228 PART ONE MANAGEMENT ACCOUNTING, INFORMATION AND DECISIONS
228 PART ONE MANAGEMENT ACCOUNTING, INFORMATION AND DECISIONS
1. Prepare a bu dget th at sh ows th e total bu dgeted cost an d th e u n it cost for each circu it board. Use th e n ew system with six cost pools (plu s a separate direct application of direct m aterials cost).
2. Com pu te th e bu dgeted total an d u n it costs of each circu it board if th e old direct labou r h ou r-based system h ad been u sed.
3. How w ou ld you ju dge w h eth er th e n ew system is better th an th e old on e?
P5-22
A LLOCATIN G CEN TRA L COSTS. Th e Cen tral Railroad allocates all cen tral corporate overh ead costs to its division s. Som e costs, su ch as specified in tern al au ditin g an d legal costs, are iden tified on th e basis of tim e spen t. However, oth er costs are h arder to allocate, so th e reven u e ach ieved by each division is u sed as an allocation base. Exam ples of su ch costs were execu tive salaries, travel, secretarial, u tilities, ren t, am ortization , don ation s, corporate plan n in g, an d gen eral m arketin g costs.
Allocation s on th e basis of reven u e for 2001 were (in m illion s):
D IVISIO N
REVEN U E
ALLO CATED CO STS
In 2002, North ern ’s reven u e rem ain ed u n ch an ged. However, Plain s’ reven u e soared to $280 m illion becau se of u n u su ally bou n tifu l crops. Th e latter are trou - blesom e to forecast becau se u n predictable weath er h as a pron ou n ced in flu en ce on volu m e. Mesa h ad expected a sh arp rise in reven u e, bu t severe com petitive con dition s resu lted in a declin e to $200 m illion . Th e total cost allocated on th e basis of reven u e was again $35 m illion , despite rises in oth er costs. Th e presiden t was pleased th at cen tral costs did n ot rise for th e year.
1. Com pu te th e allocation s of costs to each division for 2002.
2. How wou ld each division m an ager probably feel abou t th e cost alloca- tion in 2002 as com pared with 2001? Wh at are th e weakn esses of u sin g reven u e as a basis for cost allocation ?
3. Suppose the budgeted revenues for 2002 were $120 million, $240, and $280, respectively, and the budgeted revenues were used as a cost driver for allocation. Compute the allocations of costs to each division for 2002. Do you prefer this method to the one used in requirement 1? Why?
4. Man y accou n tan ts an d m an agers oppose allocatin g an y cen tral costs. Wh y?
Chapter 5 Cost Allocation and Activity-Based Costing Systems
P5-23
A LLOCATION OF SERVICE-D EPA RTMEN T COSTS. Ch ief Clean in g, In c., provides clean in g ser- vices for a variety of clien ts. Th e com pan y h as two produ cin g division s, Residen tial an d Com m ercial, an d two service-departm en ts, Person n el an d Adm in istrative. Th e com pan y h as decided to allocate all service-departm en t costs to th e produ cin g departm en ts: Person n el, on th e basis of n u m ber of em ployees, an d Adm in istrative, on th e basis of direct departm en t costs. Th e bu dget for 2002 sh ows th e followin g:
PERSO N N EL AD M IN ISTRATIVE RESID EN TIAL CO M M ERCIAL
Direct department costs
Number of employees
Direct labour hours
Square metres cleaned
1. Allocate service-departm en t costs u sin g th e direct m eth od.
2. Allocate service-departm en t costs u sin g th e step-down m eth od. Th e Person n el Departm en t costs sh ou ld be allocated first.
3. Su ppose th e com pan y prices by th e h ou r in th e Residen tial Departm en t an d by th e squ are m etre clean ed in Com m ercial. Usin g th e resu lts of th e step-down allocation s in requ irem en t 2,
a. Com pu te th e cost of providin g on e direct labou r h ou r of service in th e Residen tial Departm en t.
b. Com pu te th e cost of clean in g on e squ are m etre of space in th e Com m ercial Departm en t.
P5-24
A CTIVITY-BA SED COSTIN G. Yam agu ch i Com pan y m akes prin ted circu it boards in a su bu rb of Kyoto. Th e produ ction process is au tom ated with com pu ter-con trolled robotic m ach in es assem blin g each circu it board from a su pply of parts. Yam agu ch i h as iden tified fou r activities:
ACTIVITY
CO ST D RIVER
RATE
Materials handling
Cost of direct materials
5% of materials cost
Assembly
Number of parts used
¥50 per part
Soldering
Number of circuit boards
¥1,500 per board
Quality assurance
Minutes of testing
¥400 per minute
Yam agu ch i m akes th ree types of circu it boards, Model A, Model B, an d Model C. Requ irem en ts for produ ction of 100 circu it boards are as follows:
Direct materials cost
Number of parts used
Minutes of testing
1. Com pu te th e cost of produ ction of 100 of th e th ree types of circu it boards an d th e cost per circu it board for each type.
2. Su ppose th e design of Model A cou ld be sim plified so th at it requ ired on ly 30 parts (in stead of 60) an d took on ly th ree m in u tes of testin g tim e (in stead of five). Com pu te th e cost of 100 Model A circu it boards an d th e cost per circu it board.