PROFIT ANALYSIS AND BUDGETARY PLANNINGSESSION No 1

REVISION OF COST ACCOUNTING FUNDEMENTAL CONCEPTS AND TOOLS

(From Wild, Larson and Chiapetta, 2007, MaGraw Hill International Edition)

Exercise 18-11 Cost of goods manufactured and cost of goods sold computation
Using the following data, compute (1) the cost of goods manufactured and (2) the cost of goods sold for both Canyon Company and Crossings Company.

Canyon Ltd

Crossings Ltd

14000 16500 9250 29000 21000 19650 24000 7300 11000 10200 23000 3250 6780 35000 52000

18450 21950 11000 24750 37000 15300 18000 9200 14000 5200 45000 9660 3500 54000 48000

Problem 21-1A Allocation of costs to departments

National Bank has several departments that occupy both floors of a two-story building. The departmental accounting system has a single account, Building Occupancy Cost, in its ledger.
1

The types and amounts of occupancy costs recorded in this account for the current period follow. Depreciation-Building Interest-Building mortgage Taxes-Building and land Gas (heating) expense Lighting expense Maintenance expense Total occupancy cost 18000 27000 8000 2500 3000 5500 64000

The building has 4,000 square feet on each floor. In prior periods, the accounting manager merely divided the $64,000 occupancy cost by 8,000 square feet to find an average cost of $8 per square foot and then charged each department a building occupancy cost equal to this rate times the number of square feet that it occupied. Diane Linder manages a first-floor department that occupies 1,000 square feet, and Juan Chiro manages a second-floor department that occupies 1,800 square feet of floor space. In discussing the departmental reports, the second-floor manager questions whether using the same rate per square foot for all departments makes sense because the first-floor space is more valuable. This manager also references a recent real estate study of average local rental costs for similar space that shows first-floor space worth $30 per square foot and second-floor space worth $20 per square foot (excluding costs for heating, lighting, and maintenance). Required 1. Allocate all occupancy costs to the Linder and Chiro departments using the current allocation method. 2. Allocate the depreciation, interest, and taxes occupancy costs to the Linder and Chiro departments in proportion to the relative market values of the floor space. Allocate the heating, lighting, and maintenance costs to the Linder and Chiro departments in proportion to the square feet occupied (ignoring floor space market values). Analysis Component 3. Which allocation method would you prefer if you were a manager of a second-floor department? Explain.

Problem 21-2A Activity-based costing

Patient Health is an outpatient surgical clinic that was profitable for many years, but Medicare has cut its reimbursements by as much as 50%. As a result, the clinic wants to better understand its costs. It decides to prepare an activity-based cost analysis, including an estimate of the average cost of both general surgery and orthopedic surgery. The clinics three cost centers and their cost drivers follow.

Cost center Professional salaries

Cost 1500000

Cost driver Professional hours Number of patients Square feet

Driver quantity 10000 500 1500

Patent services and supplies 25000 Building cost 150000

The two main surgical units and their related data follow. Service General surgery Orthopedic surgery hours 2500 7500 Square feet * 500 1000 Patients 400 100

*Orthopedic surgery requires more space for patients, supplies, and equipment Required 1. Compute the cost per cost driver for each of the three cost centers. 2. Use the results from part 1 to allocate costs from each of the three cost centers to both the general surgery and the orthopedic surgery units. Compute total cost and average cost per patient for both the general surgery and the orthopedic surgery units. Analysis Component 3. Without providing computations, would the average cost of general surgery be higher or lower if all center costs were allocated based on the number of patients? Explain.