Question

Hewtex now allocates committed costs based on flexible labor costs. A study has determined that committed costs are as follows: (1) supervisory costs for tape recorder production $500,000 (2) supervisory salaries for electronic calculator production $600,000 (3) the balance of the committed costs are proportional to the number of batches of production. Hewtex schedules tape recorders for production in batches of 1,000 and electronic calculators are made in batches of 10,000. Finally $300,000 of what was originally classified as facility sustaining cost was actually attributable to tape recorders and $400,000 was attributable to the electronic calculator line. Recast the original financial statements to correct the costing errors due to misclassification.

Answer 1

As per the new allocation, committed costs (ie., fixed costs) are allocated to the units based on flexible labour costs (ie., variable labour costs).

Hence, the objective is to arrive at;

a. Total Committed costs b. Total flexible labour costs and c. No. of batches of production.

Committed costs are:
		Tape Recorder	Calculator
	supervisory costs $	500,000	600,000
	Facility sustaining cost $	300,000	400,000
	Total committed cost	800,000	1,000,000

If there is any common costs which are fixed in nature, the same should be allocated in proportion to the number of batches of production. For eg.,

Allocation of unallocated (common) committed cost to Tape Recorder is

Un-allocated common costs/ Number of total batches * No. of batches of Tape Recorder

Similarly, Allocation of unallocated (common) committed cost to Calculator is;

Un-allocated common costs/ Number of total batches * No. of batches of Calculator

Finally, the total committed costs (which is direct committed cost + allocated common committed cost) of eachproduct is arrived and allocated to each unit of production based on Flexible labour costs.

Assuming that there are no other common commited costs; the committed costs of each product is;

Tape Recorder Calculator

Committed costs 800,000 1000,000

Now, the alocation of committed costs is based on flexible labour costs of each product. As the data is not given, let us say that the total flexible labour cost of tape recorder is X (per unit labour cost is X/n, as "n" be the total number of units of tape recorder produced) and

let us say that the total flexible labour cost of the calculator is Y (per unit labour cost is Y/n, as "n" be the total number of units of calculator produced)

Alllocation of commtted cost to Tape recorder;

= 800,000/X * X/n

Alllocation of commtted cost to Calculator;

= 1000,000 / Y * Y/n

Conclusion:

As detailed above, the cost statement can be recast according to the cost allocation as shown above