224 PART ONE MANAGEMENT ACCOUNTING, INFORMATION AND DECISIONS

Traceable Factor O verhead Costs

Activity Centre

Production Scheduling

Shipping Administration

Total costs

Th e accou n tin g an d en gin eerin g team h as provided th e followin g cost-driver con su m ption estim ates for th e produ ction of 100,000 u n its of Part T151A:

Cost D river

Cost-D river Consumption

Pieces scrapped

Containers shipped

Machine hours

1. Prepare a sch edu le calcu latin g th e u n it cost an d gross m argin of Part T151A u sin g th e activity-based costin g approach .

2. Based on th e ABC resu lts, wh at cou rse of action wou ld you recom - m en d regardin g th e proposal by Ch rysler? List th e ben efits an d costs associated with im plem en tin g an activity-based costin g system at RMP.

P5-18

D IRECT A N D STEP-D OWN METHOD S OF A LLOCATION . Gen eral Textiles Com pan y h as pre- pared departm en tal overh ead bu dgets for n orm al activity levels before reappor- tion m en ts, as follows:

Building and grounds

General factory administration*

Cafeteria operating loss

*To be reapportioned before cafeteria.

Man agem en t h as decided th at th e m ost sen sible produ ct costs are ach ieved by u sin g departm en tal overh ead rates. Th ese rates are developed after appropriate service departm en t costs are allocated to produ ction departm en ts.

Cost drivers for allocation are to be selected from th e followin g data:

Chapter 5 Cost Allocation and Activity-Based Costing Systems

SQUARE M ETRES O F

N U M BER O F D EPARTM EN T

D IRECT LABO U R

N U M BER O F

FLO O R SPACE

TOTAL

H O U RS

EM PLOYEES

O CCU PIED

LABO U R H O U RS REQU ISITIO N S

Building and grounds

— Personnel*

— General factory administration

— Cafeteria operating loss

4,500 * Basis used is number of employees.

1. Allocate service-departm en t costs by th e step-down m eth od. Develop overh ead rates per direct labou r h ou r for m ach in in g an d assem bly.

2. Sam e as requ irem en t 1, u sin g th e direct m eth od.

3. Wh at wou ld be th e blan ket plan twide factory-overh ead application rate, assu m in g th at direct labou r h ou rs are u sed as a cost driver?

4. Usin g th e followin g in form ation abou t Job K10 an d Job K11, prepare th ree differen t total overh ead costs for each job, u sin g rates developed in requ irem en ts 1, 2, an d 3.

D IRECT LABO U R H O U RS M ACH IN IN G

ASSEM BLY

P5-19 JOIN T COSTS A N D D ECISION S.

A chemical company has a batch process that takes 1,000 litres of

a raw material and transforms it into 80 kilograms of X-1 and 400 kilograms of X-

2. Although the joint costs of their production are $1,200, both products are worth- less at their split-off point. Additional separable costs of $350 are necessary to give X-1 a sales value of $1,000 as Product A. Similarly, additional separable costs of $200 are necessary to give X-2 a sales value of $1,000 as Product B.

You are in ch arge of th e batch process an d th e m arketin g of both produ cts. (Sh ow you r com pu tation s for each an swer.)

1. a. Assu m in g th at you believe in assign in g join t costs on a ph ysical basis, allocate the total profit of $250 per batch to Products A and B.

b. Wou ld you stop processin g on e of th e produ cts? Wh y?

2. a . Assu m in g th at you believe in assign in g join t costs on a n et-realizable-valu e (relative-sales-valu e) basis, allocate th e total operatin g profit of $250 per batch to Produ cts A an d B. If th ere is n o m arket for X-1 an d X-2 at th eir split-off poin t, a n et realizable valu e is u su - ally im pu ted by takin g th e u ltim ate sales valu e at th e poin t of sale an d workin g backward to obtain approxim ated “syn th etic” relative sales valu es at th e split-off poin t. Th ese syn th etic valu es are th en u sed as weigh ts for allocatin g th e join t costs to th e produ cts.

224 PART ONE MANAGEMENT ACCOUNTING, INFORMATION AND DECISIONS