Question

Model, Inc., produces model automobiles made from metal. It operates two production departments, Molding and Painting, and has three service departments, Administration, Accounting, and Maintenance. The accumulated costs in the three service departments were $233,000, $386,000, and $193,000, respectively. Management is concerned that the costs of its service departments are getting too high. In particular, managers would like to keep the costs of service departments under $3.50 per unit on average. You have been asked to allocate service department costs to the two production departments and compute the unit costs.

The company decided that Administration costs should be allocated on the basis of square footage used by each production and service department. Accounting costs are allocated on the basis of number of employees. Maintenance costs are allocated on the basis of the dollar value of the equipment in each department. The use of each base by all departments during the current period follows:  
  

	Used by
Allocation Base	Administration			Accounting			Maintenance			Molding			Painting
Building area		16,000			42,000			54,000			432,000			72,000
Employees		23			16			46			92			69
Equipment value (in thousands)	$	57.00		$	171.00		$	16.50		$	228.00		$	114.00

      
Direct costs of the Molding Department included $230,000 in direct materials, $345,000 in direct labor, and $120,000 in overhead. The Painting Department’s direct costs consisted of $241,000 in direct materials, $159,000 in direct labor, and $75,000 in overhead.

  
Required:

a. Using the step method, determine the allocated costs and the total costs in each of the two producing departments. Ignore self-usage (for example, ignore work done by Administration for itself). Rank order the allocation as follows: (1) Maintenance, (2) Accounting, and (3) Administration. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.)

b. Assume that 100,000 units were processed through these two departments. What is the unit cost for the sum of direct materials, direct labor, and overhead (1) for Molding, (2) for Painting, and (3) in total? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

c.

(1) Compute the cost per unit for the service department costs allocated to the production departments. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

(2) Did the company meet management's standards of keeping service department costs below $3.50 per unit in the Molding Department?

	Yes
	No

(3) Did the company meet management's standards of keeping service department costs below $3.50 per unit in the Painting Department?

	Yes
	No

Answer 1

Allocation Base		Administration	Accounting	Maintenance	Molding	Painting	Total
Building area		16,000	42,000	54,000	432,000	72,000	616,000
Employees		23	16	46	92	69	246
Equipment value (in thousands)		57	171	16.5	228	114	587
Total costs		233000	386000	193000	695000	475000
Cost alloacted by service deprtament		Administration	Accounting	Maintenance	Molding	Painting
Admin		6051.948	15886.36	20425.32	163402.6	27233.77	233000
Accounting		36089.43	25105.69	72178.86	144357.7	108268.3	386000
Maintenance		18757.03	56271.1	5429.668	75028.13	37514.07	193000
Total		60898.41	97263.15	98033.85	382788.5	173016.1	812000

Calculation

For distributing Admin costs to painting - (233000 * 72000)/616000 = $27234

For distributing Admin costs to Moulding - (233000 * 432000)/616000 = $163403

(similarly for other expenses ) i.e (Total over head * cost driver unit used) / total of cost driver

Ranking for Moulding

1. Accounting
2. Admin
3. Maintenance

Ranking for Painting

1. Accounting
2. Admin
3. Painting

2. Moulding

• Direct material- 230000/100000 = $2.3
• Direct labour- 345000/10000 = $3.45
• Overhead- (120000+382788.5)/100000 = $5.02

Painting

• Direct Material = 241000/100000 =$2.41
• Direct Labour= 159000/100000=$1.59
• Overhead= (75000+173016.1)/100000= $2.4801

Total

• Direct Material= (230000+241000)/200000 = 2.355
• Direct Labour= (345000+159000)/200000 = 2.52
• Overhead=[(120000+382788.5)+(75000+173016.1)]/200000 = 3.7544

C)

1.Cost per unit allocated to service departments :

Moulding = 382788.5 /100000 = $3.827

Painting = 173016.1 /100000 = $1.7302

2.No, the company did not meet managment standards for keeping service deprtament costs below $3.5 for moulding

3. Yes, the company meets managment standards for keeping service deprtament costs below $3.5 for Painting