Question
In: Accounting
The Personnel Department at Hernandez Bros. is centralized and provides services to the two operating units:...
The Personnel Department at Hernandez Bros. is centralized and provides services to the two operating units: Miami and New York. The Miami unit is the original unit of the company and is well established. The New York unit is new, much like a start-up company. The costs of the Personnel Department are allocated to each unit based on the number of employees in order to determine unit profitability. The current rate is $560 per employee. Data for the fiscal year just ended show the following.
Miami New York
Number of employees 1,260 360
Number of new hires 16 26
Number of employees departing 14 24
Orlando, the manager of the New York unit, is unhappy with the results of the controller’s study. He asks the controller to develop separate rates for fixed and variable costs in the Personnel Department. The controller reports back to Orlando that the rates would be as follows:
Allocation based on Variable Rate Fixed Rate Total Rate
Employees $ 80 per employee $ 180 per employee $ 260 per employee
Transitions $ 2,060 per transition $ 4,015 per transition $ 6,075 per transition
Required: a. Orlando argues that New York should only be allocated the variable costs from this system, because the company would have to pay the fixed costs even if New York did not exist. Compute the cost allocated to each unit using the approach Orlando prefers.
2.
Upriver Parts manufactures two products, V-1 and V-2, at its
River Plant. Selected data for an average month for the two
products follow.
| V-1 | V-2 | |||||
| Units produced | 10,000 | 1,000 | ||||
| Direct materials cost per unit | $ | 2 | $ | 4 | ||
| Machine hours per unit | 1 | 2 | ||||
| Production runs per month | 80 | 40 | ||||
Production at the plant is automated and any labor cost is included
in overhead. Data on manufacturing overhead at the plant
follow.
| Machine depreciation | $ | 78,000 | |
| Setup labor | 34,800 | ||
| Material handling | 17,760 | ||
| Total | $ | 130,560 | |
Required:
a. Compute the unit costs for the two products
V-1 and V-2 using the current costing system at Upriver (using
machine hours as the allocation basis). (Do not round
intermediate calculations. Round your answers to 2 decimal
places.)
b. Compute the unit costs for the two products V-1
and V-2 using the proposed ABC system at Upriver.
Solutions
Expert Solution
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| Hernandez Bros | |||
| Answer 1 | Miami | New York | Note |
| Number of employees | 1,260.00 | 360.00 | A |
| Allocation rate | 560.00 | 560.00 | B |
| Cost Allocated | 705,600.00 | 201,600.00 | C=A*B |
| Answer 2 | Miami | New York | |
| Number of employees | 1,260.00 | 360.00 | See A |
| Allocation rate- Routine Matters | 260.00 | 260.00 | D |
| Cost Allocated- Routine Matters | 327,600.00 | 93,600.00 | E=A*D |
| Transitions | Miami | New York | |
| Number of new hires | 16.00 | 26.00 | F |
| Number of departures | 14.00 | 24.00 | G |
| Total number of transitions | 30.00 | 50.00 | H=F+G |
| Allocation rate- Transitions | 6,075.00 | 6,075.00 | I |
| Cost Allocated- Transitions | 182,250.00 | 303,750.00 | J=H*I |
| Total Cost Allocated | 509,850.00 | 397,350.00 | K=E+J |
| Upriver Parts | ||||
| Answer a | ||||
| Calculation of Predetermined OH Rate | V-1 | V-2 | Total | Note |
| Units produced | 10,000.00 | 1,000.00 | A | |
| Machine Hour Per unit | 1.00 | 2.00 | B | |
| Calculation of Total Machine Hours | 10,000.00 | 2,000.00 | 12,000.00 | C=A*B |
| Total Manufacturing overhead | 130,560.00 | D | ||
| Predetermined OH Rate | 10.88 | E=C/D | ||
| Allocated OH per unit | 10.88 | 21.76 | F=E*B |
| Product cost- Current Costing System | V-1 | V-2 | Note |
| Direct Materials | 2.00 | 4.00 | |
| Allocated OH per unit | 10.88 | 21.76 | See F |
| Product cost | 12.88 | 25.76 |
| G | H | I | J=H+I | K=G/J | ||
| Calculation of ABC rates for overhead | Activity usage | ABC rates | ||||
| Activity cost pool | Activity Measure | Cost | V-1 | V-2 | Total | |
| Material Depreciation | Total Machine Hours | 78,000.00 | 10,000.00 | 2,000.00 | 12,000.00 | 6.50 |
| Set Up labor | Total Production runs | 34,800.00 | 80.00 | 40.00 | 120.00 | 290.00 |
| Material Handling | Number of units | 17,760.00 | 10,000.00 | 1,000.00 | 11,000.00 | 1.61 |
| Total Cost assigned | 130,560.00 |
| See K | See H | L=K*H | See I | M=K*I | |||
| Allocation table | V-1 | V-2 | |||||
| Activity cost pool | Activity Measure | ABC Rates | Activity used | Cost assigned | Activity used | Cost assigned | Note |
| Material Depreciation | Total Machine Hours | 6.50 | 10,000.00 | 65,000.00 | 2,000.00 | 13,000.00 | |
| Set Up labor | Total Production runs | 290.00 | 80.00 | 23,200.00 | 40.00 | 11,600.00 | |
| Material Handling | Number of units | 1.61 | 10,000.00 | 16,145.45 | 1,000.00 | 1,614.55 | |
| Total Cost assigned | 104,345.45 | 26,214.55 | N | ||||
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