Question

Support department cost allocation—comparison

Becker Tabletops has two support departments ( Janitorial and Cafeteria) and two production departments (Cutting and Assembly). Relevant details for these departments are as follows:

Support Department		Cost Driver
Janitorial Department		Square footage to be serviced
Cafeteria Department		Number of employees

	Janitorial Department	Cafeteria Department	Cutting Department	Assembly Department
Department costs	$310,000	$169,000	$1,504,000	$680,000
Square feet	50	5,000	1,000	4,000
Number of employees	10	3	30	10

Allocated the support department costs to the production departments using the direct method below.

	Cutting Department		Assembly Department
Janitorial Department cost allocation	$62,000		$248,000
Cafeteria Department cost allocation	$126,750		$42,250

Allocated the support department costs to the production departments using the reciprocal services method below.

	Cutting Department		Assembly Department
Janitorial Department cost allocation	$38,200		$152,800
Cafeteria Department cost allocation	$216,000		$72,000

Allocated the support department costs to the production departments and Cafeteria Department using the sequential method below.

	Cafeteria Department		Cutting Department		Assembly Department
Janitorial Department cost allocation	$155,000		$31,000		$124,000
Cafeteria Department cost allocation			$243,000		$81,000

Compare the total support department costs allocated to each production department under each cost allocation method.

a. Which production department is allocated the most support department costs under the direct method?

		Cost
Assembly Department		$

b. Which production department is allocated the most support department costs under the sequential method?

		Cost
Cutting Department		$

c. Which production department is allocated the most support department costs under the reciprocal services method?

		Cost
Cutting Department		$

Joint Cost Allocation—Net Realizable Value Method

Nature's Garden Inc. produces wood chips, wood pulp, and mulch. These products are produced through harvesting trees and sending the logs through a wood chipper machine. One batch of logs produces 20,304 cubic yards of wood chips, 14,100 cubic yards of mulch, and 9,024 cubic yards of wood pulp. The joint production process costs a total of $32,000 per batch. After the split-off point, wood chips are immediately sold for $25 per cubic yard while wood pulp and mulch are processed further. The market value of the wood pulp and mulch at the split-off point is estimated to be $22 and $24 per cubic yard, respectively. The additional production process of the wood pulp costs $5 per cubic yard, after which it is sold for $30 per cubic yard. The additional production process of the mulch costs $4 per cubic yard, after which it is sold for $32 per cubic yard.

Allocate the joint costs of production to each product using the net realizable value method.

Joint Product	Allocation
Wood chips	$
Wood pulp
Mulch
Totals	$

Joint Cost Allocation—Market Value at Split-off Method

Toil & Oil processes crude oil to jointly produce gasoline, diesel, and kerosene. One batch produces 3,415 gallons of gasoline, 2,732 gallons of diesel, and 1,366 gallons of kerosene at a joint cost of $12,000. After the split-off point, all products are processed further, but the estimated market price for each product at the split-off point is as follows:

Gasoline	$2 per gallon
Diesel	1 per gallon
Kerosene	3 per gallon

Using the market value at split-off method, allocate the $12,000 joint cost of production to each product.

Joint Product	Allocation
Gasoline	$
Diesel
Kerosene
Totals	$

Answer 1

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Becker Tabletops
Direct Method	Janitorial	Cafeteria	Cutting	Assembly	Total
Square Feet	50.00	5,000.00	1,000.00	4,000.00	10,050.00
Square Feet %			20.0000%	80.0000%	100.0000%
Number of Employees	10.00	3.00	30.00	10.00	53.00
Number of Employees %			75.0000%	25.0000%	100.0000%
Total costs	310,000.00	169,000.00			479,000.00
Janitorial cost to be allocated- Square Feet %	(310,000.00)	-	62,000.00	248,000.00	-
Total	-	169,000.00	62,000.00	248,000.00	479,000.00
Cafeteria cost to be allocated- Number of Employees %		(169,000.00)	126,750.00	42,250.00
Total cost after allocation	-	-	188,750.00	290,250.00	479,000.00
Assembly department is allocated highest cost of $ 290,250.
Reciprocal Method	Janitorial	Cafeteria	Cutting	Assembly	Total
Janitorial Department cost allocation			38,200.00	152,800.00	191,000.00
Cafeteria Department cost allocation			216,000.00	72,000.00	288,000.00
Total cost after allocation	-	-	254,200.00	224,800.00	479,000.00
Cutting department is allocated highest cost of $ 254,200.
Sequential Method	Janitorial	Cafeteria	Cutting	Assembly	Total
Square Feet	50.00	5,000.00	1,000.00	4,000.00	10,050.00
Square Feet %		50.0000%	10.0000%	40.0000%	100.0000%
Number of Employees	10.00	3.00	30.00	10.00	53.00
Number of Employees %			75.0000%	25.0000%	100.0000%
Total costs	310,000.00	169,000.00			479,000.00
Janitorial cost to be allocated- Square Feet %	(310,000.00)	155,000.00	31,000.00	124,000.00	-
Total	-	324,000.00	31,000.00	124,000.00	479,000.00
Cafeteria cost to be allocated- Number of Employees %		(324,000.00)	243,000.00	81,000.00
Total cost after allocation	-	-	274,000.00	205,000.00	479,000.00
Cutting department is allocated highest cost of $ 274,000.
Nature's Garden Inc.
Calculation of net realizable value (NRV)	Wood chips	Wood pulp	Mulch	Total
Units sold	20,304.00	9,024.00	14,100.00
Net realizable value per unit	25.00
Net realizable value ($30- $5) per unit		25.00
Net realizable value ($32- $4) per unit			28.00
Net realizable value	507,600.00	225,600.00	394,800.00	1,128,000.00	F
Joint costs				32,000.00	G
Allocation rate				0.03	H=F/G
	H	F	I=H*F
Allocation on the basis of net realizable value	Allocation rate	NRV	Allocated cost
Gasoline	0.03	507,600.00	14,400.00
Diesel	0.03	225,600.00	6,400.00
Kerosene	0.03	394,800.00	11,200.00
Total Allocated cost			32,000.00
Toll & Oil
Calculation of market value	Gasoline	Diesel	Kerosene	Total
Weight	3,415.00	2,732.00	1,366.00		A
Sell price per gallon	2.00	1.00	3.00		B
Revenue	6,830.00	2,732.00	4,098.00	13,660.00	C=A*B
Joint costs				12,000.00	D
Calculation of Allocation rate				0.88	E=D/C
	E	C	F=E*C
Allocation on the basis of market value	Allocation rate	Revenue	Allocated cost
Gasoline	0.88	6,830.00	6,000.00
Diesel	0.88	2,732.00	2,400.00
Kerosene	0.88	4,098.00	3,600.00
Total Allocated cost			12,000.00