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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.

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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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