In: Accounting
Kay and Dee Manufacturing (K+D) has three business lines:
They also have three support departments. Major activities of each department are:
Other financial information is in Appendix A.
REQUIRED:
a) Briefly comment on the cost drivers for the support departments. (ie. Do you think they are appropriate, or can you recommend something better?)
b) Using the Direct Method, allocate overhead costs from the support departments to the business lines.
c) Using the Step-down method, allocate overhead costs from the support departments to the business lines.
1st Building
2nd HR
3rd HQ
d) Using the Reciprocal Method, allocate overhead costs from the support departments to the business lines.
Additional Information: | ||||||
HQ | HR | Building | Repair + Overhaul | Manufacturing | Chemical Treating | |
Direct Labour (hours) | 0 | 0 | 0 | 225,000 | 237,422 | 0 |
Processing Time (hours) | 0 | 0 | 0 | 0 | 0 | 1,820 |
Headcount (employees) | 8 | 7 | 15 | 180 | 350 | 3 |
Floorspace (square feet) | 3,005 | 2,200 | 19,600 | 540,000 | 360,000 | 28,483 |
Overhead Costs (in $) | 4,901,398 | 777,199 | 9,198,554 | 16,179,253 | 33,923,386 | 845,325 |
1) I think HR and building cost drivers, to allocate service department cost are correct. There is no need to change for the same. But in case of HQ instaed of direct labour company can used Corporate time spend for that business line.
2)
Direct method to allocate the budgeted costs | |||||||
Departments | HQ Cost Allocation % | HR Cost Allocation % | Building Cost Allocation % | HQ Cost Allocation (Amount $) | HR Cost Allocation (Amount $) | Building Cost Allocation (Amount $) | Total Cost of Deparment (Amount$) |
A | B | C | D= 4901398* A/total of A | E= 777199* B/563 | F= 9198554* C/953288 | D+E+F | |
Repair and Overhaul | 225,000 | 180 | 540,000 | 2,384,866 | 248,483 | 5,210,618 | 7,843,966 |
Manufacturing | 237,422 | 350 | 360,000 | 2,516,532 | 483,161 | 3,473,745 | 6,473,438 |
Chemical treating | - | 3 | 28,483 | - | 4,141 | 274,841 | 278,982 |
Total | 462,422 | 533 | 928,483 | 4,901,398 | 735,785 | 8,959,203 | 14,596,387 |
3)
Step-Down method to allocate the budgeted costs | Amount $ | |||||||
Repair and Overhaul | Manufacturing | Chemical treating | HQ Dept | HR Dept | Building Dept | TOTAL | ||
Cost of Department | A | 16,179,253 | 33,923,386 | 845,325 | 4,901,398 | 777,199 | 9,198,554 | - |
Building Dept | ||||||||
Allocation Base | B | 540,000 | 360,000 | 28,483 | 3,005 | 2,200 | - | 933,688 |
Cost allocation ($9198554*B/933688) | C | 5,319,999 | 3,546,666 | 280,610 | 29,605 | 21,674 | (9,198,554) | - |
Total | D=A+C | 21,499,252 | 37,470,052 | 1,125,935 | 4,931,003 | 798,873 | - | - |
HR Dept | ||||||||
Allocation Base | E | 180 | 350 | 3 | 8 | - | - | 541 |
Cost allocation ($798873*E/541) | F | 265,799 | 516,831 | 4,430 | 11,813 | (798,873) | - | - |
Total | G=D+F | 21,765,051 | 37,986,883 | 1,130,365 | 4,942,816 | - | - | |
HQ Dept | ||||||||
Allocation Base | H | 225,000 | 237,422 | - | - | - | - | 462,422 |
Cost allocation ($4942816*H/462422) | I | 2,405,019 | 2,537,797 | - | (4,942,816) | - | - | - |
Total | G+I | 24,170,070 | 40,524,680 | 1,130,365 | - | - | - |
4)