Question

In: Accounting

Clean Tube Laboratories (CTL) contracts with area hospitals to perform various lab tests for outpatients. CTL...

Clean Tube Laboratories (CTL) contracts with area hospitals to perform various lab tests for outpatients. CTL is organized into four departments – two support departments (Maintenance and Administration) and two patient departments (Traditional Tests and DNA Tests). The traditional tests department tends to be more labor-intensive, while the DNA Tests department is equipment intensive.

As a part of a push to convert to a responsibility accounting system, management wants to determine the total costs to operate the Traditional Tests and DNA Tests departments. Management wants to allocate, to the two patient departments, the Maintenance department costs based on the depreciation dollars and the Administration department costs on the basis of labor hours recorded by employees in each department.

The following data (with dollar amounts in thousands) appear in the organization’s records for the current period:

Department Total Costs Labor Hours

Depreciation $

(included in total cost)
Maintenance $10,000 1,000 $1,000
Administration $15,000 2,000 $2,000
DNA Tests $30,000 3,000 $8,000
Traditional Tests $40,000 4,000 $5,000
Total $95,000 10,000 $16,000

1. Allocate the support department costs to the patient departments using the direct method.

2. Allocate the support department costs to the patient departments using the step-down method and starting with the Maintenance Department

3. Allocate the support department costs to the patient departments using the reciprocal method (Hint: As an alternative to developing and directly solving for variables in four cost equations via substitution method, the reciprocal solution can be easily accomplished by creating a four-by-four matrix using the Excel "Minverse" command to obtain solution parameters for the four variables. The four-by-four inverted matrix can then be multiplied by the one-by-four cost matrix using the Excel "Mmult" command to obtain the final allocations in dollars.)

4. What would be the next steps to put the new cost information to use?

Solutions

Expert Solution

Direct method
Allocation ratio
DNA Trational
Maintenance 0.615384615 0.384615385
=8000/13000 =5000/13000
Administartion 0.428571429 0.571428571
=3000/7000 =4000/7000
Direct method apportionment
Maintenance Adminitartion DNA Tests Traditional tests Total
Total costs 10000 15000 30000 40000 95000
Maintenance allocation -10000 6153.85 3846.15 0
=10000*0.615385 =10000*0.384615
Adminitration alloctaion -15000 6428.57 8571.43 0
=15000*0.428571 =15000*0.571429
Total costs 0 0 42582.42 52417.58 95000
Labor hours 3000 4000
Depreciation 8000 5000
Per unit cost                                 5.32                              13.10
Step-down method allocation
Administration cost is allocated first based on value
Maintenance DNA Traditional
Administration 0.222222222 0.333333333 0.444444444
=2000/9000 =3000/9000 =4000/9000
Maintenance 0.615384615 0.384615385
=8000/13000 =5000/13000
Step-down cost apportionment
Maintenance Adminitartion DNA Tests Traditional tests Total
Total costs 10000 15000 30000 40000 95000
Maintenance allocation -13333.33 8205.13 5128.20 0.00
=13333.33*0.615385 =13333.33*0.384615
Adminitration alloctaion 3333.33 -15000.00 5000.00 6666.67 0
=15000*0.2222 =15000*0.33333 =15000*0.44444
Total costs 0.000333333 0 43205.13 51794.87 95000
Labor hours 3000 4000
Depreciation 8000 5000
Per unit cost                                 5.40                              12.95
Reciprocal method
Allocation
Maintenance Adminitartion DNA Tests Traditional tests Total
Administartion 0.125 0.375 0.5
Labor hours =1000/8000 =3000/8000 =4000/8000 0
Maintenance 0.133333333 0.533333333 0.333333333
Depreciation =2000/15000 =8000/15000 =5000/15000 0
Administartion =Administration costs+0.133333Maintenance costs
Maintenance costs =Maintenance costs+0.125 administartion costs
M =10000+0.125(Administartion costs+0.133333maintenance costs)
M =10000+0.125(15000+0.133333maintenance costs)
M =10000+1875+0.016666625M
M-0.016666625M 11875
0.983333375M 11875
M 12076.27
12076
A =15000+0.133333(12076)
16610.12931
16610 rounded off
Maintenance Adminitartion DNA Tests Traditional tests Total
Total costs 10000.00 15000.00 30000.00 40000.00 95000.00
Maintenance allocation 2076.27 -16610.13 6228.80 8305.07 0.00
=16610*0.125 =16610*0.375 =16610*0.5
Adminitration alloctaion -12076.27 1610.17 6440.68 4025.42 0.00
=12076.27*0.133333 =12076*0.533333 =12076*0.33333
Total costs 0.00 0.04 42669.48 52330.49 95000.00
Labor hours 3000 4000
ekkarill92 answered 2 years ago
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