218 PART ONE MANAGEMENT ACCOUNTING, INFORMATION AND DECISIONS 218 PART ONE MANAGEMENT ACCOUNTING, INFORMATION AND DECISIONS
218 PART ONE MANAGEMENT ACCOUNTING, INFORMATION AND DECISIONS 218 PART ONE MANAGEMENT ACCOUNTING, INFORMATION AND DECISIONS
Th ree produ cts were produ ced:
PRO D U CT
D IRECT M ATERIALS
D IRECT LABO U R
Total for the machining department
Total added by finishing department
Th e m an u factu rin g overh ead in cu rred by th e m ach in in g departm en t an d allo- cated to all produ cts th erein am ou n ted to th e follow in g: m ach in in g, $36,000; fin ish in g, $42,000.
1. Com pu te th e total costs in cu rred by th e m ach in in g departm en t an d added by th e fin ish in g departm en t.
2. Com pu te th e total costs of each produ ct th at wou ld be sh own as fin - ish ed goods in ven tory if all th e produ cts were tran sferred to fin ish ed stock u pon com pletion .
P5-9 COST A LLOCATION A N D A CTIVITY-BA SED A CCOUN TIN G. Th e cordless ph on e m an u factu rin g division of a con su m er electron ics com pan y u ses activity-based accou n tin g. For sim plicity, assu m e th at its accou n tan ts h ave iden tified on ly th e followin g th ree activities an d related cost drivers for m an u factu rin g overh ead:
ACTIVITY
COST DRIVER
Materials h an dlin g
Direct m aterials cost
En gin eerin g
En gin eerin g ch an ge orders
Kilowatt h ou rs Th ree types of cordless ph on es are produ ced: SA2, SA5, an d SA9. Direct costs
Power
an d cost-driver activity for each produ ct for a recen t m on th are:
Direct materials cost
Direct labour cost
Kilowatt hours
Engineering change orders
Man u factu rin g overh ead for th e m on th was Materials handling
Total manufacturing overhead
Chapter 5 Cost Allocation and Activity-Based Costing Systems
1. Com pu te th e m an u factu rin g overh ead allocated to each produ ct with th e activity-based accou n tin g system .
2. Su ppose all m an u factu rin g overh ead costs h ave been allocated to prod- u cts in proportion to th eir direct labou r costs. Com pu te th e m an u fac- tu rin g overh ead allocated to each produ ct.
3. In wh ich produ ct costs—th ose in requ irem en t 1 or th ose in requ ire- m en t 2—do you h ave th e m ost con fiden ce? Wh y?
P5-10 HOSPITA L A LLOCATION BA SE. Jade Soon , th e adm in istrator of Sain t Ju de Hospital, is in ter- ested in obtain in g m ore accu rate cost allocation s on th e basis of cau se an d effect. Th e $180,000 of lau n dry costs h ad been allocated on th e basis of 600,000 kilo- gram s processed for all departm en ts, or $.30 per kilogram .
Soon is con cern ed th at govern m en t h ealth -care officials will requ ire weigh ted statistics to be u sed for cost allocation . Sh e asks you , “Please develop a revised base for allocatin g lau n dry costs. It sh ou ld be better th an ou r presen t base, bu t sh ou ld n ot be overly com plex eith er.”
You stu dy th e situ ation an d fin d th at th e lau n dry processes a large volu m e of u n iform s for stu den t n u rses an d ph ysician s, an d for dietary, h ou sekeepin g, an d oth er person n el. In particu lar, th e coats or jackets worn by person n el in th e radiology departm en t requ ire u n u su al h an dwork.
A special stu dy of lau n dry for radiology revealed th at 7,500 of th e 15,000 kilogram s were jackets an d coats th at were five tim es m ore expen sive to process th an regu lar lau n dry item s. A n u m ber of reason s explain ed th e differen ce, bu t it was prin cipally becau se of h an dwork in volved.
Ignore the special requirements of the departments other than radiology. Revise the cost-allocation base and compute the new cost-allocation rate. Compute the total cost charged to radiology using kilograms and using the new base.
P5-11 COST OF PA SSEN GER TRA FFIC . North ern Pacific Railroad (NP) h as a com m u ter operation th at services passen gers alon g a rou te between San Jose an d San Fran cisco. Problem s of cost allocation were h igh ligh ted in a n ews story abou t NP’s application to th e Pu blic Utilities Com m ission (PUC) for a rate in crease. Th e PUC staff claim ed th at th e “avoidable an n u al cost” of ru n n in g th e operation was $700,000, in con trast to NP officials’ claim of a loss of $9 m illion . PUC’s estim ate was based on wh at NP wou ld be able to save if it sh u t down th e com m u ter operation s.
Th e NP loss estim ate was based on a “fu ll-allocation -of-costs” m eth od, wh ich allocates a sh are of com m on m ain ten an ce an d overh ead costs to th e pas- sen ger service.
If th e PUC accepted its own estim ate, a 25 percen t fare in crease wou ld h ave been ju stified, wh ereas NP sou gh t a 96 percen t fare in crease. The PUC stressed that commuter costs represent less than 1 percent of the sys- temwide costs of NP and that 57 percent of the commuter costs are derived from some type of allocation method—sharing the costs of other operations.
NP’s represen tative stated th at “avoidable cost” is n ot an appropriate way to allocate costs for calcu latin g rates. He said th at “it is n ot fair to in clu de ju st so- called above-th e-rail costs” becau se th ere are oth er real costs associated with com m u ter service. Exam ples are m ain tain in g sm ooth er con n ection s an d m akin g m ore frequ en t track in spection s.
1. As Pu blic Utilities Com m ission er, wh at approach toward cost allocation wou ld you favou r for m akin g decision s regardin g fares? Explain .