Chapter 7 Support Department Cost Allocation

1. 118899
CHAPTER 7
SUPPORT-DEPARTMENT COST ALLOCATION
QUESTIONS FOR WRITING AND DISCUSSION
1. Stage one assigns support-department
costs to producing departments. Costs are
assigned using factors that reflect the con-
sumption of the services by each producing
department. Stage two allocates the costs
assigned to the producing departments (in-
cluding service costs and direct costs) to the
products passing through the producing de-
partments.
2. Support-department costs are part of the
cost of producing a product. Knowing the in-
dividual product costs is helpful for develop-
ing bids and cost-plus prices.
3. GAAP require that all manufacturing costs
be assigned to products for inventory valua-
tion.
4. Allocating support-department costs makes
users pay attention to the level of service ac-
tivity consumed and also provides an incen-
tive for them to monitor the efficiency of the
support departments.
5. Without any allocation of support-
department costs, users may view services
as a free good and consume more of the
service than is optimal. Allocating support-
department costs would encourage manag-
ers to use the service until such time as the
marginal cost of the service is equal to the
marginal benefit.
6. Since the user departments are charged for
the services provided, they will monitor the
performance of the support department. If
the service can be obtained more cheaply
externally, then the user departments will be
likely to point this out to management.
Knowing this, a manager of a support de-
partment will exert effort to maintain a com-
petitive level of service.
7. The identification and use of causal factors
ensures that support-department costs are
accurately assigned to users. This increases
the legitimacy of the control function and
enhances product costing accuracy.
8. a. Number of employees; b. Square foo-
tage; c. Pounds of laundry; d. Orders
processed; e. Maintenance hours worked; f.
Number of employees; and g. Number of
transactions processed.
9. Allocating actual costs passes on the effi-
ciencies or inefficiencies of the support de-
partment, something which the manager of
the producing department cannot control. Al-
locating budgeted costs avoids this problem.
10. The direct method allocates the direct costs
of each support department directly to the
producing departments. No consideration is
given to the fact that other support depart-
ments may use services. The sequential
method allocates support-department costs
sequentially. First, the costs of the center
providing the greatest service to all user de-
partments, including other support depart-
ments, are allocated. Next the costs of the
second greatest provider of services are al-
located to all user departments, excluding
any department(s) that has already allocated
costs. This continues until all support-
department costs have been allocated. The
principal difference in the two methods is the
fact that the sequential method considers
some interactions among support depart-
ments and the direct method ignores inte-
ractions.
11. Yes, the reciprocal method is more accurate
because it fully considers interactions
among support departments. However, the
reciprocal method is much more complex
and can be difficult for managers to under-
stand. If the results are similar, the simpler
method should be used.
12. A joint cost is a cost incurred in the simulta-
neous production of two or more products.
At least one of these joint products must be
a main product. It is possible for the joint
production process to produce a product of
relatively little sales value relative to the
main product(s); this product is known as a
by-product.
13. Joint costs occur only in cases of joint pro-
duction. A joint cost is a common cost, but a
common cost is not necessarily a joint cost.
Many overhead costs are common to the
products manufactured in a factory but do
not signify a joint production process.

2. 119900
EXERCISES
7–1
a. support
b. support
c. producing
d. producing
e. support
f. support
g. producing
h. producing
i. support
j. support
k. producing
l. support
m. producing
n. support
o. support
7–2
a. support
b. support
c. support
d. support
e. support
f. producing
g. producing
h. support
i. support
j. producing
k. producing
l. support
m. support
n. support
o. support
7–3
a. direct labor hours;
number of employees
b. number of processing hours
c. labor hours; units produced
d. number of orders;
materials cost
e. materials cost;
orders received
f. orders shipped
g. number of employees
h. square feet
i. square feet
j. kilowatt-hours
k. number of employees;
direct labor cost
l. square feet
m. machine hours;
number of repair jobs
n. cubic feet

3. 119911
7–4
1. Charging rate = ($80 × 100 hours)/400 units = $20 per apartment unit
2. Amount charged = ($80 × 130 hours) = $10,400
Amount actually charged apartment building owners:
Number of Charge Total
Units × per Unit = Charges
The Roost 130 $20 $ 2,600
Magnolia House 70 20 1,400
Oak Park 120 20 2,400
Wisteria Lane 50 20 1,000
Elm Street 30 20 600
Total 400 $ 8,000
Number of Charge Total
Hours × per Hour = Charges
The Roost 35 $80 $ 2,800
Magnolia House 10 80 800
Oak Park 45 80 3,600
Wisteria Lane 15 80 1,200
Elm Street 25 80 2,000
Total 130 $10,400
3. The use of number of legal hours as the charging base is much better than the
number of apartment units. The number of legal hours is directly associated with
the attorney’s charges. The number of units is, apparently, a poor proxy for the
use of legal services. Two problems are immediately evident. First, the use of the
unit charge means that Stewart will only be charging actual legal fees when the
number of units times the per-unit rate happens to equal the number of hours
times the per-hour rate. In this case, he will not recoup all of his spending on le-
gal fees. That occurred here, where Stewart charged the owners only $8,000 for
legal fees, but paid the attorney $10,400. In other years, the amount charged the
apartment owners will be more than the amount charged by the attorney. Second,
it is possible for apartment owners to have a smaller or larger proportion of units
than of hours. Even in the example above, we can see that Elm Street has a small
percentage of units, but causes a larger proportion of legal fees.

4. 119922
7–5
1. Single charging rate = ($320,000 + $400,000)/24,000 = $30/DLH
2. Charge to the Used Car Sales Dept. = $517 + ($30 × 12 DLH) = $877
3. Actual DLH × Charging Rate + DM = Total Charges
New Car Sales 1,000 $30 $ 3,100 $ 33,100
Used Car Sales 4,700 30 7,860 148,860
Service 19,400 30 86,300 668,300
Total 25,100 $97,260 $850,260
7–6
1. Billing rate for maintenance = $193,200/4,200 = $46/maintenance hour
2. $46 × 370 = $17,020
3. Total charged ($46 × 4,110) $ 189,060
Actual cost 190,060
Maintenance cost undercharged $ 1,000

5. 119933
7–7
1. $460 = $46 × number of hours of maintenance
Number of hours of maintenance = 10 hours
The controller must have looked up the usage of maintenance by the Assembly
Department, found that it had used 10 hours, and multiplied those hours by the
single charging rate of $46. In that case, $460 would be correct.
2. Rate for routine maintenance = $48,000/2,000 = $24/routine maint. hour
Rate for technical maintenance = $145,200/2,200 = $66/tech. maint. hour
New charge for Assembly Department = $24 × 10 routine hours = $240
3. When single charging rates are used by companies, they must be aware that
changes in the way work is performed may require changes in the charging
rate(s). In this case, the additional complexity caused by the computer-controlled
equipment means that a single charging rate does not adequately control for the
differences in cost caused by different departments. Multiple charging rates do a
better job of charging the using department for the resources provided by the
support departments.

6. 119944
7–8
1. Allocation ratios for S1 based on number of employees:
Cutting = 120/(120 + 80) = 0.60
Sewing = 80/(120 + 80) = 0.40
Allocation ratios for S2 based on number of maintenance hours:
Cutting = 15,000/(15,000 + 5,000) = 0.75
Sewing = 5,000/(15,000 + 5,000) = 0.25
2. Support Departments Producing Departments
S1 S2 Cutting Sewing
Direct costs $200,000 $ 140,000 $ 122,000 $ 90,500
Allocate:
S1 (200,000) — 120,000 80,000
S2 — (140,000) 105,000 35,000
Total $ 0 $ 0 $ 347,000 $ 205,500
7–9
1. Allocation ratios for S1 based on number of employees:
S2 = 50/(50 + 120 + 80) = 0.20
Cutting = 120/(50 + 120 + 80) = 0.48
Sewing = 80/(50 + 120 + 80) = 0.32
Allocation ratios for S2 based on number of maintenance hours:
Cutting = 15,000/(15,000 + 5,000) = 0.75
Sewing = 5,000/(15,000 + 5,000) = 0.25
2.
Support Departments Producing Departments
S1 S2 Cutting Sewing
Direct costs $ 200,000 $ 140,000 $ 122,000 $ 90,500
Allocate:S1 (200,000) 40,000 96,000 64,000
S2 — (180,000) 135,000 45,000
Total $ 0 $ 0 $ 353,000 $ 199,500

7. 119955
7–10
1. Allocation ratios:
Proportion of Output Used by Department
S1 S2 Cutting Sewing
S1 — 0.2000 0.4800 0.3200
S2 0.0566 — 0.7075 0.2358
2. S1 = Direct costs + Share of S2 costs
S1 = $200,000 + 0.0566(S2)
S2 = Direct costs + Share of S1 costs
S2 = $140,000 + 0.200(S1)
S2 = $140,000 + 0.200 [$200,000 + 0.0566(S2)]
S2 = $140,000 + $40,000 + 0.0113(S2)
0.9887S2 = $180,000
S2 = $182,057
Substituting $180,057 for S2 into the S1 equation yields total S1 cost:
S1 = $200,000 + 0.0566($182,057)
= $200,000 + $10,304 = $210,304
3. Support Departments Producing Departments
S1 S2 Cutting Sewing
Direct costs $200,000 $140,000 $122,000 $ 90,500
Allocated from:
S1 (210,304) 42,061 100,946 67,297
S2 10,304 (182,057) 128,805 42,929
Total $ 0 $ (4)* $351,751 $200,726
*Difference due to rounding.

8. 119966
7–11
1. Baking Dept. overhead rate = $150,000/6,250 = $24 per MHr
Decorating Dept. overhead rate = $42,000/6,000 = $7 per DLH
2. Cost per batch:
Direct materials $55
Direct labor 42
Overhead:
Baking Dept. (2 × $24) 48
Total $145
Cost per loaf = $145/100 = $1.45
3. Cost of Dearman wedding cake:
Direct materials $ 20
Direct labor 50
Overhead:
Baking Dept. (1 × $24) 24
Decorating Dept. (8 × $7) 56
Total cost $150
Price = 3 × $150 = $450

9. 119977
7–12
1. Allocation ratios:
Shaping Firing
Kilowatt-hours1
0.20 0.80
Square feet2
0.75 0.25
Direct labor hours3
0.71 0.29
1
based on kilowatt hours: 20,000/(20,000+80,000); 80,000/(20,000+80,000)
2
based on square feet: 24,000/(24,000+8,000); 8,000/(24,000+8,000)
3
based on direct labor hours: 10,000/(10,000+4,000); 4,000/(10,000+4,000)
Cost assignment:
Power Gen. Factory HR Shaping Firing
Direct overhead costs $90,000 $$167,000 $84,000 $72,000 $230,000
Allocate:
Power ($90,000) - - 18,000 72,000
General Factory - (167,000) - 125,250 41,750
Human Resources - - 84,000 59,640 24,360
Total after allocation $0 $0 $0 $274,890 $368,110
2. Departmental overhead rates:
Shaping: $274,890/10,000 = $27.49 per DLH*
Firing: $368,110/4,000 = $92.03 per DLH*
*Rounded

10. 119988
7–13
1. Assume the support-department costs are allocated in order of highest to lowest
cost: General Factory, Power, and Human Resources.
Power GF HR Shaping Firing
Square feet 0.05 — 0.15 0.60 0.20
Kilowatt-hours — — 0.20 0.16 0.64
Labor hours — — — 0.71 0.29
Direct costs $90,000 $167,000 $84,000 $ 72,000 $230,000
General Factory1
:
(0.05 × $167,000) 8,350 (8,350)
(0.15 × $167,000) (25,050) 25,050
(0.60 × $167,000) (100,200) 100,200
(0.20 × $167,000) (33,400) 33,400
Power2
:
(0.20 × $98,350) (19,670) 19,670
(0.16 × $98,350) (15,736) 15,736
(0.64 × $98,350) (62,944) 62,944
Human Resources:
(0.71 × $128,720) (91,391) 91,391
(0.29 × $128,720) (37,329) 37,329
Total $ 0 $ 0 $ 0 $279,327 $363,673
1
based on square feet:
Power = 2,000/(2,000+6,000+24,000+8,000)
HR = 6,000/(2,000+6,000+24,000+8,000)
Shaping = 24,000/(2,000+6,000+24,000+8,000)
Firing = 8,000/(2,000+6,000+24,000+8,000)
2
based on kilowatt hours :
HR = 25,000/(25,000+20,000+80,000)
Shaping = 20,000/(25,000+20,000+80,000)
Firing = 80,000/(25,000+20,000+80,000)
Allocation Ratios for HR department based on direct labor hours :
Shaping 10,000/(10,000+4,000)
Firing 4,000/(10,000+4,000)
2. Shaping: $279,327/10,000 = $27.93 per DLH*
Firing: $403,576/4,000 = $90.92 per DLH*
*Rounded

11. 119999
7-14
Units Percent × Joint Cost = Allocated Joint Cost
Andol 1,000 0.1250 $100,000 $12,500
Incol 1,500 0.1875 100,000 18,750
Ordol 2,500 0.3125 100,000 31,250
Exsol 3,000 0.3750 100,000 37,500
Total 8,000 $100,000
7-15
Price at Market Value Joint Allocated
Units Split-off at Split-off Percent Cost Cost
Andol 1,000 $20.00 $ 20,000 0.0556 $100,000 $ 5,560
Incol 1,500 75.00 112,500 0.3125 100,000 31,250
Ordol 2,500 64.00 160,000 0.4444 100,000 44,440
Exsol 3,000 22.50 67,500 0.1875 100,000 18,750
Total 8,000 $360,000 $100,000
7-16
1. Eventual Separable Hypothetical
Units Price Market Value Costs Market Value Percent
Ups 39,000 $2.00 $78,000 $18,000 $60,000 0.60
Downs 21,000 2.18 45,780 5,780 40,000 0.40
Total $100,000
Ups Downs
Joint cost $42,000 $42,000
× Percent of hypothetical market value × 0.60 × 0.40
Allocated joint cost $25,200 $16,800
2. Value of ups at split-off (39,000 × $1.80) $70,200
Value of ups when processed further $78,000
Less: Further processing cost 18,000
Incremental value of further processing $60,000
Ups should NOT be processed further as there will $10,200 more profit if sold at split-
off.

12. 220000
7–17
1. HR Power Mixing Packaging
HR1
— 0.3000 0.3500 0.3500
Power2
0.0769 — 0.2308 0.6923
1
based on payroll:
90,000/(90,000+105,000+105,000)
105,000/(90,000+105,000+105,000)
105,000/(90,000+105,000+105,000)
2
based on kilowatt hours:
5,000/(5,000+15,000+45,000)
15,000/(5,000+15,000+45,000)
45,000/(5,000+15,000+45,000)
P = $150,000 + 0.3HR
P = $150,000 + 0.3($110,000 + 0.0769P)
P = $150,000 + $33,000 + 0.0231P
0.9769P = $183,000
P = $187,327
HR = $110,000 + 0.0769P
HR = $110,000 + 0.0769($187,327)
HR = $110,000 + $14,405
HR = $124,405
Human
Resources Power Mixing Packaging
Direct overhead costs $110,000 $150,000 $100,000 $280,000
Allocated from:
HR (124,405) 37,321 43,542 43,542
Power 14,409 (187,327) 43,235 129,686
Total $ 0 $ (5)* $186,777 $453,228
*Difference due to rounding.
2. Mixing: $186,777/20,000 = $9.34 per DLH
Packaging: $453,228/30,000 = $15.11 per DLH

13. 220011
7–18
1. Support Departments Producing Departments
HR Power Mixing Packaging
Direct overhead $110,000 $150,000 $100,000 $280,000
Allocate HR1
(110,000) - 55,000 55,000
Allocate Power - (150,000) 37,500 112,500
Total $ 0 $ 0 $192,500 $447,500
1
based on payroll:
Mixing = 105,000/(105,000+105,000) = 0.50
Packaging = 105,000/(105,000+105,000) = 0.50
2
based on kilowatt hours:
Mixing = 15,000/(15,000+45,000) = 0.25
Packaging = 45,000/(15,000+45,000) = 0.75
2. Mixing: $192,500/20,000 = $9.63 per DLH
Packaging: $447,500/30,000 = $14.92 per DLH
The reciprocal method is more accurate because support-department costs are
allocated to other support departments. Using the direct method, Human Re-
sources and Power do not receive any other support department costs. How im-
portant the increased accuracy is for this example is not clear. Some might argue
that the departmental rates do not differ enough to justify using the more compli-
cated reciprocal method.

14. 220022
7–19
1. Support Departments Producing Departments
HR Power Mixing Packaging
Direct overhead $110,000 $150,000 $100,000 $280,000
Allocate HR1
(110,000) 33,000 38,500 38,500
Allocate Power2
- (183,000) 45,750 137,250
Total $ 0 $ 0 $184,250 $455,750
1
based on payroll:
Power = 90,000/(90,000+105,000+105,000) = 0.30
Mixing = 105,000/(90,000 + 105,000+105,000) = 0.35
Packaging = 105,000/(90,000 + 105,000+105,000) = 0.35
2
based on kilowatt hours:
Mixing = 15,000/(15,000+45,000) = 0.25
Packaging = 45,000/(15,000+45,000) = 0.75
2. Mixing: $184,250/20,000 = $9.21 per DLH
Packaging: $455,750/30,000 = $15.19 per DLH
The sequential method is more accurate than the direct method and less accurate
than the reciprocal method. The reason is that at least some support-department
reciprocity is accounted for using the sequential method, while none is recog-
nized under the direct method.

15. 220033
7–20
A = $35,000 + 0.3B
B = $40,000 + 0.2A
A = $35,000 + 0.3($40,000 + 0.2A)
A = $47,000 + 0.06A
0.94A = $47,000
A = $50,000
B = $40,000 + 0.2($50,000)
B = $50,000
Allocation ratios (ratios for D obtained by “plugging”):
Dept. A Dept. B Dept. C Dept. D
Dept. A — 0.2 0.2 0.6*
Dept. B 0.3 — 0.4 0.3**
*(1.0 – 0.2 – 0.2)
**(1.0 – 0.3 – 0.4)
Dept. C Dept. D
Allocate A:
(0.2 × $50,000) $10,000
(0.6 × $50,000) $30,000
Allocate B:
(0.4 × $50,000) 20,000
(0.3 × $50,000) 15,000

16. 220044
7–21
1. General
HR Factory Grinding Assembly
Direct costs $ 70,000 $ 230,000 $ 63,900 $ 39,500
Allocate:
HR1
(70,000) — 14,000 56,000
Gen. Factory2
— (230,000) 57,500 172,500
Total OH $ 0 $ 0 $135,400 $268,000
1
based on payroll: 20,000/(20,000+80,000)=20%; 80,000/(20,000+80,000)=80%
2
based on square feet: 2,000/(2,000+6,000)=25%; 6,000/(2,000+6,000)=75%
2. Grinding OH rate: $135,400/4,000 = $33.85 per MHr
Assembly OH rate: $268,000/80,000 = $3.35 per DLH
3. Prime costs $123.00
Grinding (1 × $33.85) 33.85
Assembly (12 × $3.35) 40.20
Unit product cost $197.05
7–22
1. General
HR Factory Grinding Assembly
Direct costs $ 70,000 $ 230,000 $ 63,900 $ 39,500
Allocate:
Gen. Factory1
76,667 (230,000) 38,333 115,000
HR2
(146,667) — 29,333 117,334
Total OH $ 0 $ 0 $131,566 $271,834
1
HR = 4,000/(4,000+2,000+6,000)=33.33%
Grinding = 2,000/(4,000+2,000+6,000)=16.67%
Assembly = 6,000/(4,000+2,000+6,000)=50%
2
Grinding = 20,000/(20,000+80,000)=20%
Assembly = 80,000/(20,000+80,000)=80%
2. Grinding OH rate: $131,566/4,000 = $32.89 per MHr (rounded)
Assembly OH rate: $271,834/80,000 = $3.40 per DLH (rounded)
3. Prime cost $123.00
Grinding (1 × $32.89) 32.89
Assembly (12 × $3.40) 40.80
Unit product cost $196.69
7–23

17. 220055
1. HR GF Grinding Assembly
GF-square feet1
0.3333 — 0.1667 0.5000
HR-direct labor hrs2
— 0.0991 0.1802 0.7207
1
HR: 4,000/(4,000+2,000+6,000) = 0.3333
Grinding: 2,000/(4,000+2,000+6,000) = 0.1667
Assembly: 6,000/(4,000+2,000+6,000) = 0.5000
2
Allocation ratios for HR based on payroll :
General Factory: 11,000/(11,000+20,000+80,000) = 0.0991
Grinding: 20,000/(11,000+20,000+80,000) = 0.1802
Assembly: 80,000/(11,000+20,000+80,000) = 0.7207
HR = $70,000 + 0.3333GF
GF = $230,000 + 0.0991HR
GF = $230,000 + 0.0991($70,000 + 0.3333GF)
0.967GF = $236,937
GF = $245,023
HR = $70,000 + 0.3333GF
HR = $70,000 + 0.3333($245,023)
HR = $151,666
General
HR Factory Grinding Assembly
Direct costs $ 70,000 $ 230,000 $ 63,900 $ 39,500
Allocate:
HR (151,666) 15,030 27,330 109,306
GF 81,666 (245,023) 40,845 122,512
Total OH $ 0 $ 7* $132,075 $271,318
*Difference due to rounding.
2. Grinding OH rate: $132,075/4,000 = $33.02 per MHr*
Assembly OH rate: $271,318/80,000 = $3.39 per DLH*
*Rounded
3. Prime costs $123.00
Grinding (1 × $33.02) 33.02
Assembly (12 × $3.39) 40.68
Unit product cost $196.70

18. 220066
7–24
1. Units Percent × Joint Cost = Allocated Joint Cost
Alpha 12,500 0.25 $125,000 $31,250
Beta 17,500 0.35 125,000 43,750
Gamma 20,000 0.40 125,000 50,000
Total 50,000 $125,000
2.
Price at Market Value Joint Allocated
Units Split-off at Split-off Percent Cost Cost
Alpha 12,500 $20 $ 250,000 0.1684 $125,000 $ 21,050
Beta 17,500 50 875,000 0.5892 125,000 73,650
Gamma 20,000 18 360,000 0.2424 125,000 30,300
Total 50,000 $1,485,000 $125,000

19. 220077
PROBLEMS
7–25
1. Direct method: Tissue
Delivery Accounting Laboratory Pathology
Direct costs $240,000 $270,000 $345,000 $456,000
Allocate:
Delivery1
(240,000) -- 144,000 96,000
Accounting2
-- (270,000) 175,500 94,500
Total $ 0 $ 0 $664,500 $646,500
1
Laboratory: 70,200/(70,200+46,800) = 0.60
Tissue Pathology: 46,800/(70,200+46,800) = 0.40
2
Laboratory: 24,700/(24,700+13,300) = 0.65
Tissue Pathology: 1,3,300/(24,700+13,300) = 0.35
2. Sequential method
Tissue
Delivery Accounting Laboratory Pathology
Direct costs $ 240,000 $ 270,000 $345,000 $456,000
Allocate:
Accounting1
13,500 (270,000) 166,725 89,775
Delivery2
(253,500) 0 152,100 101,400
Total $ 0 $ 0 $663,825 $647,175
1
Delivery: 2,000/(2,000+24,700+13,300) = 0.050
Laboratory: 24,700/(2,000+24,700+13,300) = 0.6175
Tissue Pathology: 13,300/(2,000+24,700+13,300) = 0.3325
2
Laboratory: 70,200/(70,200+46,800) = 0.60
Tissue Pathology: 46,800/(70,200+46,800) = 0.40

20. 220088
7–26
1. a. Direct method
Maintenance Power Drilling Assembly
Direct costs $320,000 $400,000 $163,000 $ 90,000
Allocate:
Maintenance1
(320,000) 0 256,000 64,000
Power2
0 (400,000) 40,000 360,000
Total $ 0 $ 0 $459,000 $514,000
1
Drilling: 30,000/(30,000+7.500) = 0.80
Assembly: 7,500/(30,000+7,500) = 0.20
2
Drilling: 36,000/(36,000+324,000) = 0.10
Assembly: 324,000/(36,000+324,000) = 0.90
Drilling: $459,000/30,000 = $15.30 per MHr
Assembly: $514,000/40,000 = $12.85 per DLH
Prime costs $1,817.00
Drilling (2 × $15.30) 30.60
Assembly (50 × $12.85) 642.50
Total cost $2,490.10
Markup (15%) 373.52
Bid price $2,863.62

21. 220099
7–26 Continued
b. Reciprocal method
Maintenance Power Drilling Assembly
Machine hours1
— 0.375 0.500 0.125
Kilowatt-hours2
0.100 — 0.090 0.810
1
Power: 22,500/(22,500+30,000+7.500) = 0.375
Drilling: 30,000/(22,500+30,000+7.500) = 0.500
Assembly: 7,500/(22,500+30,000+7,500) = 0.125
2
Maintenance: 40,000/(40,000+36,000+324,000) = 0.100
Drilling: 36,000/(40,000+36,000+324,000) = 0.090
Assembly: 324,000/(40,000+36,000+324,000) = 0.810
M = $320,000 + 0.1P
P = $400,000 + 0.375M
M= $320,000 + 0.1($400,000 + 0.375M)
M = $320,000 + $40,000 + 0.0375M
0.9625M = $360,000
M = $374,026
P = $400,000 + 0.375M
P = $400,000 + 0.375($374,026)
P = $400,000 + $140,260
P = $540,260
Maintenance Power Drilling Assembly
Direct cost $320,000 $400,000 $163,000 $90,000
Allocate:
Maintenance ($374,026) 140,260 187,013 46,753
Power 54,026 (540,260) 48,623 437,611
Total $ 0 $ 0 $398,636 $574,364
Drilling: $398,636/30,000 = $13.29 per MHr (rounded)
Assembly: $574,364/40,000 = $14.36 per DLH (rounded)
Prime costs $1,817.00
Drilling (2 × $13.29) 26.58
Assembly (50 × $14.36) 718.00
Total cost $2,561.58
Markup (15%) 384.24
Bid price $2,945.82
2. The reciprocal method is more accurate, as it takes into account the use of
support departments by other support departments.

22. 221100
7–27
1. a. Sequential method: Allocate Maintenance first, then Power
Maintenance Power Drilling Assembly
Direct costs $ 320,000 $ 400,000 $163,000 $ 90,000
Allocate:
Maintenance1
(320,000) 120,000 160,000 40,000
Power2
0 (520,000) 52,000 468,000
Total $ 0 $ 0 $375,000 $598,000
1
Power: 22,500/(22,500+30,000+7.500) = 0.375
Drilling: 30,000/(22,500+30,000+7.500) = 0.500
Assembly: 7,500/(22,500+30,000+7,500) = 0.125
2
Drilling: 36,000/(36,000+324,000) = 0.100
Assembly: 324,000/(36,000+324,000) = 0.900
Drilling: $375,000/30,000 = $12.50 per MHr
Assembly: $598,000/40,000 = $14.95 per DLH
Prime costs $1,817.00
Drilling (2 × $12.50) 25.00
Assembly (50 × $14.95) 747.50
Total cost $2,589.50
Markup (15%) 388.43
Bid price $2,977.93

23. 221111
7–27 Concluded
b. Sequential method: Allocate Power first, then Maintenance
Maintenance Power Drilling Assembly
Direct costs $ 320,000 $ 400,000 $163,000 $ 90,000
Allocate:
Power1
40,000 (400,000) 36,000 324,000
Maintenance2
(360,000) 0 288,000 72,000
Total $ 0 $ 0 $487,000 $486,000
1
Maintenance: 40,000/(40,000+36,000+324,000) = 0.10
Drilling: 36,000/(40,000+36,000+324,000) = 0.09
Assembly: 324,000/(40,000+36,000+324,000) = 0.81
2
Drilling: 30,000/(30,000+7.500) = 0.80
Assembly: 7,500/(30,000+7,500) = 0.20
Drilling: $487,000/30,000 = $16.23 per MHr (rounded)
Assembly: $486,000/40,000 = $12.15 per DLH
Prime costs $1,817.00
Drilling (2 × $16.23) 32.46
Assembly (50 × $12.15) 607.50
Total cost $2,456.96
Markup (15%) 368.54
Bid price $2,825.50
2. Yes, there is a difference in the bids. Ranking Maintenance first results in a higher
dollar allocation to Power ($120,000) than the allocation from Power to Mainten-
ance ($40,000). Then, the greater usage of Power by Assembly results in a higher
allocation to Assembly when Maintenance is ranked first. Thus, the ranking of
Maintenance first gives a greater chance for support-department interaction to be
reflected in the ultimate overhead rates. (These results can be compared with the
results using the reciprocal method in Problem 7–26.)

24. 221122
7–28
1.
Units Percent × Joint Cost = Allocated Joint Cost
Two Oil 300,000 0.4545 $10,000,000 $4,545,000
Six Oil 240,000 0.3636 10,000,000 3,636,000
Distillates 120,000 0.1818 10,000,000 1,818,000
Total 660,000 $9,999,000
2.
Price at Market Value Joint Allocated
Units Split-off at Split-off Percent Cost Cost
Two Oil 300,000 $20 $6,000,000 0.4000 $10,000,000 $4,000,000
Six Oil 240,000 30 7,200,000 0.4800 10,000,000 4,800,000
Distillates 120,000 15 1,800,000 0.1200 10,000,000 1,200,000
Total 660,000 $15,000,000 $10,000,000

25. 221133
7–29
1. Fixed cost allocation (direct method):
Allocation Ratios
Cost driver Mixing Cooking Packaging
Employees1
0.400 0.200 0.400
Items processed2
0.329 0.318 0.353
Square feet3
0.444 0.333 0.222
Machine hours4
0.200 0.500 0.300
1
Mixing = 20/(20+10+20) = 0.40
Cooking = 10/(20+10+20) = 0.20
Packaging = 20/(20+10+20) = 0.40
2
Mixing = 2,800/(2,800+2,700+3,000) = 0.329
Cooking = 2,700/(2,800+2,700+3,000) = 0.318
Packaging = 3,000/(2,800+2,700+3,000) = 0.353
3
Mixing = 40,000/(40,000+30,000+20,000) = 0.444
Cooking = 30,000/(40,000+30,000+20,000) = 0.333
Packaging = 20,000/(40,000+30,000+20,000) = 0.222
4
Mixing = 4,000/(4,000+10,000+6,000) = 0.20
Cooking = 10,000/(4,000+10,000+6,000) = 0.50
Packaging = 6,000/(4,000+10,000+6,000) = 0.30

26. 221144
7-29 continued
Cafeteria and personnel are allocated using number of employees; custodial services
using square feet; maintenance using machine hours; and cost accounting using
items processed.
Mixing Cooking Packaging
Cafeteria:
(0.4 × $20,000) $ 8,000
(0.2 × $20,000) $ 4,000
(0.4 × $20,000) $ 8,000
Personnel:
(0.4 × $70,000) 28,000
(0.2 × $70,000) 14,000
(0.4 × $70,000) 28,000
Custodial Services:
(0.444 × $80,000) 35,520
(0.333 × $80,000) 26,640
(0.222 × $80,000) 17,760
Maintenance:
(0.2 × $100,000) 20,000
(0.5 × $100,000) 50,000
(0.3 × $100,000) 30,000
Cost Accounting:
(0.329 × $130,000) 42,770
(0.318 × $130,000) 41,340
(0.353 × $130,000) 45,890
Direct costs 120,000 60,000 25,000
Total $254,290 $195,980 $154,650

27. 221155
7–29 Continued
Variable cost allocation (direct method):
Cafeteria: $40,000/50 = $800/employee
Personnel: $20,000/50 = $400/employee
Maintenance: $100,000/20,000 = $5/machine hour
Cost Accounting: $16,500/8,500 = $1.94*/item processed
Mixing Cooking Packaging
Cafeteria:
($800 × 20) $16,000
($800 × 10) $ 8,000
($800 × 20) $16,000
Personnel:
($400 × 20) 8,000
($400 × 10) 4,000
($400 × 20) 8,000
Maintenance:
($5 × 4,000) 20,000
($5 × 10,000) 50,000
($5 × 6,000) 30,000
Cost Accounting:
($1.94 × 2,800) 5,432
($1.94 × 2,700) 5,238
($1.94 × 3,000) 5,820
Direct costs 20,000 10,000 40,000
Total $69,432 $77,238 $99,820
*Rounded

28. 221166
7–29 Continued
2. Fixed overhead rates:
Mixing: $254,290/30,000 = $8.48 per DLH*
Cooking: $195,980/10,000 = $19.60 per MHr*
Packaging: $154,650/50,000 = $3.09 per DLH*
Variable overhead rates:
Mixing: $69,432/30,000 = $2.31 per DLH*
Cooking: $77,238/10,000 = $7.72 per MHr*
Packaging: $99,820/50,000 = $2.00 per DLH*
*Rounded
3. Sequential method:
Fixed cost allocation ratios (descending order of magnitude):
Cost Driver* Maint. Custod. Pers. Cafe. Mix. Cook. Pack.
Items 0.200 0.016 0.080 0.024 0.224 0.216 0.240
Machine hours 0.200 0.500 0.300
Square feet — — 0.069 0.049 0.392 0.294 0.196
Employees (1) — — — 0.091 0.364 0.182 0.364
Employees (2) — — — — 0.400 0.200 0.400
*Note: Items are used to allocate accounting costs; machine hours to allocate
maintenance; square feet to allocate custodial services; and employees to allo-
cate both personnel costs and cafeteria costs.

29. 221177
7–29 Continued
Allocation of fixed costs (expressed in thousands of dollars):
Main. Cust. Pers. Cafe. Mixing Cooking Packaging
Direct costs $100 $80.000 $70.000 $20.000 $120.000 $60.000 $25.000
Accounting:
(0.200 × $130) 26
(0.016 × $130) 2.080
(0.080 × $130) 10.400
(0.024 × $130) 3.120
(0.224 × $130) 29.120
(0.216 × $130) 28.080
(0.240 × $130) 31.200
Maintenance:
(0.2 × $126) 25.200
(0.5 × $126) 63.000
(0.3 × $126) 37.800
Custodial:
(0.069 × $82.08) 5.664
(0.049 × $82.08) 4.022
(0.392 × $82.08) 32.175
(0.294 × $82.08) 24.132
(0.196 × $82.08) 16.088
Personnel:
(0.091 × $86.064) 7.832
(0.364 × $86.064) 31.327
(0.182 × $86.064) 15.664
(0.364 × $86.064) 31.327
Cafeteria:
(0.4 × $34.974) 13.990
(0.2 × $34.974) 6.995
(0.4 × $34.974) 13.990
Total $251.812 $197.871 $155.405
Note: Total of post-allocation fixed costs does not equal pre-allocation total due
to rounding error.

30. 221188
7–29 Continued
Allocation ratios for variable costs:
Cost
Cost Driver Personnel Accounting Mixing Cooking Packaging
Machine hours 0.200 0.500 0.300
Employees (1) 0.137 0.178 0.274 0.137 0.274
Employees (2) 0.206 0.317 0.159 0.317
Items 0.329 0.318 0.353
Note 1: Custodial services was not included as it had no direct variable costs.
Note 2: The order of allocation was based on the magnitude of direct variable
costs as follows: maintenance, cafeteria, personnel, and cost accounting.
Note 3: Employees is the base for allocating cafeteria and personnel. Employees
(1) pertains to cafeteria and employees (2) to personnel.

31. 221199
7–29 Continued
Allocation of variable costs:
Cafe. Pers. Cost Acc. Mixing Cook. Pack.
Direct costs $40,000 $20,000 $16,500 $20,000 $10,000 $40,000
Maintenance:
(0.200 × $100,000) 20,000
(0.500 × $100,000) 50,000
(0.300 × $100,000) 30,000
Cafeteria:
(0.137 × $40,000) 5,480
(0.178 × $40,000) 7,120
(0.274 × $40,000) 10,960
(0.137 × $40,000) 5,480
(0.274 × $40,000) 10,960
Personnel:
(0.206 × $25,480) 5,249
(0.317 × $25,480) 8,077
(0.159 × $25,480) 4,051
(0.317 × $25,480) 8,077
Accounting:
(0.329 × $28,869) 9,498
(0.318 × $28,869) 9,180
(0.353 × $28,869) 10,191
Total $68,535 $78,711 $99,228
Note: Total of post-allocation variable costs does not equal pre-allocation
total due to rounding error.

32. 222200
7–29 Concluded
4. Overhead rates:
Fixed rates:
Mixing: $251,812/30,000 = $8.39 per DLH*
Cooking: $197,871/10,000 = $19.79 per MHr*
Packaging: $155,405/50,000 = $3.11 per DLH*
Variable rates:
Mixing: $68,535/30,000 = $2.28 per DLH*
Cooking: $78,711/10,000 = $7.87 per MHr*
Packaging: $99,228/50,000 = $1.98 per DLH*
*Rounded
5. Selling price computation:
a. With direct method:
Prime costs $ 60,000
Overhead* 77,220
Total costs $137,220
Markup (30%) 41,166
Price $178,386
*($8.48 + $2.31)1,000 + ($19.60 + $7.72)1,500 + ($3.09 + $2.00)5,000
b. With sequential method:
Prime costs $ 60,000
Overhead* 77,610
Total costs $137,610
Markup (30%) 41,283
Price $178,893
*($8.39 + $2.28)1,000 + ($19.79 + $7.87)1,500 + ($3.11 + $1.98)5,000
The methods assign costs differently and produce different prices for the batch
of chocolate bars. The difference in price is over $500. This amount could be sig-
nificant, depending on the competitive conditions facing the firm. Assuming that
the sequential method provides more accurate cost assignments, this method
should be used if the increased accuracy is important for the firm’s well-being.
Otherwise, the firm should use the much simpler direct method.

33. 222211
7–30
1. Baton Rouge ($781,000/$4,641,000)($146,500)* = $24,653
Kilgore ($750,000/$4,641,000)($146,500) = $23,675
Longview ($912,000/$4,641,000)($146,500) = $28,789
Paris ($1,098,000/$4,641,000)($146,500) = $34,660
Shreveport ($1,100,000/$4,641,000)($146,500) = $34,723
*($18)(4,250) + $70,000 = $146,500
2. Share of Purchasing Department fixed costs based on 2005 revenues:
Baton Rouge ($675,000/$4,500,000)($70,000) = $10,500
Kilgore ($720,000/$4,500,000)($70,000) = $11,200
Longview ($900,000/$4,500,000)($70,000) = $14,000
Paris ($1,125,000/$4,500,000)($70,000) = $17,500
Shreveport ($1,080,000/$4,500,000)($70,000) = $16,800
Variable Cost + Fixed Cost = Total
Baton Rouge ($18)(1,475) = $26,550 + $10,500 = $37,050
Kilgore ($18)(1,188) = $21,384 + $11,200 = $32,584
Longview ($18)(500) = $9,000 + $14,000 = $23,000
Paris ($18)(525) = $9,450 + $17,500 = $26,950
Shreveport ($18)(562) = $10,116 + $16,800 = $26,916
3. Method 2 allocates cost on the basis of the cost driver which causes it and would
be more likely to encourage managers to use Purchasing Department time effi-
ciently. Method 1 assigns purchasing costs according to a base that may not be
causally related. Therefore, an apartment complex with stable rentals from one
year to the next may still experience wild fluctuations in allocated cost due to
changing rental patterns of other apartment complexes.

34. 222222
7–31
1. Department A Department B
Direct overhead $200,000 $ 800,000
Maintenance:
(1/8)($500,000) 62,500
(7/8)($500,000) 437,500
Power:
(1/6)($225,000) 37,500
(5/6)($225,000) 187,500
Setups:
(40/200)($150,000) 30,000
(160/200)($150,000) 120,000
General Factory:
(0.272)($625,000) 170,000
(0.728)($625,000) 455,000
Total $500,000 $ 2,000,000
Dept. A overhead rate: $500,000/200,000 = $2.50 per DLH
Dept. B overhead rate: $2,000,000/120,000 = $16.67 per MHr (rounded)

35. 222233
7–31 Continued
2. Allocation order: General Factory, Maintenance, Power, Setups, A, and B
Allocation Ratios
Alloc. from: G.F. Maint. Power Setups Dept. A Dept. B
G.F. — 0.125 0.200 0.025 0.177 0.473
Maint. — — 0.150 0.050 0.100 0.700
Power — — — — 0.167 0.833
Setups — — — — 0.200 0.800
G.F. Maint. Power Setups Dept. A Dept. B
Direct $ 625,000 $ 500,000 $ 225,000 $ 150,000 $200,000 $ 800,000
G.F. (625,000) 78,125 125,000 15,625 110,625 295,625
Maint. — (578,125) 86,719 28,906 57,813 404,687
Power — — (436,719) — 72,932 363,787
Setups — — — (194,531) 38,906 155,625
Total $ 0 $ 0 $ 0 $ 0 $480,276 $2,019,724
Dept. A overhead rate: ($480,276/200,000) = $2.40 per DLH*
Dept. B overhead rate: ($2,019,724/120,000) = $16.83 per MHr*
*Rounded
Job SS Job TT
Prime cost $120,000 $ 50,000
Overhead:
($2.40 × 5,000) 12,000
($16.83 × 500) 8,415
($2.40 × 400) 960
($16.83 × 3,000) 50,490
$140,415 $101,450
Markup (50%) 70,208 50,725
Total bid revenue $210,623 $152,175
Units ÷ 14,400 ÷ 1,500
Bid price $ 14.63 $ 101.45
Although the difference is small, it appears to make the bids more attractive.
3. The use of the sequential method to allocate support-department costs to produc-
ing departments gives more accurate overhead rates.
4. If the best competing bid was $4.10 lower than the original bid, then it would be
$14.65. In this case, the sequential method of allocating overhead costs would
provide a bid ($14.63) that is just below the competing bid. Since the sequential
method is more accurate, the $14.63 bid is a good one.

36. 222244
MANAGERIAL DECISION CASES
7–32
1. Emma’s argument about the arbitrary nature of allocations has little merit. Even if
the allocation is arbitrary, changing it to exploit a customer is wrong. Many allo-
cations, however, are based on causal factors and reflect the consumption of re-
sources. If we accept cause and effect as a reasonable criterion for allocation,
then switching to a factor that is less related to overhead consumption certainly
will increase the inaccuracy of the product cost. Emma should price the new or-
der using the most accurate cost information available. Thus, the current alloca-
tion scheme should be maintained.
2. The controller (Lenny) should refuse to change the allocation method and make
every attempt to tactfully convince Emma of the impropriety of the recommended
action. Often, a simple comment questioning the propriety of an action is suffi-
cient to dissuade. According to the IMA Statement of Ethical Professional Prac-
tice, accountants should “refrain from engaging in any conduct that would preju-
dice carrying out duties ethically.” (III-2) The accountant should also abstain from
engaging in or supporting any activity that might discredit the profession. (III-3)
By changing allocation procedures, the controller would obtain personal gain (a
bonus) from unethical means. Furthermore, Lenny has an obligation to communi-
cate information fairly and objectively (IV-1). Choosing an allocation method that
is known to be less accurate is not consistent with this requirement.
3. Lenny should pursue all levels of internal review until a satisfactory resolution is
achieved. Then, after exhausting all levels of internal review, Lenny should sub-
mit his resignation.
4. Reacting with anger and contacting the customer was not an appropriate action
(as defined by the code for management accountants). According to the code,
“Except where legally prescribed, communication of such problems to authorities
or individuals not employed or engaged by the organization is not considered ap-
propriate.”

37. 222255
7–33
1. Variable maintenance: $246,667/3,700 = $66.67*/flying hour
Allocation Ratios for Fixed Costs
500D 206B 206L-1
Maintenance 0.32432 0.43243 0.24324
Hangar rent 0.33333 0.33333 0.33333
Administrative 0.32432 0.43243 0.24324
Alloc. of fixed costs: 500D 206B 206L-1
Maintenance—fixed:
(0.32432 × $26,000) $ 8,432
(0.43243 × $26,000) $11,243
(0.24324 × $26,000) $ 6,324
Hangar rent:
(0.33333 × $18,000) 6,000
(0.33333 × $18,000) 6,000
(0.33333 × $18,000) 6,000
Administrative:
(0.32432 × $110,000) 35,675
(0.43243 × $110,000) 47,567
(0.24324 × $110,000) 26,756
Total fixed costs $50,107 $64,810 $39,080
Indirect fixed costs per unit:
500D: $50,107/1,200 = $41.76* per hour
206B: $64,810/1,600 = $40.51* per hour
206L-1: $39,080/900 = $43.42* per hour
*Rounded

38. 222266
7–33 Continued
500D 206B 206L-1
Direct costs—fixed* $ 77.70* $ 58.88* $195.41*
Direct costs—variable** 25.54* 23.96* 110.28*
Overhead—fixed 41.76 40.51 43.42
Overhead—variable 66.67 66.67 66.67
Cost per unit $211.67 $190.02 $415.78
Markup* (15%) 31.75 28.50 62.37
Bid price $243.42 $218.52 $478.15
Less cost 211.67 190.02 415.78
Profit/hour $ 31.75 $ 28.50 $ 62.37
*Total direct fixed costs/Flying hours
**Total direct variable costs/Flying hours
Original expected profit (uses the original hours and the above bid prices and unit
variable costs):
Revenues:
1,200 × $243.42 = $292,104
,600 × $218.52 = 349,632
900 × $478.15 = 430,335 $ 1,072,071
Less variable costs 414,903
Contribution margin $ 657,168
Less direct fixed expenses (363,315)
Less indirect fixed expenses (154,000)
Income before taxes $ 139,853
Note: The answer can also be obtained by multiplying the profit per hour for each
helicopter by the original hours and summing. (Any slight difference is due to
rounding error.)
*Rounded

39. 222277
7–33 Continued
2. The actual revenues earned (for the first six months) were as follows:
299 × $243.42 = $ 72,783
160 × $218.52 = 34,963
204 × $478.15 = 97,543
$205,289
Actual costs incurred:
500D 206B 206L-1 Total
Direct costs—fixed* $46,623 $47,100 $87,935 $181,658
Direct costs—variable** 7,636 3,834 22,497 33,967
Overhead—variable*** 19,934 10,667 13,601 44,202
Indirect fixed costs* 77,000
Total $336,827
*Half of total annual costs
**Per-unit variable costs × Actual flying hours
***Per-unit variable cost ($66.67) × Actual flying hours
Income statement:
Revenue $ 205,289
Variable costs 78,169
Contribution margin $ 127,120
Fixed costs 258,658
Loss $(131,538)
Profit that should have been earned (for the first six months):
500D 206B 206L-1
Profit per hour $ 31.75 $ 28.50 $ 62.37
50% of projected hours × 600 × 800 × 450
$19,050 $22,800 $28,067
Total profit: $69,917 ($19,050 + $22,800 + $28,067)

40. 222288
7–33 Continued
3. Revenue:
450 × $243.42 = $109,539
600 × $218.52 = 131,112
800 × $478.15 = 382,520
$623,171
Costs:
500D 206B 206L-1 Total
Direct costs—fixed $ 93,245 $ 94,200 $175,870 $363,315
Direct costs—variable 11,493 14,376 88,224 114,093
Overhead—fixed 50,107 64,810 39,080 153,997
Overhead—variable 30,002 40,002 53,336 123,340
Total $184,847 $213,388 $356,510 $754,745
Income statement:
Revenue $ 623,171
Variable costs 237,433
Contribution margin $ 385,738
Fixed costs 517,312
Loss $(131,574)
4. Variable maintenance: $246,667/3,700 = $66.67 per flying hour
Allocation ratios for fixed costs (based on revised hours):
500D 206B 206L-1
Maintenance 0.24324 0.32432 0.43243
Hangar rent 0.33333 0.33333 0.33333
Administrative 0.24324 0.32432 0.43243
Allocation of fixed costs:
500D 206B 206L-1
Maintenance—fixed $ 6,324 $ 8,432 $11,243
Hangar rent 6,000 6,000 6,000
Administrative 26,756 35,675 47,567
Total fixed costs $39,080 $50,107 $64,810

41. 222299
7–33 Concluded
500D: $39,080/450 = $86.84* per hour
206B: $50,107/600 = $83.51* per hour
206L-1: $64,810/800 = $81.01* per hour
*Rounded
500D 206B 206L-1
Direct costs—fixed* $207.21 $157.00 $219.84
Direct costs—variable** 25.54 23.96 110.28
Overhead—fixed 86.84 83.51 81.01
Overhead—variable 66.67 66.67 66.67
Cost per unit $386.26 $331.14 $477.80
*Direct fixed costs/Revised flying hours
**Direct variable costs/Original flying hours
Revenues needed
= Total costs for revised hours + Original profit
= [($386.26 × 450) + ($331.14 × 600) + ($477.80 × 800)] + $139,853
= $754,741 + $139,853
= $894,594
Let m = Markup
Revenues needed = (1 + m)(Total costs for revised hours)
= (1 + m)($754,741)
$894,594 = (1 + m)($754,741)
1 + m = $894,594/$754,741
1 + m = 1.185
m = 0.185
Thus, the revised prices are as follows:
500D: (1.185)($386.26) = $457.72* per hour
206B: (1.185)($331.14) = $392.40* per hour
206L-1: (1.185)($477.80) = $566.19* per hour
*Rounded

42. 223300
RESEARCH ASSIGNMENTS
7–34
Answers will vary.
7–35
Answers will vary.