ASSIGNMENT

(Chapters 14-15)
Asynchronous/ 10-05-2021

GROUP 10
SIANSON, SHIRLY ANN
TUAZON, JEFANIE
URBANO, MARY JOY
URBINO, VERALOU
BSA-4A
14-1 “I’m going to focus on the customers of my business and leave cost-
allocation
 issues to my
I strongly accountant.”
disagree. Do you agree
Cost accounting with
data this comment
serves by ain many
a vital role
division president?
management Explain.
planning and control decisions. The president will be able to
make better operating and strategy decisions by being involved in key
decisions about cost pools and cost allocation bases. For example, he the
division president fully comprehended about these, he/she will be able to
know the profitability of each customers.

14-2 Why is customer-profitability analysis an important topic to managers?

 Customer profitability analysis shows for managers how each customer

individually contribute to total profitability of the company and helps to see
whether they are receiving a comparable level of attention from company.

14-3 How can a company track the extent of price discounting on a customer-
by-customer basis?

 The company can take a look at the list price and see the discounts together
with the information to assess the level of discounting for each customers
provided by each individual salesperson.

14-4 “A customer-profitability profile highlights those customers a company

should drop to improve profitability.” Do you agree? Explain.
 No, I don’t agree. A customer’s profitability may depend on each period. An
unprofitable customer in one period may be highly profitable in subsequent
future periods. Moreover, costs assigned to each customer need not be
purely variable with respect to short run elimination of sales to those
customers. Thus, when customers are dropped, costs assigned to those
customers may not disappear in the short run.

14-5 Give examples of three different levels of costs in a customer-cost

hierarchy.
 Customer output-unit-level costs
  Product-handling costs of each case sold.
 Customer batch-level costs
 Costs incurred to process orders or to make deliveries.
 Corporate-sustaining costs (Division-sustaining costs)
 Top management and general administration costs.
 Customer sustaining costs
 Costs of visits to customers or costs of displays at customer
sites.
 Distribution-channel costs
 The salary of the manager of a retail distribution channel.

14-6 What information does the whale curve provide?

 It shows the managers where and when the customers will be unprofitable.

14-7 “A company should not allocate all of its corporate costs to its divisions.”
Do you agree? Explain.
 I disagree. Actually it depends, the company can pour all corporate cost,
allocate some, or not allocate at all. Whether which is the appropriate one it

14-8 What criteria might managers use to guide cost-allocation decisions?

Which arewill
thebe
dominant criteria?
based on the composition of cost, purpose of costing, the time
period, and other.

 The Cause and Effect, Benefits received, Fairness of equity, and the ability
to bear. The most dominant would be the cause and effect because it tells
the managers the variables that cause the resources to be consume.

14-9 “Once a company allocates corporate costs to divisions, these costs

should not be reallocated to the indirect-cost pools of the division.” Do you
agree? Explain.

 I disagree. If corporate costs allocated to a division can be reallocated to the

indirect cost pools of the division on the basis of a logical cause-and-effect
relationship, then it preferable to do so. In addition, this will result in fewer

14-10 “A company should not allocate costs that are fixed in the short run to
customers.” Do you agree? Explain briefly.
 division-indirect-cost pools and a more cost-effective cost allocation system.
This reallocation of allocated corporate costs should only be done if the
allocation base used for the division indirect cost pool has the same cause-
and-effect relationship with every cost in that indirect cost pool, including the
reallocated corporate cost.

 I disagree. A company will frequently allocate costs that are fixed in the
short run to customers to determine long-run profitability of customers. The
company must ensure that the revenues received from a customer exceed
the total resources consumed to support the customer, regardless of
whether these costs are variable or fixed in the short run.

 When the company is allocating costs to divisions, channels, and

customers, companies must construct cost pools that are homogeneous, so
that all costs in the cost pool have the same or a similar cause-and-effect or

14-11 How many cost pools should a company use when allocating costs to
divisions, channels, and customers?
benefits-received relationship with the cost-allocation base.
14-12 Show how managers can gain insight into the causes of a sales-volume
variance by subdividing the components of this variance.

 The managers can gain substantial insight into the sales volume variance
by subdividing it into the sale-mix variance and the sales quantity variance.
The sales mix variance tells the difference between budgeted contribution
margin for the actual salesmix, and the budgeted contributed margin for the
budgeted salesmix, where the sales quantity variance identifies the
difference between the budgeted contribution margin based on actual units
sold or all products in the budgeted mix and the contribution margin in the
static budget.

14-13 How can the concept of a composite unit be used to explain why an
unfavorable total sales-mix variance of contribution margin occurs?
?

 The total sales-mix variance arises from differences in the budgeted

contribution margin of the actual and budgeted sales mix. The composite
unit concept enables the effect of individual product changes to be
 summarized in a single intuitive number by using weights based on the mix
of individual units in the actual and budgeted mix of products sold.

14-14 Explain why a favorable sales-quantity variance occurs.

 A favorablesales-quantity variance occurs when the actual units of all
products sold exceed the budgeted units of all products sold.
 Thesales-quantity variance can be decomposed further into a market share

14-15 How can the sales-quantity variance be decomposed further?

variance, which arises when the actual market share of a company is
different from its budgeted marketshare.
 ANSWERS

Exercise 14-16

1.
Overhead Rate    
  Indirect Cost 9.12
  Direct Costs 2.4
      380%

Overhead Cost Item Allocation Criteria

b. Cost of processing of paperwork for Cause and effect
 purchase
c. Supplies-room management fee Benefits Received
d. Operating-room and patient-room
handling costs Cause and effect
e. Administrative hospital costs Benefits Received
f. University teaching-related costs Ability to Bear
g. Malpractice insurance costs Ability to Bear
h. Cost of treating uninsured patients Ability to Bear
i. Profit component None
2.

3.If Meltzer have a health insurance, the insurance company is the one who’ll pay for the

$4,800 bill so he should not worry about anything. But as involved, he can express his

thought or questioned anything if there’s something off, but not to the extent that he will

instruct the insurance company not to pay the roll of cotton. The insurance company is

the one who will assess whether they’ll pay for all whole amount, or only the amount

covered or stipulated in the insurance contract.

 ANSWERS

Exercise 14-18

          Avery Okie Wizard Grainger Duran

Revenues $260,000 $200,000 $322,000 $122,000 $212,000
Technician and equipment cost 182,000 175,000 225,000 107,000 178,000
Gross margin 78,000 25,000 97,000 15,000 34,000
Service call handling($75x No. of service calls) 11,250 18,000 3,000 9,000 13,500
Web-based parts ordering ($80x No. orders) 9,600 16,800 4,800 12,000 12,000
Billing and\Collection ($50x No. of bills) 9,600 4,500 4,500 3,000 6,000
Database maintenance ($10x No. of service calls) 1,500 2,400 400 1,200 1,800
Customer-level Operating Income 1,500 ($16,700) $84,300 ($10,200) $700
1.
2. The Table and Graph below presents the summary:

(a)

(b)
 The most profitable customer is Wizard, he accounts for 75% of overall operating

profits. The three best customers produce 124 percent of IS's operating income, while

the other two reduce the remaining 24 percent of operational income through incurring

losses for IS.

3. IS should consider the following options:

 Look for methods to cut costs or boost revenue on the trouble accounts—Okie

and Grainger.

 Increase your focus on Wizard and Avery. These are "important clients," and

every effort must be made to keep them on board with IS. IS can offer a little

price cut to demonstrate how essential it is to them to deliver a cost-effective

service to their consumers.

 IS may want to consider terminating specific accounts. However, the surplus

fixed capacity created by "firing" unprofitable clients must be used or disposed of

in other ways.
ANSWERS

Exercise 14-24

1.Individual and Total Sales-Quantity Variance:

Sales- Quantity Variance- PLAIN

Static Variance: (Bud.Units x Budgeted Sales Mix x Bud. Cont. Margin per unit)
  (2,300 x 0.75)x $5
  1,725 x $5
  $8, 625
Actual Units Used: (Actual Units x Budgeted Sales Mix x Bud. Cont. Margin per unit)
  (1,900 x 0.75) x $5
  1,425 x $5
  $7, 125
Sales- Quantity Variance- PLAIN  
The difference between the static variance and if the actual units of all glasses sold is used
  Static Variance: $ 8, 625  
  Actual Units Used; $ 7, 125  
$ 1, 500
  Sales- Quantity Variance- PLAIN Unfavorable  
   
Sales- Quantity Variance- CHIC
Static Variance: (Bud.Units x Budgeted Sales Mix x Bud. Cont. Margin per unit)
  (2,300 x 0.25)x $12
  575 x $12
  $6,900
Actual Units Used: (Actual Units x Budgeted Sales Mix x Bud. Cont. Margin per unit)
  (1,900 x 0.25) x $12
  475 x $12
  $5,700
Sales- Quantity Variance-CHIC  
The difference between the static variance and if the actual units of all glasses sold is used
  Static Variance: $6,900  
  Actual Units Used; $5,700  
$ 1, 200
  Sales- Quantity Variance- CHIC Unfavorable  
   
Total Sales- Quantity Variance
Sales- Quantity Variance- PLAIN $ 1, 500 Unfavorable  
Sales- Quantity Variance- CHIC $ 1, 200 Unfavorable  
Total Sales- Quantity Variance $ 2,700 Unfavorable  
               
2.1Individual and Total Sales-Mix Variance:

Sales- Mix Variance- PLAIN

Flexible Variance: (Actual Units x Actual Sales Mix x Bud. Cont. Margin per unit)
  (1,900 x 0.60)x $5
  1,140 x $5
  $5,700
Actual Units Used: (Actual Units x Budgeted Sales Mix x Bud. Cont. Margin per unit)
  (1,900 x 0.75) x $5
  1,425 x $5
  $7, 125
Sales- Mix Variance- PLAIN  
The difference between the flexible variance and if the actual units of all glasses sold is used
  Flexible Variance: $5,700  
  Actual Units Used: $ 7, 125  
  Sales- Quantity Variance- PLAIN $ 1, 425 Unfavorable  
   
Sales- Mix Variance- CHIC
Flexible Variance: (Actual Units x Actual Sales Mix x Bud. Cont. Margin per unit)
  (1,900 x 0.40)x $12
  760 x $12
  $9,120
Actual Units Used: (Actual Units x Budgeted Sales Mix x Bud. Cont. Margin per unit)
  (1,900 x 0.25) x $12
  475 x $12
  $5,700
Sales- Mix Variance- Chic  
The difference between the flexible variance and if the actual units of all glasses sold is used
  Static Variance: $9,120  
  Actual Units Used: $5,700  
  Sales- Quantity Variance- CHIC $ 3, 420 Favorable  
   
Total Sales- Mix Variance
Sales- Mix Variance- PLAIN $ 1, 425 Unfavorable  
Sales- Mix Quantity Variance- CHIC $ 3, 420 Favorable  
Total Sales- Mix Quantity Variance $ 1,995 Favorable  
               
2.2 Individual and Total Sales-Volume Variance:

Sales-Volume Variance-PLAIN
Sales- Quantity Variance- PLAIN $ 1,500 Unfavorable  
Sales- Mix Variance- PLAIN $ 1,425 Unfavorable  
Total Sales-Volume Variance- PLAIN $2,925 Unfavorable  
   
Sales-Mix Variance- PLAIN
Sales- Quantity Variance-
CHIC $ 1,200 Unfavorable  
Sales- Mix Variance-CHIC $3, 420 Favorable  
Total Sales-Mix Variance- CHIC $2, 220 Favorable  
   
TOTAL SALES-VOLUME VARIANCE
Sales-Volume Variance- PLAIN $2,925 Unfavorable  
Sales-Mix Variance- CHIC $2, 220 Favorable  
TOTAL SALES-VOLUME VARIANCE   $ 705 Unfavorable  

3.Conclusion:

Hiro Corporation had an unfavorable sales-quantity variance because it sold

fewer wine glasses than expected. Because the actual mix of wine glasses sold has

shifted in favor of the higher contribution margin Chic wine glasses, the adverse sales-

quantity variance is somewhat offset by a favorable sales-mix variance. Failure to attain

the anticipated brand recognition can have a negative impact on operational income, as

illustrated by this situation.

ANSWERS

Exercise 14-29

1.Customer Profitability, distribution

Customer Profitability, distribution

  Customer
  1 2 3 4 5
Revenues at list prices (a) $47,580 $176,280 $1,157,000 $811,200 $50,700
Discount(b) 0 5,424 75,650 6,240 4,095
Revenues (at actual prices) 47,580 170,856 1,081,350 804,960 46,650
Cost of goods sold(c) 36,600 135,600 890,000 624,000 39,000
Gross margin 10,980 35,256 191,350 180,960 7,605
Customer-level operating costs  
Order taking(d) 900 1,620 3,150 1,440 3,150
Customer visits(e) 225 375 900 300 900
Deliveries(f) 504 336 1,560 450 4,725
Product handling(g) 2,196 8,136 53,400 37,440 2,340
Expedited runs(h) 0 0 0 0 750
Total 3,825 10,467 59,010 39,630 11,865
Customer-level operating income $7,155 $24,789 $132,340 $141,330 $(4,260)
(a) $26 x 1,830; 6,780; 44,500; 31,200; 1,950  
(b) ($26-$26) x 1,830; ($26 - $25.20) x 6,780; ($26-$24.30) x 44,500; ($26-$25.80) x 31,200; ($26-$23.90) x
1,950
(c) $20 x 1,830; 6,780; 44,500; 31,200; 1,950  
(d) $90 x 10; 18; 35; 16; 35  
(e) $75 x 3; 5; 12; 4; 12  
(f) $3 x (12x14); (28x4); (65x8); (25x6); (35x45)  
(g) $1.20 x 1,830; 6,780; 44,500; 31,200; 1,950  
(h) $250 x 0; 0; 0; 0; 3          

Despite having only 70% of Customer 3's unit volume (31,200 44,500), Customer 4 is
the most profitable customer. Customer 3 obtains a $1.70 discount each case, however
Customer 4 only receives a $0.20 discount per case.

Customer 5 is a losing, whereas Customer 1 is profitable. Customer 4 gets a $2.10 per

case discount, places more purchases, requires more customer visits, and requires
more delivery miles and expedited deliveries than Customer 1.

2.Green Paper Delivery can evaluate whether clients receive various discounts and how
salespeople may differ in the discounts they provide thanks to separate reporting of
both the list selling price and the actual selling price.

Sales Volume Discount per case

3 (44,500 cases) $1.70 The basis for Customer 5's

$2.10 discount with only 1,950
4 (31,200) cases) $0.20
cases sold and Customer 2's
2 (6,780 cases) $0.80 $0.80 discount with only 6,780
cases sold should be
5 (1,950 cases) $2.10 investigated.
3.Green Paper Delivery should
1 (1,830 cases) $0.00
only drop consumers as a last
    option. The following are some
things to think about:
 What costs can be avoided by dropping one or more customers?
 Do certain consumers have externalities, even if they are unproductive in the
short term?
 Is it possible to reorganize the relationship with the "difficult" clients so that it
becomes a "win-win" situation?
 What is each customer's predicted future profitability? Is it conceivable that the
clients who are currently unprofitable (5) or low-profit (1) will become very
profitable in the future?
1.

Customer profitability and ethics

Order taking Customer batch-level
Product handling Customer output-unit-level
Delivery Customer batch-level
Expedited delivery Customer batch-level
Restocking customer batch-level
Visits to customers Customer sustaining-level
Sales Commissions Customer batch-level
 2.Customer-level operating income based on expected cost of orders:

Customer-level operating income based on expected cost of orders:

  Customers
  AC DC MC JC RC BC
Revenues  
$30 x 225; 520; 295; 110; 390; 1,050 $6,750 $15,600 $8,850 $3,300 $11,700 $31,500
Less: Returns  
$30 x 15; 40; 0; 0; 35; 40 450 1,200 0 0 1,050 1,200
Net Revenues  
$30 x 210; 480; 295; 110; 355; 1,010 6,300 14,400 8,850 3,300 10,650 30,300
Cost of goods sold  
$18 x 210; 480; 295; 110; 355; 1,010 3,780 8,640 5,310 1,980 6,390 18,180
Gross margin 2,520 5,760 3,540 1,320 4,260 12,120
Customer-level operating costs:  
Order taking  
$15 x 10; 20; 9; 12; 24; 36 150 300 135 180 360 540
Product handling  
$1 x 225; 520; 295; 110; 390; 1,050 225 520 295 110 390 1,050
Delivery  
$1.20 x 360; 580; 350; 220; 790; 850 432 696 420 264 948 1,020
Expedited delivery  
$175 x 0; 8; 0; 0; 3; 4 0 1,400 0 0 525 700
Restocking  
$50 x 3; 2; 0; 0; 1; 5 150 100 0 0 50 250
Visits to customers 125 125 125 125 125 125
Sales commissions  
$10 x 10; 20; 9; 12; 24; 36 100 200 90 120 240 360
Total customer level operating costs 1,182 3,341 1,065 799 2,638 4,045
Customer-level operating income $1,338 $2,419 $2,475 $521 $1,622 $8,075
             
 3. Customer-level operating income based on actual order costs:

Customer-level operating income based on actual order costs:

  Customers
  AC DC MC JC RC BC
Revenues  
$8,85
$30 x 225; 520; 295; 110; 390; 1,050 $6,750 $15,600 0 $3,300 $11,700 $31,500
Less: Returns  
$30 x 15; 40; 0; 0; 35; 40 450 1,200 0 0 1,050 1,200
Net Revenues  
$30 x 210; 480; 295; 110; 355; 1,010 6,300 14,400 8,850 3,300 10,650 30,300
Cost of goods sold  
$18 x 210; 480; 295; 110; 355; 1,010 3,780 8,640 5,310 1,980 6,390 18,180
Gross margin 2,520 5,760 3,540 1,320 4,260 12,120
Customer-level operating costs:  
Order taking  
$8 x 10; $15 x 20; $8 x 9; $8 x 12; $8 x 24; $8
x 36 80 300 72 96 192 288
Product handling  
$1 x 225; 520; 295; 110; 390; 1,050 225 520 295 110 390 1,050
Delivery  
$1.20 x 360; 580; 350; 220; 790; 850 432 696 420 264 948 1,020
Expedited delivery  
$175 x 0; 8; 0; 0; 3; 4 0 1,400 0 0 525 700
Restocking  
$50 x 3; 2; 0; 0; 1; 5 150 100 0 0 50 250
Visits to customers 125 125 125 125 125 125
Sales commissions  
$10 x 10; 20; 9; 12; 24; 36 100 200 90 120 240 360
Total customer level operating costs 1,112 3,341 1,002 715 2,470 3,793
$2,53
Customer-level operating income $1,408 $2,419 8 $605 $1,790 $8,327
             

When comparing the answers to requirements 2 and 3, it looks that operating

income is larger than predicted, thus KC Corporation's management would be quite

pleased with the salespeople's performance in lowering order costs. Except for DC, all

of the customers are making more money than they had previously reported.
4.

Customer-level operating income based on actual orders and adjusted commissions

  Customers
  AC DC MC JC RC BC
Revenues  
$6,75 $15,60 $8,85 $3,30 $11,70 $31,50
$30 x 225; 520; 295; 110; 390; 1,050 0 0 0 0 0 0
Less: Returns  
$30 x 15; 40; 0; 0; 35; 40 450 1,200 0 0 1,050 1,200
Net Revenues  
$30 x 210; 480; 295; 110; 355; 1,010 6,300 14,400 8,850 3,300 10,650 30,300
Cost of goods sold  
$18 x 210; 480; 295; 110; 355; 1,010 3,780 8,640 5,310 1,980 6,390 18,180
Gross margin 2,520 5,760 3,540 1,320 4,260 12,120
Customer-level operating costs:  
Order taking  
$15 x 5; 20; 4; 6; 9; 18 75 300 60 90 135 270
Product handling  
$1 x 225; 520; 295; 110; 390; 1,050 225 520 295 110 390 1,050
Delivery  
$1.20 x 360; 580; 350; 220; 790; 850 432 696 420 264 948 1,020
Expedited delivery  
$175 x 0; 8; 0; 0; 3; 4 0 1,400 0 0 525 700
Restocking  
$50 x 3; 2; 0; 0; 1; 5 150 100 0 0 50 250
Visits to customers 125 125 125 125 125 125
Sales commissions  
$10 x 5; 20; 4; 6; 9; 18 50 200 40 60 90 180
Total customer level operating
costs 1,057 3,341 940 649 2,263 3,595
$1,46 $2,60
Customer-level operating income 3 $2,419 0 $671 $1,997 $8,525
             

5.

The salespeople's actions lost KC Corporation $588 in profit (the difference

between the incomes in requirements 3 and 4.) Although management believes the
salespeople are saving money by increasing order expenses ($1,028 in requirement 3
compared $930 in requirement 4) and boosting their sales commissions ($1,110 in
requirement 3 versus $620 in requirement 4), they are actually costing the company
money. This is unethical. In this case, the sales commission structure of KC Corporation
has to be changed, with commissions possibly tied to the total number of units sold
rather than the number of orders placed.

15-1 Distinguish between the single-rate and the dual-rate methods

 The main difference between the single rate and dual rate method is that the
single rate method allocates the rate per unit of cost allocation for both variable
and fixed cost. Whereas the dual-rate method firstly categorized the cost into two
categories- variable cost and fixed cost, then allocate per unit rate of cost
allocation differently for variable cost and fixed cost.

15-2 Describe how the dual-rate method is useful to division managers in decision
making.

 The dual-rate method provides information to division managers about cost

behavior. Knowing how fixed costs and variable costs behave differently is useful
in decision making.

15-3 How do budgeted cost rates motivate the support-department manager to

improve efficiency

 Budgeted costrates rouse the supervisor of the help division to further develop
proficiency on the grounds that the help office bears the danger of any negative
expense changes.

15-4 Give examples of allocation bases used to allocate support-department

cost pools to operating departments

 Planned expense rates rouse the supervisor of the help division to further
develop proficiency on the grounds that the help office bears the danger of any
negative expense changes.
15-5The user knows the costs in advance and can factor them into ongoing
operating choices.

 The client realizes the expenses ahead of time and can figure them progressing
working decisions.

15-6 “To ensure unbiased cost allocations, fixed costs should be allocated on
the basis of estimated long-run use by user-department managers.” Do you
agree? Why?

 Disagree.Assigning costs based on assessed since quite a while ago show use
to client division directors implies office supervisors can bring down their expense
designations by intentionally thinking little of their since quite a while ago run use
(expecting any remaining administrators don't also belittle their utilization)

15-7 Distinguish among the three methods of allocating the costs of support
departments to operating departments.

 Reciprocal (allocation) strategy dispenses support office expenses to working

divisions by completely perceiving the common administrations gave among all
help offices. b Direct ( allocation ) strategy overlooks any administrations
delivered by one help office to another, it allocates each support departments
cost directly to the operating.

15-8 What is conceptually the most defensible method for allocating support-
department costs? Why?

 The reciprocal methodis hypothetically the most faultless technique since it

completely perceives the common administrations gave among all offices,
regardless of whether those divisions are working or backing offices.
15-9 Distinguish between two methods of allocating common costs.

 The stand-alone cost-allocation methodutilizes data relating to every client of an

expense object as a different element to decide the expense designation loads.
The gradual expense distribution strategy positions the singular clients of an
expense object in the request for clients generally answerable for the normal
expenses and afterward utilizes this positioning to apportion costs among those
clients. The main positioned client of the expense object is the essential client
and is designated costs up to the expenses of the essential client as an
independent client. The second-positioned client is the main steady client and is
apportioned the extra expense that emerges from two clients rather than just the
essential client. The third-positioned client is the second gradual client and is
allotted the extra expense that emerges from three clients rather than two clients,
etc. The Shapley Value technique ascertains a normal expense dependent on
the expenses allotted to every client as first the essential client, the second-
positioned client, the third-positioned client, etc.

15-10 What role does the Cost Accounting Standards Board play when
companies contract with the U.S. government?

 The Cost Accounting Standards (CAS) are a bunch of 19 principles and rules
declared by the U.S. government to be utilized in building up costs on arranged
acquirements. CAS contrasts from Federal Acquisition Regulation (FAR) on the
grounds that FAR applies to most workers for hire while CAS applies basically to
the bigger ones. The Cost Accounting Standards Board (CASB) is a U.S. central
government body that advances consistency and consistency in cost
representing government awards and agreements.

15-11 What is one keyway to reduce cost-allocation disputes that arise with
government contracts?

 Spaces of question between contracting gatherings can be decreased by making

the ―rules of the game‖ unequivocal and recorded as a hard copy at the time
the agreement is agreed upon.
15-12 Describe how companies are increasingly facing revenue-allocation
decisions.

 Organizations are progressively selling items or administrations at a solitary cost

income assignment is required when troughs responsible for creating or
promoting items in a group are assessed utilizing, item explicit incomes.

15-13 Distinguish between the stand-alone and the incremental revenue-

allocation methods.

 The stand-alone cost methodallots bunch expenses for clients as an extent of the
costs that would have been separately caused by every client. For instance, the
field administration office and the profits division independently need to send
fixed apparatuses to two clients situated in a similar town. while the increment
revenue allocation is the distribution technique building up needs among the
things in a group. The essential item is appointed 100% of its independent
income, with the excess income from the pack relegated consecutively to
different things.

15-14 Identify and discuss arguments that individual product managers may put
forward to support their preferred revenue-allocation method

 Managersordinarily will contend that their singular item is the great justification
for why customers purchase a heap of items. Proof on this contention could
emerge out of the deals of the items when sold as individual items. Different bits
of proof incorporate overviews of clients of every item and reviews of individuals
who buy the heap of items.
15-15 How might a dispute over the allocation of revenues of a bundled product
be resolved?

 An argument about allotment of incomes of a packaged item could be settled by

(a) having an arrangement that traces the favored strategy on account of a
question, or (b) hosting a third gathering (like the organization president or a free
referee) settles on a choice.
 ANSWER

Single-rate versus dual-rate methods, support department.

Bases available (kilowatt Warre Livoni Westlan Dearbor

Total
hours): n a d n
80,00
Practical capacity 22,000 16,000 19,000 23,000 0
40,00
Expected monthly usage 10,000 12,000 10,000 8,000 0

1a.

1a. Single-rate method based on

practical capacity:
 Total costs in pool = $4,000 +
$17,600 = $21,600
Practical capacity = 80,000
kilowatt hours
Allocation rate = $21,600 ÷
80,000 = $0.27 per hour of capacity
1a. Single-rate method based on
practical capacity:
Total costs in pool = $4,000 +
$17,600 = $21,600
Practical capacity = 80,000
kilowatt hours
Allocation rate = $21,600 ÷
80,000 = $0.27 per hour of capacity
1a. Single-rate method based on
practical capacity:
Single-rate method based on practical capacity:

Total Cost in Pool = $4,000 + $17,600 = $21,600

Practical Capacity = 80,000 kilowatt hours

Allocation Rate = $21,600 / 80,000 = $0.27 per hour of capacity

 Westlan Dearbor
Warren Livonia Total
d n
Practical capacity 22,000 16,000 19,000 23,000 80,000
Costs allocated at $0.30 per hour $5,940 $4,320 $5,130 $6,210 $21,600

1b.

Single-rate method based on expected monthly usage:

Total Cost in Pool = $4,000 + $17,600 = $21,600

Practical Capacity = 40,000 kilowatt hours

Allocation Rate = $21,600 / 40,000 = $0.54 per hour of capacity

Warren Livonia Westland Dearborn Total

Expected monthly usage in hours 10,000 12,000 10,000 8,000 40,000
Costs allocated at $0.54 per hour $5,400 $6,480 $5,400 $4,320 $21,600

2. Variable Cost Pool:

Total Cost in Pool = $4,000

Expected Usage = 40,000 kilowatt hours

Allocation Rate = $4,000 / 40,000 = $0.10 per hour of expected usage

Fixed Cost Pool:

Total Cost in Pool = $17,600

Expected Usage = 80,000 kilowatt hours

Allocation Rate = $17,600 / 80,000 = $0.10 per hour of capacity

Warren Livonia Westland Dearborn Total

Variable Cost Pool $1,000 $1,200 $1,000 $800 $4,000
Fixed Cost Pool 4,840 3,520 4,180 5,060 17,600
TOTAL $5,840 $4,720 $5,180 $5,860 $21,600

The dual-rate method allows a more correlative allocation of the power department
costs; it allows the use of different allocation bases for different cost pools. The fixed
costs result from decisions most likely linked with the scale of the facility, or the practical
capacity level. The variable costs result from decisions most likely connected with
monthly usage.

ANSWER

1.

Support Departments Operating Departments

 
AS IS Government Corporation
Cost $600,000 $2,400,000    
Allocation of AS cost
-861,538 215,385 $344,615 $301,538
(0.25, 0.40, 0.35)
Allocation of IS cost
261,538 -2,615,385 784,616 1,569,231
(0.10, 0.30, 0.60)
0 0 $1,129,231 1,870,769

Reciprocal Method Computation

AS = $600,000 + 0.10 IS
IS = $2,400,000 + 0.25AS
IS = $2,400,000 + 0.25 ($600,000 + 0.10 IS)
= $2,400,000 + $150,000 + 0.025 IS
0.975IS = $2,550,000
 IS = $2,550,000 ÷ 0.975
= $2,615,385
AS = $600,000 + 0.10 ($2,615,385)
= $600,000 + $261,538
= $861,538
2.

The four methods differ in the level of support department cost allocation across
support departments. The level of reciprocal service by support departments is material.
Administrative Services supplies 25% of its services to Information Systems.
Information Systems supplies 10% of its services to Administrative Services. The
Information Department has a budget of $2,400,000 that is 400% higher than
Administrative Services. The reciprocal method recognizes all the interactions and is
thus the most accurate. This is especially clear from looking at the repeated iterations
calculations.

ANSWER

1a. Allocation based on budgeted usage of gift-wrapping services:

Giftware (1,000 × $1.45) $1,450.00

Women’s Apparel (850 × $1.45) 1,232.50

Fragrances (1,000 × $1.45) 1,450.00

Men’s Apparel (750 × $1.45) 1,087.50

Domestics (900 × $1.45) 1,305.00

Total $6,525.00

1b. Allocation based on actual usage of gift-wrapping services:

Giftware (1,200 × $1.45) $1,740.00

Women’s Apparel (650 × $1.45) 942.50

Fragrances (900 × $1.45) 1,305.00

Men’s Apparel (450 × $1.45) 652.50

Domestics (800 × $1.45) 1,160.00

Total $5,800.00

1c. Allocation based on actual usage of gift-wrapping services:

Giftware (1,200 × $1.34) $1,680.00

Women’s Apparel (650 × $1.34) 871.00

Fragrances (900 × $1.34) 1,206.00

Men’s Apparel (450 × $1.34) 603.00

Domestics (800 × $1.34) 1,072.00

Total $5,360.00

2.

Budgeted rate for fixed costs = Budgeted fixed costs / Practical capacity
 = $4,950 ÷ 5,000 gifts = $0.99 per gift Fixed costs allocated on budgeted usage.

Rate for variable costs = $0.35 per item Variable costs based on actual usage.

Department Variable Costs Fixed Costs Total

Giftware 1,200 × $0.35 = $ 420.00 1,000 × $0.99 = $ 990.00 $1,410.00
Women’s Apparel 650 × $0.35 = 227.50 850 × $0.99 = 841.50 1,069.00
Fragrances 900 × $0.35 = 315.00 1,000 × $0.99 = 990.00 1,305.00
Men’s Apparel 450 × $0.35 = 157.50 750 × $0.99 = 742.50 900
Domestics 800 × $0.35 = 280.00 900 × $0.99 = 891.00 1,171.00
Total $1,400.00 $4,455.00 $5,855.00

3. The dual-rate method has two major advantages over the single-rate method:

a. Fixed costs and variable costs can be allocated differently—fixed costs based on
rates calculated using practical capacity and budgeted usage and variable costs based
on budgeted rates and actual usage.

b. Fixed costs are allocated proportionately to the departments causing the incurrence
of those costs based on the budgeted usage of each department.

c. The costs allocated to a department are not affected by the usage by other
departments.
Single-rate method based on
practical capacity:
Total costs in pool = $4,000 +
$17,600 = $21,600
Practical capacity =
80,000 kilowatt hours
Allocation rate = $21,600
÷ 80,000 = $0.27 per hour of
capacity

ANSWER
Single-rate method based on
practical capacity:
Total costs in pool = $4,000 +
$17,600 = $21,600
Practical capacity =
80,000 kilowatt hours
Allocation rate = $21,600
÷ 80,000 = $0.27 per hour of
capacity
1.

Direct method: To X To Y

A 500/800  $210,000 = $131,250 300/800  $210,000 = $ 78,750

B 125/500  $ 90,000 = 22,500 375/500  $ 90,000 = 67,500
Total $153,750 $146,250

Step-down method, allocating A

first:
A B X Y

Costs to be allocated $210,000 $ 90,000 — —

Allocate A: (200; 500; 300 ÷ 1,000) (210,000) 42,000 $105,000 $ 63,000

Allocate B: (125; 375 ÷ 500) (132,000) 33,000 99,000

Total $ $ $138,000 $162,000

 0

Step-down method, allocating B

first:
A B X Y

Costs to be allocated $210,000 $ 90,000 — —

Allocate B: (750; 125; 375 ÷ 1,250) 54,000 (90,000) $ $ 27,000

Allocate A: (500; 300 ÷ 800) (264,000) 165,000 99,000

Total $ $ $174,000 $126,000

Reciprocal method:

Stage 1: Let A = total costs of materials-handling

department
B =
total costs of power-generating
department

(1) A = $210,000 + 0.6 B

(2) B = $ 90,000 + 0.2 A

Stage 2: Substituting in (1) A = $210,000 + 0.6 ($90,000 + 0.2 A)

A = $210,000 + $54,000 + 0.12 A

0.88 A = $264,000

A = $300,000

Substituting in (2): B = $90,000 + 0.2 ($300,000)

B = $150,000

Stage 3:

A B X Y
Original amounts $210,000 $ 90,000 — —

Allocation of A (300,000) 60,000 (20%) $150,000 (50%) $ 90,000 (30%)

Allocation of B 90,000 (60%) (150,000) 15,000 (10%) 45,000 (30%)

Totals accounted for $ 0$ 0 $165,000 $135,000

Reciprocal Method of Allocating Support Department Costs for Milton Company Using
Repeated Iterations.

A B X Y
Budgeted manufacturing overhead costs
before
any interdepartmental cost allocations $210,000 $ 90,000
1st Allocation of Dept. A
(2/10, 5/10, 3/10)b (210,000) 42,000 $105,000 $ 63,000
132,000
1st Allocation of Dept. B
(6/10, 1/10, 3/10)b 79,200 (132,000) 13,200 39,600
2nd Allocation of Dept. A
(2/10, 5/10, 3/10)a (79,200) 15,840 39,600 23,760
2nd Allocation of Dept B:
(6/10, 1/10, 3/10)b 9,504 (15,840) 1,584 4,752
3rd Allocation of Dept A:
(2/10, 5/10, 3/10)a (9,504) 1,901 4,752 2,851
3rd Allocation of Dept. B:
(6/10, 1/10, 3/10)b 1,141 (1,901) 190 570
4th Allocation of Dept. A
(2/10, 5/10, 3/10)a (1,141) 228 570 343
4th Allocation of Dept. B
(6/10, 1/10, 3/10)b 137 (228) 23 68
5th Allocation of Dept A
(2/10, 5/10, 3/10) (137) 28 68 41
5th Allocation of Dept B
(6/10, 1/10, 3/10) 17 (28) 3 8
6th Allocation of Dept A
(2/10, 5/10, 3/10) (17) 3 9 5
6th Allocation of Dept B
(6/10, 1/10, 3/10) 2 (3) 0 1
7th Allocation of Dept A
(2/10, 5/10, 3/10) (2) 0 1 1
Total budgeted manufacturing
overhead of operating departments $ 0 $ 0 $165,000 $135,000
2. At first glance, it appears that the cost of power is $72 per kilowatt-hour ($90,000 ÷
1,250 Kwh) plus the material handling costs. If so, Milton would be better off by
purchasing from the power company. However, the decision should be influenced by
the effects of the interdependencies and the fixed costs. Note that the power needs
would be less (students frequently miss this) if they were purchased from the outside

ANSWER
1a. Allocate the total Support Department costs to the operating departments under the
Direct Allocation Method:

Domestic Tours World Tours

Departmental Overhead Costs $1,300,000 $1,840,000

From:

Administration ($55,000/$132,000)
× $400,000
166,667

($77,000/$132,000) × $400,000 233,333

Information Technology
(2,200/3,400) × $250,000
161,765

(1,200/3,400) × $250,000 88,235

Total Departmental Overhead $1,628,432 $2,161,568

Costs

Total Costs to account for:

$3,790,000

1b. Allocate the Support Department Costs to the Operating Departments under the
Step- down (Sequential) Allocation Method with Administration first sequentially:

Domestic World

Administration IT Tours Tours

Departmental Overhead Costs $ 400,000 $ 250,000 $1,300,000 $1,840,000

From:

Administration $(400,000) 40% × $400,000

160,000
 25% × $400,000 100,000

35% × $400,000 140,000

Information Technology (410,000)

(2,200/3,400) × $410,000 (1,200/3,400) × 265,294

$410,000
144,706

Total Departmental Costs $ 0 $ 0 $1,665,294 $2,124,706

Total Costs to account for: $3,790,000

1c. Allocate the Support Department Costs to the Operating Departments under the
Step- down (Sequential) Allocation Method IT first sequentially

To:

Domestic World

IT Administration Tours Tours

Departmental Costs $250,000 $400,000 $1,300,000 $1,840,000

From:

Information Technology (250,000)

15% × $250,000 37,500

55% × $250,000 137,500

30% × $250,000 75,000

Administration (437,500)
(55,000/132,000) × $437,500
182,292 255,208

(77,000/132,000) × $437,500

Total Departmental Costs $ 0 $ 0 $1,619,792 $2,170,208

2. Summary of cost allocation resulting from the four methods in part 1:

 Domestic World Tours

Tours

Direct method $1,628,432 $2,161,568

Step-down method (Admin. primary) $1,665,294 $2,124,706

Step-down method (IT primary) $1,619,792 $2,170,208

Reciprocal method $1,656,250 $2,133,750

Although the reciprocal method produces the most accurate support department cost
allocation, it is also the most complicated. The step-down method with administration
being the primary department produces similar results. That is due to the fact that 40%
of administration services are provided to the IT department, another support
department, while only 15% of IT services are provided to administration. Therefore, the
step-down method with administration as the primary department would be an
acceptable substitute for the reciprocal method