216 PART ONE MANAGEMENT ACCOUNTING, INFORMATION AND DECISIONS

3. Wh at advan tages are th ere to u sin g bu dgeted rath er th an actu al sales for allocatin g th e cen tral costs?

P5-3

D IRECT A N D STEP-D OWN A LLOCATION S . Bu lter Hom e Produ cts h as two produ cin g depart- m en ts, m ach in in g an d assem bly, an d two service departm en ts, person n el an d cu stodial. Th e com pan y’s bu dget’s for April, 2001 is:

SERVICE D EPARTM EN T

PRO D U CTIO N D EPARTM EN TS

PERSO N N EL CU STO D IAL

M ACH IN IN G ASSEM BLY

Direct department costs

Square metres

Number of employees

Bu lter allocates person n el costs on th e basis of n u m ber of em ployees an d cu stodial costs on th e basis of squ are m etres.

1. Allocate person n el an d cu stodial costs to th e produ cin g departm en ts u sin g th e direct m eth od.

2. Allocate person n el an d cu stodial costs to th e produ cin g departm en ts u sin g th e step-down m eth od. Allocate person n el costs first.

P5-4 JOIN T COSTS. Robin son Com pan y’s produ ction process for two of its solven ts can be dia-

gram m ed as follows:

Solvent A = 20,000 litres Joint input = 30,000 litres

Split-off point

Solvent B =10,000 litres

Th e cost of th e join t in pu ts, in clu din g processin g costs before th e split-off poin t, is $400,000. Solven t A can be sold at split-off for $10 per litre an d Solven t B for $30 per litre.

1. Allocate th e $400,000 join t cost to Solven ts A an d B by th e ph ysical- u n its m eth od.

2. Allocate th e $400,000 join t cost to Solven ts A an d B by th e relative- sales-valu e m eth od.

P5-5 JOIN T PROD UCTS. Millban k Millin g bu ys oats at $.60 per kilogram an d produ ces MM Oat Flou r, MM Oat Flakes, an d MM Oat Bran . Th e process of separatin g th e oats in to oat flou r an d oat bran costs $.30 per kilogram . Th e oat flou r can be sold for $1.50 per kilogram , th e oat bran for $2.00 per kilogram . Each kilogram of oats h as .2 kilogram s of oat bran an d .8 kilogram s of oat flou r. A kilogram of oat flou r can be m ade in to oat flakes for a fixed cost of $240,000 plu s a variable cost of $.60 per kilogram . Millban k Millin g plan s to process on e-m illion kilogram s of oats in 2001, at a pu rch ase price of $600,000.

1. Allocate all th e join t costs to oat flou r an d oat bran u sin g th e ph ysical- u n its m eth od.

Chapter 5 Cost Allocation and Activity-Based Costing Systems

2. Allocate all th e join t costs to oat flou r an d oat bran u sin g th e relative- sales-valu e m eth od.

3. Suppose there was no market for oat flour. Instead, it must be made into oat flakes to be sold. Oat flakes sell for $2.90 per kilogram. Allocate the joint cost to oat bran and oat flakes using the relative-sales-value method.

P5-6 BY-PROD UCT COSTIN G. Th e Wen atch ee Com pan y bu ys apples from local orch ards an d presses th em to produ ce apple ju ice. Th e pu lp th at rem ain s after pressin g is sold to farm - ers as livestock food. Th is livestock food is accou n ted for as a by-produ ct.

Du rin g th e 2001 fiscal year, th e com pan y paid $1,000,000 to pu rch ase eigh t-m illion kilogram s of apples. After processin g, on e-m illion kilogram s of pu lp rem ain ed. Jon es spen t $35,000 to package an d sh ip th e pu lp, w h ich w as sold for $50,000.

1. How m u ch of th e join t cost of th e apples is allocated to th e pu lp?

2. Com pu te th e total in ven tory cost (an d th erefore th e cost of goods sold) for th e pu lp.

3. Assu m e th at $130,000 was spen t to press th e apples an d $150,000 was spen t to filter, pasteu rize, an d pack th e apple ju ice. Com pu te th e total in ven tory cost of th e apple ju ice produ ced.

P5-7 JIT A N D N ON -VA LUE-A D D ED A CTIVITIES.

A m otorcycle m an u factu rer was con cern ed with declin in g m arket sh are becau se of foreign com petition . To becom e m ore efficien t, th e com pan y was con siderin g ch an gin g to a ju st-in -tim e (JIT) produ ction system . As a first step in an alyzin g th e feasibility of th e ch an ge, th e com pan y iden tified its m ajor activities. Am on g th e 120 activities were th e followin g:

Materials receivin g an d in spection Produ ction sch edu lin g Produ ction set-u p Rear-wh eel assem bly Move en gin e from fabrication to assem bly bu ildin g Assem ble h an dlebars Pain t in spection Rework defective brake assem blies In stal speedom eter Pu t com pleted m otorcycle in fin ish ed goods storage

1. From th e list of 10 activities given above, prepare two lists—on e of valu e-added activities an d on e of n on -valu e-added activities.

2. For each n on -valu e-added activity, explain h ow a JIT produ ction system m igh t elim in ate, or at least redu ce, th e cost of th e activity.

P5-8 COST A SSIGN MEN T A N D A LLOCATION . Hwan g Man u factu rin g Com pan y h as two depart- m en ts—m ach in in g an d fin ish in g. For a given period, th e followin g costs were in cu rred by th e com pan y as a wh ole: direct m aterials, $120,000; direct labou r, $60,000; an d m an u factu rin g overh ead, $78,000. Th e total costs were $258,000.

Th e m ach in in g departm en t in cu rred 80 percen t of th e direct-m aterials costs, bu t on ly 20 percen t of th e direct-labou r costs. As is com m on place, m an u factu rin g

216 PART ONE MANAGEMENT ACCOUNTING, INFORMATION AND DECISIONS