CHAPTER 7

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Allocating Costs of Support Departments and Joint Products

COLLABORATIVE LEARNING EXERCISE SOLUTION

1. a. Direct method
Packaging
Cooking and Freezing
Machine hours................................ 0.6667 0.3333
Kilowatt-hours ............................... 0.5556 0.4444
Maintenance:
(0.6667 $340,000)................. $ 226,678
(0.3333 $340,000)................. $ 113,322
Power:
(0.5556 $200,000)................. 111,120
(0.4444 $200,000)................. 88,880
Direct costs..................................... 75,000 55,000
$ 412,798 $ 257,202
Cooking: $412,798/40,000 = $10.32 per machine hour
Packaging and freezing: $257,202/30,000 = $8.57 per direct labor hour
Prime costs ........................................................ $ 16.00
Cooking ($10.32 2) ........................................ 20.64
Packaging and freezing ($8.57 0.5) ............... 4.29
Total cost...................................................... $ 40.93
Markup (20%) ................................................... 8.19
Bid price ...................................................... $ 49.12
b. Sequential method:
Packaging
and
Maintenance Power Cooking Freezing
Machine hours ....................... 0.4000 0.4000 0.2000
Kilowatt hours ....................... 0.5556 0.4444
Direct costs............................ $ 340,000 $ 200,000 $ 75,000 $ 55,000
Maintenance:

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 (0.4000 $340,000) ........ (136,000) 136,000
(0.4000 $340,000) ........ (136,000) 136,000
(0.2000 $340,000) ........ (68,000) 68,000
Power:
(0.5556 $336,000) ........ (186,682) 186,682
(0.4444 $336,000) ........ $ (149,318) 149,318
$ 0 $ 0 $ 397,682 $ 272,318

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737 Continued
Cooking: $397,682/40,000 = $9.94 per machine hour
Packaging and freezing: $272,318/30,000 = $9.08 per direct labor hour

Prime costs ........................................................ $ 16.00

Cooking ($9.94 2) .......................................... 19.88
Packaging and freezing ($9.08 0.5) ............... 4.54
Total cost...................................................... $ 40.42
Markup (20%) ................................................... 8.08
Bid price ....................................................... $ 48.50

c. Reciprocal method:
Packaging
and
Maintenance Power Cooking Freezing
Machine hours ....................... 0.4 0.4 0.2
Kilowatt-hours ...................... 0.1 0.5 0.4
M = $340,000 + 0.1P P = $200,000 + 0.4M
M = $340,000 + 0.1($200,000 + 0.4M) P = $200,000 + 0.4($375,000)
M = $340,000 + $20,000 + 0.04M P = $200,000 + $150,000
0.96M = $360,000 P = $350,000
M = $375,000

Packaging
Total Cooking and Freezing
From:
Maintenance: $375,000
(0.4 $375,000)......................... $ 150,000
(0.2 $375,000)......................... $ 75,000
Power: 350,000
(0.5 $350,000)......................... 175,000
(0.4 $350,000)......................... 140,000
Direct costs....................................... 75,000 55,000
$ 400,000 $ 270,000

Cooking: $400,000/40,000 = $10 per machine hour

Packaging and freezing: $270,000/30,000 = $9 per direct labor hour

Prime cost.......................................................... $ 16.00

Cooking ($10 2) ............................................. 20.00
Pack/freeze ($9 0.5) ....................................... 4.50
Total cost...................................................... $ 40.50
Markup (20%) ................................................... 8.10
Bid price ....................................................... $ 48.60
737 Concluded

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2. No, the direct method did not produce a winning bid. The direct method fails to consider the in-
terrelationships of the support centers and, as a consequence, assigns too much of the support
center costs to the cooking department. Since the job spends more time in the cooking depart-
ment than in the packaging and freezing department, it receives too much overhead and is over-
priced. The reciprocal method is the most accurate as it takes into account the use of support de-
partments by other support departments.

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accessible website, in whole or in part.