Question

QUESTION 1 :

Mr. Brown and Mr. Black own cleaning companies. They are considering renting a small sweeper to share between their two separate businesses. Mr. Brown requires the machine for a total of 900 hours and Mr. Black 600 hours. If each company rents the machine on their own, the hourly rate is $40. If they rent the machine together the hourly rate drops to $32.

a) Calculate Mr. Brown’s and Mr. Black’s respective share of the cost using the stand-alone method.

b) Calculate Mr. Brown’s and Mr. Black’s respective share of the cost using the incremental method. Assume Mr. Brown to be the primary party.

Question 2)

E-Mark, an online store, has two operating divisions – Corporate Sales and Consumer Sales – and two support divisions –Admin and IT. Each operating division operates independently. E-Mark uses number of employees to allocate Admin costs and processing time to allocate IT costs. The following data are available for the month:

					SUPPORT DEPT		OPERATING DEPT
					Admin	IT	Corp Sales	Cons. Sales
Budgeted costs incurred before
	any interdivision allocations				$85,000	$200,000	$1,000,000	$500,000
Admin budgeted # of employees
	deployed					20	40	40
IT budgeted # of processing time
	deployed (minutes)				300		2,000	1,700

Using the reciprocal method, allocate the support department costs.

Answer 1

Answer 1.

Using the standalone method, the cost for Mr. Brown is $$ 21600 while that of Mr. Brown shall be $9600 as shown below:

Using the stand-alone formula; independent cost /total cost=cost allocation; the cost allocation x the independent cost;

Mr. Brown=900 hoursx$40/hour=$ 36000

Mr. Balck=600 hoursx$40/hour=$ 24000

Total cost=$ 60000

Allocation cost for Mr. Brown=$ 36000 /$ 60000 =0.6 or 60%

Stand-alone cost=60%x$36,000=$ 21600

Allocation cost for Mr. Black=$24000/$60000=0.4 or 40%

Stand-alone cost=40% of $24,000= $9600

Using the incremental method; find the marginal cost; difference between the costs=$40 per hour-$32 per hour=$8 per hour;

Mr. Brown=$8/hourx900 hours= $7200

Incremental cost=$36000-$7200= $28800

Mr. Black=$8/hourx600hours=$ 4800

Incremental cost=$24000-$4800= $19200

Answer 2.

Description Admin IT Corp Sales Cons Sales

Total OH Costs $                  (0) $                  (0) $      1,150,762 $         634,239

Explanation:

Step 1 Form algebraic equations for service Departments

Admin = 85000 + 3/40 IT _____(1)

IT = 200000 + 1/5 Admin _____(2)

Step 2 Solve equations

Put value of equation 2 in equation 1

A = 85000 + .075 I

A = 85000 + .075*(200000+.2A)

A = 85000 + 15000 + .015A

A - .015A = 100000

.985A = 100000

A = 100000/.985 = $101,523

Step 3 Put Value of Admin in equation 2

I = 200000 + .2*101523

IT = $220,305

Step 4 Allocate Service Departments

Description Admin IT Corp Sales Cons Sales

Budgeted costs $85,000 $200,000 $1,000,000 $500,000

Allocate Admin 2  :  4   :   4 $(101,523) $20,305 $40,609 $40,609

Calculations Blank =101523*2/10 =101523*4/10 =101523*4/10

Allocate IT  3  :  20  :  17 $16,523 $(220,305) $110,153 $93,630

Calculations =220305*3/40 Blank =220305*20/40 =220305*17/40

Total OH Costs $(0) $(0) $1,150,762 $634,239