Question

In: Accounting

Yong Seng (YS) is a manufacturing firm. It has three support departments: A, B and C,...

Yong Seng (YS) is a manufacturing firm. It has three support departments: A, B and C, and three operating departments: P, Q and R. Its support departments provide services to both other support and operating departments. Their usage is captured below:

Usage By

Support Depts Operating Depts

A B C P Q R

Departmental OH Costs $114,000 $179,000 $130,000

Support Department

A - 20% 20% 20% 20% 20%

B 20% - - 20% 30% 30%

C 20% 20% - 20% 20% 20%

YS uses the step down method to allocate support department costs to operating departments, and a plant wide method based on machine hours to allocate manufacturing overheads to products. Each operating department manufactures a line of products. YS prices its products on a cost plus mark-up basis.

Required:

(a)(i) Ryan, a new cost accountant, believes department B should be allocated first as it has the highest support department costs. Without performing any calculations, explain if Ryan is correct. (5m)

(ii) Ignoring your answer in part (i), calculate the support department costs allocated to each of the operating departments P, Q and R; by using the Step Down method beginning with department C, followed by department A, and finally B. Provide your final answer to the nearest dollar. (14m)

(b) Without performing any calculations, briefly explain if the overall profit of YS will change if YS uses the direct method to allocate support department costs instead. (4m)

Solutions

Expert Solution

A.

1. According to the step down method of cost allocation firstly the support department with the highest cost will be allocated followed by the next support department with highest cost and goes on. Accordingly since dept. B is having the highest cost, it will be allocated first followed by dept C and lastly by dept A. Hence Ryan is correct.

B.

Allocation based on Step down method
A B C P Q R Total
Support costs before allocation 114000 179000 130000 423000
Allocation of B (Ratio 20:0:20:30:30) 35800 -179000 0 35800 53700 53700 0
Total 149800 0 130000 35800 53700 53700 423000
Allocation of C (20:0:20:20:20) 32500 0 -130000 32500 32500 26000 0
Total 182300 0 0 68300 86200 86200 423000
Allocation of A (20:20:20) -182300 0 0 60766 60767 60767 0
TOTAL 0 0 0 129066 146367 146967 423000

2. It is very much noteworthy that the above table is just a cost allocation. It does not have anything to do with increasing or decreasing of overall cost of the company. Thus the overall profit of the company will remain the same regardless of the allocation made.

ekkarill92 answered 1 year ago
Next > < Previous

Related Solutions

A consulting firm has two departments, Corporate and Government. Computer support is common to both departments....
A consulting firm has two departments, Corporate and Government. Computer support is common to both departments. The cost of computer support is $14.24 million. The following information is given: Gigabytes of Storage Number of Consultants Corporate 95,400 130 Government 47,600 165 Required: What is the cost allocation if fixed computer costs of $10.23 million are allocated on the basis of number of consultants and the remaining costs (all variable) are allocated on the basis of the number of gigabytes of...
A consulting firm has two departments, Corporate and Government. Computer support is common to both departments....
A consulting firm has two departments, Corporate and Government. Computer support is common to both departments. The cost of computer support is $13.11 million. The following information is given: Gigabytes of Storage Number of Consultants Corporate 92,200 135 Government 64,000 160 Required: What is the cost allocation if fixed computer costs of $9.90 million are allocated on the basis of number of consultants and the remaining costs (all variable) are allocated on the basis of the number of gigabytes of...
Hart Manufacturing makes three products. Each product requires manufacturing operations in three departments: A, B, and...
Hart Manufacturing makes three products. Each product requires manufacturing operations in three departments: A, B, and C. The labor-hour requirements, by department, are as follows: Department Product 1 Product 2 Product 3 A 1.50 3.00 2.00 B 2.00 1.00 2.50 C 0.25 0.25 0.25 During the next production period the labor-hours available are 450 in department A, 350 in department B, and 50 in department C. The profit contributions per unit are $25 for product 1, $28 for product 2,...
Hart Manufacturing makes three products. Each product requires manufacturing operations in three departments: A, B, and...
Hart Manufacturing makes three products. Each product requires manufacturing operations in three departments: A, B, and C. The labor-hour requirements, by department, are as follows: Department Product 1 Product 2 Product 3 A 3.00 2.00 1.50 B 1.00 2.50 2.00 C 0.25 0.25 0.25 During the next production period the labor-hours available are 450 in department A, 350 in department B, and 50 in department C. The profit contributions per unit are $28 for product 1, $30 for product 2,...
Hart Manufacturing makes three products. Each product requires manufacturing operations in three departments: A, B, and...
Hart Manufacturing makes three products. Each product requires manufacturing operations in three departments: A, B, and C. The labor-hour requirements, by department, are as follows: Department Product 1 Product 2 Product 3 A 3.00 2.00 1.50 B 1.00 2.50 2.00 C 0.25 0.25 0.25 During the next production period the labor-hours available are 450 in department A, 350 in department B, and 50 in department C. The profit contributions per unit are $28 for product 1, $30 for product 2,...
A Company has two support departments (Administration and Janitorial) and three producing departments (Fabricating, Assembly, and...
A Company has two support departments (Administration and Janitorial) and three producing departments (Fabricating, Assembly, and Finishing). Costs and activities are as follows:                                          Administration      Janitorial       Fabricating       Assembly      Finishing Direct costs........................      $50,000            $30,000         $40,000         $50,000         $25,000 Number of employees.......                                        10                  30                  40                  20 Square feet........................          2,000                                    10,000           28,000           15,000 Direct labor hours..............                                                         5,000             6,000             2,000 Administrative services are allocated based on the number of employees; janitorial services are allocated based on square footage. Overhead rates for...
A company has three production departments A, B, and C and one service department D. Planned...
A company has three production departments A, B, and C and one service department D. Planned overhead costs for the quarter are as follows: Overheads £ Absorption basis Quality Control 3000 Direct Labour Hours Depreciation 3750 Machine value Insurance 1250 Machine value Rates and Rent 7500 Floor area Utility bills           625 Floor area The following information is available for each department: Absorption basis A B C D Machine Value (£) 5000 2500 3500 1500 Budgeted Direct Labour hours 1000 500...
Tacoma Hospital has three support departments and four patient services departments. The direct costs to each...
Tacoma Hospital has three support departments and four patient services departments. The direct costs to each of the support departments are as follows: Tacoma Hospital has three support departments and four patient services departments. The direct costs to each of the support departments are as follows: Direct Costs Cost Driver General Administration $2,000,000 Salary Dollars Facilities $5,000,000 Housekeeping Labor Hours Financial Services $3,000,000 Patient Services Revenue Total $10,000,000 The patient services revenue, salary dollars, and housekeeping labor hours for each...
ABC Corporation has three support departments with the following costs and cost drivers: Support Department Cost...
ABC Corporation has three support departments with the following costs and cost drivers: Support Department Cost Cost Driver Graphics Production $200,000 number of copies made Accounting 500,000 number of invoices processed Personnel 400,000 number of employees ABC has three operating divisions, Micro, Macro, and Super. Their revenue, cost, and activity information are as follows: Micro Macro Super Revenues $700,000 $850,000 $650,000 Direct operating expenses 50,000 70,000 100,000 Number of copies made 20,000 30,000 50,000 Number of invoices processed 700 800...
Rose Company has two production departments: Fabricating (P1) and Finishing (P2), and three support departments: Human...
Rose Company has two production departments: Fabricating (P1) and Finishing (P2), and three support departments: Human Resources (S1), Plant Security (S2), and Maintenance (S3). Budgeted support department costs and the direct overhead of the production departments for 2020 are as follows: Department: Budget Costs: (S1) Human resources $80,000 (S2) Plant security $56,000 (S3) Maintenance $63,000 Department: Direct overhead: (P1) Fabricating $280,000 (P2) Finishing $340,000 Rose allocates support department costs using the following activity drivers: Human Resources (number of employees), Plant...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT