. Materials used to produce the motors d. Maintenance for the cells equipment (provided by the maintenance department) e. Labor used to produce motors f. Cafeteria that services the plants employees g. Depreciation on the plant h. Depreciation on equipment used to produce the motors i. Ordering costs for materials used in production j. Engineering support (provided by the engineering department) k. Cost of maintaining the plant and grounds l. Cost of the plants personnel office m. Property tax on the plant and land Required: Classify each of the costs as a direct cost or an indirect cost to the motor manufacturing cell.arrow_forwardProducts versus Services, Cost Assignment Holmes Company produces wooden playhouses. When a customer orders a playhouse, it is delivered in pieces with detailed instructions on how to put it together. Some customers prefer that Holmes put the playhouse together. Therefore, these customers purchase the playhouse, as well as pay an additional fee for Holmes to install the playhouse. Holmes then pulls two workers off the production line and sends them to construct the playhouse on site. Required: 1. What two products does Holmes sell? Classify each one as a product or a service. 2. CONCEPTUAL CONNECTION Do you think Holmes assigns costs individually to each product or service? Why or why not? 3. CONCEPTUAL CONNECTION Describe the opportunity cost of the installation process.arrow_forward
- Production-Based Costing versus Activity-Based Costing, Assigning Costs to Activities, Resource Drivers Willow Company produces lawnmowers. One of its plants produces two versions of mowers: a basic model and a deluxe model. The deluxe model has a sturdier frame, a higher horsepower engine, a wider blade, and mulching capability. At the beginning of the year, the following data were prepared for this plant: Additionally, the following overhead activity costs are reported: Facility-level costs are allocated in proportion to machine hours (provides a measure of time the facility is used by each product). Receiving and materials handling use three inputs: two forklifts, gasoline to operate the forklift, and three operators. The three operators are paid a salary of 40,000 each. The operators spend 25% of their time on the receiving activity and 75% on moving goods (materials handling). Gasoline costs 3 per move. Depreciation amounts to 8,000 per forklift per year. Required: (Note: Round answers to two decimal places.) 1. Calculate the cost of the materials handling activity. Label the cost assignments as driver tracing or direct tracing. Identify the resource drivers. 2. Calculate the cost per unit for each product by using direct labor hours to assign all overhead costs. 3. Calculate activity rates, and assign costs to each product. Calculate a unit cost for each product, and compare these costs with those calculated in Requirement 2. 4. Calculate consumption ratios for each activity. 5. CONCEPTUAL CONNECTION Explain how the consumption ratios calculated in Requirement 4 can be used to reduce the number of rates. Calculate the rates that would apply under this approach.arrow_forwardUse the following information for Brief Exercises 4-34 and 4-35: Sanjay Company manufactures a product in a factory that has two producing departments, Assembly and Painting, and two support departments, S1 and S2. The activity driver for S1 is square footage, and the activity driver for S2 is number of machine hours. The following data pertain to Sanjay: Brief Exercises 4-34 (Appendix 4B) Assigning Support Department Costs by Using the Direct Method Refer to the information for Sanjay Company above. Required: 1. Calculate the cost assignment ratios to be used under the direct method for Departments S1 and S2. (Note: Each support department will have two ratiosone for Assembly and the other for Painting.) 2. Allocate the support department costs to the producing departments by using the direct method.arrow_forwardCommunication The controller of New Wave Sounds Inc. prepared the following product profitability report for management, using activity-based costing methods for allocating both the factory overhead and the marketing expenses. As such, the controller has confidence in the accuracy of this report. In addition, the controller interviewed the vice president of marketing, who provided the following insight into the companys three products: The home theater speakers are an older product that is highly recognized in the marketplace. The wireless speakers are a new product that was just recently launched. The wireless headphones are a new technology that has no competition in the marketplace, and it is hoped that they will become an important future addition to the companys product portfolio. Initial indications are that the product is well received by customers. The controller believes that the manufacturing costs for all three products are in line with expectations. Based on the information provided: 1. Calculate the ratio of gross profit to sales and the ratio of operating income to sales for each product. 2. Write a brief (one-page) memo using the product profitability report and the calculations in (a) to make recommendations to management with respect to strategies for the three products.arrow_forward
- Functional-Based versus Activity-Based Costing For years, Tamarindo Company produced only one product: backpacks. Recently, Tamarindo added a line of duffel bags. With this addition, the company began assigning overhead costs by using departmental rates. (Prior to this, the company used a predetermined plantwide rate based on units produced.) Surprisingly, after the addition of the duffel-bag line and the switch to departmental rates, the costs to produce the backpacks increased, and their profitability dropped. Josie, the marketing manager, and Steve, the production manager, both complained about the increase in the production cost of backpacks. Josie was concerned because the increase in unit costs led to pressure to increase the unit price of backpacks. She was resisting this pressure because she was certain that the increase would harm the companys market share. Steve was receiving pressure to cut costs also, yet he was convinced that nothing different was being done in the way the backpacks were produced. After some discussion, the two managers decided that the problem had to be connected to the addition of the duffel-bag line. Upon investigation, they were informed that the only real change in product-costing procedures was in the way overhead costs are assigned. A two-stage procedure was now in use. First, overhead costs are assigned to the two producing departments, Patterns and Finishing. Second, the costs accumulated in the producing departments are assigned to the two products by using direct labor hours as a driver (the rate in each department is based on direct labor hours). The managers were assured that great care was taken to associate overhead costs with individual products. So that they could construct their own example of overhead cost assignment, the controller provided them with the information necessary to show how accounting costs are assigned to products: The controller remarked that the cost of operating the accounting department had doubled with the addition of the new product line. The increase came because of the need to process additional transactions, which had also doubled in number. During the first year of producing duffel bags, the company produced and sold 100,000 backpacks and 25,000 duffel bags. The 100,000 backpacks matched the prior years output for that product. Required: (Note: Round rates and unit cost to the nearest cent.) 1. CONCEPTUAL CONNECTION Compute the amount of accounting cost assigned to a backpack before the duffel-bag line was added by using a plantwide rate approach based on units produced. Is this assignment accurate? Explain. 2. Suppose that the company decided to assign the accounting costs directly to the product lines by using the number of transactions as the activity driver. What is the accounting cost per unit of backpacks? Per unit of duffel bags? 3. Compute the amount of accounting cost assigned to each backpack and duffel bag by using departmental rates based on direct labor hours. 4. CONCEPTUAL CONNECTION Which way of assigning overhead does the best jobthe functional-based approach by using departmental rates or the activity-based approach by using transactions processed for each product? Explain. Discuss the value of ABC before the duffel-bag line was added.arrow_forwardStep Costs, Relevant Range Bellati Inc. produces large industrial machinery. Bellati has a machining department and a group of direct laborers called machinists. Each machinist can machine up to 500 units per year. Bellati also hires supervisors to develop machine specification plans and oversee production within the machining department. Given the planning and supervisory work, a supervisor can oversee, at most, three machinists. Bellatis accounting and production history shows the following relationships between number of units produced and the annual costs of supervision and materials handling (by machinists): Required: 1. Prepare a graph that illustrates the relationship between direct labor cost and number of units produced in the machining department. (Let cost of direct labor be the vertical axis and number of units be the horizontal axis.) Would you classify this cost as a strictly variable cost, a fixed cost, or a step cost? 2. Prepare a graph that illustrates the relationship between the cost of supervision and the number of units produced. (Let cost of supervision be the vertical axis and number of units be the horizontal axis.) Would you classify this cost as a strictly variable cost, a fixed cost, or a step cost? 3. Suppose that the normal range of production is between 1,400 and 1,500 units and that the exact number of machinists is currently hired to support this level of activity. Further suppose that production for the next year is expected to increase by an additional 500 units. What is the increase in the cost of direct labor? Cost of supervision?arrow_forwardNizam Company produces speaker cabinets. Recently, Nizam switched from a traditional departmental assembly line system to a manufacturing cell in order to produce the cabinets. Suppose that the cabinet manufacturing cell is the cost object. Assume that all or a portion of the following costs must be assigned to the cell: a. Depreciation on electric saws, sanders, and drills used to produce the cabinets b. Power to heat and cool the plant in which the cell is located c. Salary of cell supervisor d. Wood used to produce the cabinet housings e. Maintenance for the cells equipment (provided by the maintenance department) f. Labor used to cut the wood and to assemble the cabinets g. Replacement sanding belts h. Cost of janitorial services for the plant i. Ordering costs for materials used in production j. The salary of the industrial engineer (she spends about 20 percent of her time on work for the cell) k. Cost of maintaining plant and grounds l. Cost of plants personnel office m. Depreciation on the plant n. Plant receptionists salary and benefits Required: Identify which cost assignment method would likely be used to assign the costs of each of the preceding activities to the cabinet manufacturing cell: direct tracing, driver tracing, or allocation. When driver tracing is selected, identify a potential activity driver that could be used for the tracing.arrow_forward
- Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubFinancial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage LearningPrinciples of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College