Question

Shared Service Department Problem Set

Yellow Springs Manufacturing produces machine parts on a job-order basis. Most business is obtained through bidding. Most firms competing with Yellow Springs bid full cost plus a 20 percent markup. Recently, with the expectation of gaining more sales, Yellow Springs reduced its markup from 25 percent to 20 percent. The company operates two service departments and two producing departments. The budgeted costs and the normal activity levels for each department are as follows:

	Service Departments		Producing Departments
	A	B	C	D
Overhead costs	$100,000	$200,000	$100,000	$50,000
Number of employees	8	7	30	30
Maintenance hours	2,000	200	6,400	1,600
Machine hours	--	--	10,000	1,000
Labor hours	--	--	1,000	10,000

The direct costs of Department A are allocated on the basis of employees; those of Department B are allocated on the basis of maintenance hours. Departmental overhead rates are used to assign costs to products. Department C uses machine hours, and Department D uses labor hours.

The firm is preparing to bid on a job (Job K) that requires three machine hours per unit produced in Department C and no time in Department D. The expected prime costs per unit are $67.

Required:

1. Allocate the service costs to the producing departments using the direct method.
2. Calculate the bid for Job K if the direct method is used.
3. Allocate the service costs to the producing departments using the sequential method. Rank the service departments based on amount of direct costs.
4. Calculate the bid for Job K if the sequential method is used.
5. Allocate the service costs to the producing departments using the reciprocal method. Use the ROUND function n Excel to set the allocation rate to 4 digits, except for the allocation from Department A to the two Producing Departments – set those to 5 digits. Use whole dollars for the fully allocated intraservice department amounts (the solutions to the linear equations), but do NOT use the ROUND function here!
6. Calculate the bid for Job K if the reciprocal method is used. Use the ROUNDUP function for the final bid amount.

Joint Costs Problem Set

Pandemic Pharmaceutical Company purchases a material that is then processed to yield three chemicals: anarol, estyl, and betryl. In June, PPC purchased 10,000 gallons of the material at a cost of $250,000, and the company incurred joint conversion costs of $70,000. June sales and production information are as follows:

	Gallons Produced	Price at Split-Off	Further Processing Cost per Gallon	Eventual Sales Price
Amarol	2,000	$55
Estyl	3,000	40
Betryl	5,000	30	$5	$60

Amarol and estyl are sold to other pharmaceutical companies at the split-off point. Betryl can be sold at the split -off point or processed further and packaged for sale as an asthma medication.

Required:

1. Allocate the joint costs to the three products using:
   1. The physical units method
   2. The sales-value-at-split-off method (Use =ROUND to round allocation ratios to 5 digits)
   3. The net realizable value method (Use =ROUND to round allocation ratios to 5 digits, except for Betryl — use =ROUNDUP for that ratio to get your check figures)
   4. The constant gross margin percentage method (use =ROUND to 4 decimal places on the GM%. There will be a rounding error of $23 in the final total check figure.)

Please Show work/ Explanations.

Answer 1

Due to character limit I am attaching the image for Pandemic Pharma.

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Yellow Springs
Direct Method	Dept. A	Dept. B	Dept. C	Dept. D	Total
Number of Employees			30.00	30.00	60.00
Number of Employees %			50.00%	50.00%	100.00%
Maintenance Hours			6,400.00	1,600.00	8,000.00
Maintenance Hours %			80.00%	20.00%	100.00%
Overhead costs	100,000.00	200,000.00	100,000.00	50,000.00	450,000.00
Dept. A cost to be allocated- Number of Employees %	(100,000.00)		50,000.00	50,000.00	-
Dept. B cost to be allocated- Maintenance Hours %		(200,000.00)	160,000.00	40,000.00	-
Total cost after allocation	-	-	310,000.00	140,000.00	450,000.00
Machine/ Labor Hours			10,000.00	10,000.00
Predetermined overhead rate			31.00	14.00

Bid for Job K	Amount $
Machine Hours in Dept. C	3.00
Predetermined overhead rate	31.00
Overhead per unit	93.00
Prime costs	67.00
Bid for Job K	160.00

Step Method	Dept. A	Dept. B	Dept. C	Dept. D	Total
Maintenance Hours	2,000.00		6,400.00	1,600.00	10,000.00
Maintenance Hours %	20.00%	0.00%	64.00%	16.00%	100.00%
Overhead costs	100,000.00	200,000.00	100,000.00	50,000.00	450,000.00
Dept. B cost to be allocated- Maintenance Hours %	40,000.00	(200,000.00)	128,000.00	32,000.00	-
Total cost after allocation	140,000.00	-	228,000.00	82,000.00	450,000.00
Number of Employees			30.00	30.00	60.00
Number of Employees %			50.00%	50.00%	100.00%
Dept. A cost to be allocated- Number of Employees %	(140,000.00)	-	70,000.00	70,000.00	-
Total cost after allocation	-	-	298,000.00	152,000.00	450,000.00
Machine/ Labor Hours			10,000.00	10,000.00
Predetermined overhead rate			29.80	15.20

Bid for Job K	Amount $
Machine Hours in Dept. C	3.00
Predetermined overhead rate	29.80
Overhead per unit	89.40
Prime costs	67.00
Bid for Job K	156.40

Reciprocal Method	Dept. A	Dept. B	Dept. C	Dept. D	Total
Number of Employees		7.00	30.00	30.00	67.00
Maintenance Hours	2,000.00		6,400.00	1,600.00	10,000.00
Number of Employees %	0.0000%	10.4478%	44.77612%	44.77612%	100.00%
Maintenance Hours %	20.0000%	0.0000%	64.0000%	16.0000%	100.00%
Overhead costs	100,000.00	200,000.00	100,000.00	50,000.00	450,000.00

Let cost of Dept. A is $ X and Dept. B is $ Y

So, X= 100000+ 20% of Y

So, X= 100000+ 0.20Y

Y= 200000+ 10.45% of X

Y= 200000+ 0.1045X

Substituting the value of X in equation 2:

Y = 200000 + 0.1045(100000 + 0.2Y)

Y = 200000 + 10448+.0209Y

Y – 0.0209Y = 200000+10448

0.9791044 = 210,448

Y = 210,448/0.9791044

Y = $ 214,939

Substituting the value of Y in equation 1:

So, X= 100000+ 0.2Y

So, X= 100000+ 0.2*214939

So, X= 100000+ 42988

X= $ 142,988

Allocation Summary	Dept. A	Dept. B	Dept. C	Dept. D	Total
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