Question

Cutting Department and Assembly Department are two departments in Ideal AA

Garment that are considering operating a machine together. The operating cost of each

1

department to operate the machine on its own is RM36,000 for Cutting Department and RM24,000 for Assembly Department. If they operate the machine together, the operating cost will decrease to RM48,000. a. Calculate Cutting Department and Assembly Department respective share of

operating cost under the stand-alone cost-allocation.

b. Calculate Cutting Department and Assembly Department using the incremental cost-

allocation method. Assume Cutting Department to be the primary party.

c. Calculate Cutting Department and Assembly Department using the incremental cost-

allocation method. Assume Assembly Department to be the primary party.

Answer 1

Answer to Question1:-

Stand alone Cost allocation is a method of allocating common cost by applying a ratio of stand alone cost of that user to stand alone cost of all user.

Standalone Cost of Cutting Department = RM 36,000

Standalone Cost of Assembly Department = RM 24,000

Total of Standalone of Cutting & Assembly Department = RM 36,000 + RM 24,000 = RM 60,000

% of share of Cutting Deartment in Common Operating cost = 36,000/(36,000 + 24,000) * 100 = 60%

% of share of Assembly  Deartment in Common Operating cost = 24,000/(36,000 + 24,000) * 100 = 40%

Common Cost (if they operate together) = RM 48,000

Share of Cutting Department in Common Cost under Stand alone Cost allocation = 60% of 48,000 = RM 28,800

Share of Assembly Department in Common Cost under Stand alone Cost allocation = 40% of 48,000 = RM 19,200

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Answer to Question2:-

Incremental Cost allocation Method is a technique which is variant with Stand alone Cost allocation. Under this method , there may be various users . However the first user is the primary user and all the user after that are incremental users. The common cost is allocated to primary user upto primary user's standalone cost and then remaining common cost is allocated in the same manner to incremental user(upto their individual standalone cost).

Assuming Cutting Department to be primary party

Assuming Assembly Department to be Incremental user

Standalone Cost of Cutting Department = RM 36,000

Standalone Cost of Assembly Department = RM 24,000

Common Cost (if they operate together) = RM 48,000

Cost to be allocated to Cutting Department in Common Cost allocation Method: RM 36,000

Cost to be allocated to Assembly Department in Common Cost allocation Method: RM 48,000 -RM 36,000 =

RM 12,000

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Answer to Question3:-

Assuming Assembly Department to be primary party

Assuming Cutting Department to be Incremental user

Standalone Cost of Assembly Department = RM 24,000

Standalone Cost of Cutting Department = RM 36,000

Common Cost (if they operate together) = RM 48,000

Cost to be allocated to Assembly Department in Common Cost allocation Method: RM 24,000

Cost to be allocated to Cutting Department in Common Cost allocation Method: RM 48,000 -RM 24,000 =

RM 24,000