Hilton 9E Global Edition Solutions Manual Chapter17

CHAPTER 17
Allocation of Support Activity Costs and Joint

Costs
ANSWERS TO REVIEW QUESTIONS
17-1
A service department is a unit in an organization that is not involved directly in

producing the organizations goods or services. However, a service department does
provide a service that enables the organizations production process to take place.
Production departments, on the other hand, are units that are directly involved in
producing the organizations goods and services. An example of a service
department in a bank would be the computer department or the human resources
department. An example of a production department in a bank would be the
consumer loan department.
17-2
The term reciprocal services refers to the situation in which two or more service
departments provide services to each other.
17-3 (a) Under the direct method of service department cost allocation, all service
department costs are allocated directly to the production departments, and none
of these costs are allocated to other service departments.
(b) Under the step-down method, a sequence is first established for allocation of
service department costs. Then the costs incurred in the first service department
in the sequence are allocated among all other departments that use that service
departments services, including other service departments. The method
proceeds in a similar fashion through the sequence of service departments.
(c) Under the reciprocal-services method, a system of simultaneous equations is
established to reflect the reciprocal provision of services among service
departments. Then all of the service departments costs are allocated among all
of the departments that use the various service departments output of services.
The reciprocal-services method of service department cost allocation is the only
method that fully accounts for the reciprocal provision of services among
departments.
17-4
The first department in the sequence under the step-down method is the service
department that serves the largest number of other service departments. The second
department in the sequence is the service department that serves the second-largest
number of service departments, and so forth. The sequence among tied service
departments usually is an arbitrary choice.
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Managerial Accounting, 9/e Global Edition
2011 The McGraw-Hill Companies,

17-1
17-5
The dual-allocation approach improves the resulting cost allocations because

variable costs are allocated in accordance with short-run usage, and fixed costs are
allocated in accordance with long-run service requirements.
17-6
A potential behavioral problem that can result from the dual approach to service
department cost allocation is that service department managers may have a
disincentive to provide correct predictions for their departments long-run service
department needs.
17-7
Budgeted service department costs should be allocated rather than actual service
department costs. Allocating actual costs would reduce the incentive for cost control
in the service departments.
17-8
Under two-stage allocation with departmental overhead rates, costs first are
distributed to departments; then they are allocated from service departments to
production departments. Finally, they are assigned from production departments to
products or services. Departments play a key role as intermediate cost objects under
this approach. In an activity-based costing (ABC) system, on the other hand, the key
role is played by activities, not departments. First, the costs of various activities are
assigned to activity-cost pools; then these costs are assigned to products or
services. The breakdown of costs by activity in an ABC system is much finer then a
breakdown by departments. The ABC approach generally will provide a much more
accurate cost for each of the organizations products or services.
17-9 (a) Joint-production process: A production process in which the processing of a

common input results in two or more outputs called joint products.
(b) Joint costs: The costs incurred in a joint production process before the joint
products become identifiable as separate products.
(c) Joint products: The output of a joint production process.
(d) Split-off point: The point in a joint production process at which the joint products
become identifiable as separate products.
(e) Separable costs: Costs incurred to process joint products further after they pass
the split-off point in a joint production process.
(f) By-product: A joint product with very little value relative to the other joint
products.
17-10 Under the physical-units method of joint cost allocation, joint production costs are
allocated among the joint products in proportion to a physical characteristic of those
products, such as weight or volume.
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17-2

Solutions Manual
17-11 Under the relative-sales-value method of joint cost allocation, joint production costs
are allocated to the joint products in proportion to their sales value at the split-off
point.
17-12 The net realizable value of a joint product is equal to its ultimate sales value minus
the separable costs incurred between the split-off point and the products final form.
Under the net-realizable-value method of joint cost allocation, joint production costs
are allocated among the joint products in proportion to their net realizable values.
17-13 Joint cost allocations are useful for product-costing purposes. Product costing is
useful for income determination, for inventory valuation, for third-party
reimbursement situations, and various other purposes.
17-14 The managerial accountant generally should be careful not to use joint cost
allocations for making decisions.
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17-3
SOLUTIONS TO EXERCISES
EXERCISE 17-15 (15 MINUTES)
1.
Cost allocation using direct method:

Academic Departments Using Services
Liberal Arts
Sciences
Provider of Service
Library.
Computing Services
Total.
Cost to Be
Allocated
$750,000
320,000
$1,070,000
Proportion
(3/5)
(3/8)
Amount
$450,000
120,000
$570,000
Amount
$300,000
200,000
$500,000
$1,070,000
Grand total
2.
Proportion
(2/5)
(5/8)
In the electronic version of the solutions manual, press the CTRL key and click on
the following link: Build a Spreadsheet 17-15.xls

1.
Cost allocation using step-down method:
Service Departments
Computing
Services
Library
Costs prior to allocation $320,000 $750,000
Allocation of Computing
Service costs*. $320,000 64,000(2/10)
Allocation of Library
costs.
$814,000
Total costs allocated to
each department
Total cost allocated to
academic departments.
Academic Departments
Using Services
Liberal
Arts
Sciences
$96,000(3/10)
$160,000(5/10)
488,400(3/5)
325,600(2/5)
$584,400
$485,600
$1,070,000
*Allocated first because Computing Services provides service to the Library, but not vice
versa.
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17-4

Solutions Manual
EXERCISE 17-16 (CONTINUED)

2.

Direct Customer Service
Departments Using Services
Deposit
Loan
Provider of Service
HR.
Computing.
Total
Cost to Be
Allocated
$153,000
229,500
$382,500
Proportion
(6/9)
(50/85)
Amount
$102,000
135,000
$237,000
Proportion
(3/9)
(35/85)
Amount
$51,000
94,500
$145,500
$382,500
Grand total
HR
Computing
$153,000 $229,500
Costs prior to allocation

Allocation of HR
Department costs.. $153,000 15,300(1/10)
Department costs..
$244,800
Total costs allocated to
each department
direct customer service
departments

Departments Using Services
Deposit
Loan
$91,800(6/10)
144,000(50/85)
$235,800
$45,900(3/10)
100,800(35/85)
$146,700
$382,500

Answers will vary widely, depending on the organization chosen. Support departments at
the Mayo Clinic, for example, include Admissions, Patient Records, and Housekeeping,
among others. At Sheraton Hotels, support departments include Registration, Maintenance,
and the Concierge, among others.
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17-5

Joint
Cost
Joint
Products
Oat bran
Quantity at
Split-Off Point
12,000 kilograms
Relative
Proportion
.60
Rolled oats
Total
8,000 kilograms
20,000 kilograms
.40
Allocation
of
Joint Cost
$36,000*
$60,000
24,000
$60,000
*$36,000 = $60,000 .60
$24,000 = $60,000 .40

Joint
Cost
Joint
Products
Oat bran
Quantity at
Split-Off
12,000 kg
Sales
Price
$1.50
Rolled oats
Total
8,000 kg
3.00
Allocation
Sales Value at Relative
of
Split-Off Point Proportion Joint Cost
$18,000
.429*
$25,740
$60,000
24,000
$42,000
34,260**
$60,000
.571*
*Rounded
$25,740 = $60,000 .429

**$34,260 = $60,000 .571
1.
Decision analysis:
Incremental revenue per kilogram:

Sales price of powdered health drink enhancer ......................
Sales price of rolled oats ..........................................................
Incremental revenue ..................................................................
Incremental processing cost per kilogram ..............................
Incremental revenue less incremental cost .............................
$4.50
3.00
$1.50
.50
$1.00
The rolled oats should be processed further into the health drink enhancer.
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17-6

Solutions Manual

2.
Joint cost allocation using net-realizable-value method:
Joint
Cost
Joint
Products
Oat bran
Sales Value of
Final Product
$24,000
(12,000 $1.50)
Enhancer
28,000
(8,000 $4.50)
Net
Allocation
Separable Cost Realizable Relative
of
of Processing Value* Proportion Joint Cost
-0$18,000
.36
$21,600
$30,000
$4,000
(8,000 x $.50)
32,000
.64
$50,000
38,400 **
$30,000
*Net realizable value = sales value of final product separable cost of processing
$21,600 = $60,000 .36

**$38,400 = $60,000 x .64
(a)
First, specify equations to express the relationships between the service

departments.
Notation:
H denotes the total cost of Human Resources (HR)

C denotes the total cost of Computing
Equations:H=153,000 + .15C
(1)
C=229,500 + .10H
(2)
Solution of equations: Substitute from equation (2) into equation (1).

H=
.985H=
H=
153,000 + .15(229,500 + .10H)

187,425
190,279 (rounded)
Substitute the value of H into equation (2).

C=
229,500 + .10(190,279)
C=
248,528 (rounded)
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17-7

(b)
Cost allocation using the reciprocal-services method:
Service Departments
HR
Computing
Traceable costs. $153,000
$229,500
Allocation of HR
Department costs... (190,279)
19,028*(.1)
Department costs 37,279*(.15) (248,528)
each direct customer
service department.
Total costs allocated.

Departments
Deposit
Loan
$114,167*(.6)
124,264(.50)
$238,431
$57,084*(.3)
86,985*(.35)
$144,069
$382,500
*Rounded
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17-8

Solutions Manual
SOLUTIONS TO PROBLEMS
PROBLEM 17-24 (40 MINUTES)
1.
Direct method:
Production Departments
Machining
Assembly
Provider of Service
HR
Maintenance.
CAD.
Cost to Be
Allocated
$180,000
230,000
350,000
$760,000
Total
Proportion
(4/9)
(35/75)
(45/60)
Amount
Proportion Amount
$80,000
(5/9)
$100,000
107,333* (40/75)
122,667*
262,500
(15/60)
87,500
$310,167
$449,833
$760,000
Grand total
*Rounded
2.
Sequence for step-down method:
1st:
HR (serves 2 other service departments)

2nd: Maintenance (serves 1 other service department)
3rd: CAD (serves no other service departments)
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17-9
PROBLEM 17-24 (CONTINUED)

3. Step-down method:
HR
Costs prior to
allocation.
Allocation of
HR Department
costs.
Allocation of
Maintenance
Department costs.
Allocation of CAD
Department costs.
Total cost
allocated to each
department.
$180,000
$180,000
Service Departments
Maintenance
$230,000
9,000(5/100)
$239,000
Total cost allocated to production departments
CAD
Molding
Assembly
$350,000
9,000(5/100)
$72,000(40/100)
$90,000(50/100)
14,938*(5/80)
104,563*(35/80)
119,500(40/80)
280,454*(45/60)
93,485*(15/60)
$457,017
$302,985
$373,938
$760,002**
*Rounded
**$2 overallocation due to rounding
4. In the electronic version of the solutions manual, press the CTRL key and click on the following link: Build a Spreadsheet
17-24.xls
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17-10
2011 The McGraw-Hill Companies, Inc.

Solutions Manual

1.
Direct method combined with dual allocation:

(a) Variable costs:
Machining
Assembly
Provider of Service
HR.
Maintenance..
CAD..
Cost to Be
Allocated
$50,000
80,000
50,000
Proportion*
(4/9)
(35/75)
(45/60)
$180,000
Total variable cost
Amount
Proportion* Amount
$22,222
(5/9)
$27,778
37,333
(40/75)
42,667
37,500
(15/60)
12,500
$
$97,055
82,945
*Short-run usage proportions (from preceding problem).
Rounded
$97,055 + $82,945 = $180,000

(b) Fixed costs:
Machining
Assembly
Provider of Service
HR.
Maintenance..
CAD..
Cost to Be
Allocated
$130,000
150,000
300,000
$580,000
Total fixed cost.
Proportion*
(35/85)
(48/72)
(48/60)
Amount
Proportion*
$53,529
(50/85)
100,000
(24/72)
240,000
$393,529 **
(12/60)
Amount
$76,471
50,000
60,000
$186,471
**
*Long-run proportions (from this problem)
Rounded
**Check: $393,529 + $186,471 = $580,000
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17-11

(c) Total costs allocated:
Variable costs ............................................................................

Fixed costs .................................................................................
Total costs ..................................................................................
Grand total ..................................................................................
2.
Machining
$97,055
393,529
$490,584
Assembly
$82,945
186,471
$269,416
$760,000
Step-down method combined with dual allocation:
As in the preceding problem, the sequence of allocation is HR, Maintenance, and CAD,
respectively.
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17-12

Solutions Manual

(a) Variable costs:
HR
Costs prior to
allocation
Allocation of
HR Department
costs
Allocation of
Maintenance
Department costs
Allocation of CAD
Department costs
Total variable cost
allocated to each
department
Service Departments
Maintenance
$50,000
$80,000
$50,000
2,500(5/100)*
$82,500
CAD
Molding
Assembly
$50,000
2,500(5/100)
$20,000(40/100)
$25,000(50/100)
5,156 (5/80)
36,094 (35/80)
41,250(40/80)
$57,656
43,242(45/60)
$99,336**
*Short-run usage proportions are used (from preceding problem).
Rounded.
**$99,336 + $80,664 = $180,000
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17-13
14,414(15/60)
$80,664**

(b) Fixed costs:
HR
Costs prior to
allocation
Allocation of
HR Department
costs
Allocation of
Maintenance
Department costs
Allocation of CAD
Department costs
Total fixed cost
allocated to each
department
$130,000
$130,000
Service Departments
Maintenance
$150,000
6,500(5/100)*
$156,500
CAD
Molding
Assembly
$300,000
13,000(10/100)
15,650(8/80)
$328,650
$45,500(35/100)
$65,000(50/100)
93,900(48/80)
46,950(24/80)
262,920(48/60)
65,730(12/60)
$402,320
$177,680
*Long-run usage proportions are used (from this problem).
Check: $402,320 + $177,680 = $580,000
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17-14

Solutions Manual

(c) Total costs allocated:
Machining
Variable costs ...................................................................... $99,336
Fixed costs ........................................................................... 402,320
Total costs ............................................................................ $501,656
Grand total ............................................................................
Assembly
$80,664
177,680
$258,344
$760,000

1.
Direct method:
Production Department
Etching
Finishing
Cost to Be
Provider of Service
Allocated
Proportion
Maintenance..
$48,000
(1/9)
Computing.
250,000
(7/8)
Total service department costs allocated ......................
Overhead costs traceable to
production departments ................................................
Total overhead cost .........................................................
Amount
$5,333
218,750
$224,083
Proportion Amount
(8/9)
$42,667
(1/8)
31,250
$73,917
200,000
$424,083
320,000
$393,917
Direct-labor hours (DLH)

(20 2,000) ................................................................... 40,000
(80 2,000) ...................................................................
Overhead rate per hour
(total overhead DLH) .................................................. $10.602*
160,000
Check on allocation procedure:

Service department costs allocated to Etching ................................................
Service department costs allocated to Finishing .............................................
Total costs to be allocated ($48,000 + $250,000) ..............................................
$2.462*
$224,083
73,917
$298,000
*Rounded
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17-15

2.
Step-down method:
Service Departments
Computing Maintenance
Costs prior to allocation. $250,000 $48,000
Department costs 250,000 50,000(2/10)
Allocation of Maintenance
Department costs
98,000
Total service department cost allocated ...............................
Overhead costs traceable to
production departments ......................................................
Total overhead cost ................................................................
Etching
Finishing
$175,000(7/10) $25,000(1/10)
10,889 (1/9) 87,111(8/9)

$185,889
$112,111
200,000
$385,889
320,000
$432,111

(20 2,000) ..........................................................................
40,000
(80 2,000) ..........................................................................
Overhead rate per hour
(total overhead DLH) ......................................................... $9.647*
160,000
$2.70*

Service department costs allocated to Etching ............................................. $185,889
Service department costs allocated to Finishing .......................................... 112,111
Total costs to be allocated ($48,000 + $250,000) ........................................... $298,000
*Rounded
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17-16

Solutions Manual

1.
Physical-units method of allocation:

Joint
Joint
Quantity at
Relative
Allocation of
Cost
Products
Split-Off Point
Proportion
Joint Cost
$300,000 MSB ........... 60,000 ............... 40% ..................... $120,000
CBL ............ 90,000 ............... 60% ..................... 180,000
Total ..........
150,000
The joint cost allocated to CBL is $180,000.
2.
Relative-sales-value method of allocation:

Joint
Joint
Cost
Products
$300,000 MSB ...........
CBL ............
Total ..........
Sales Value at
Relative
Allocation of
Split-Off Point
Proportion
Joint Cost
$120,000 ............. 25% ..................... $75,000
360,000 ............. 75% ..................... 225,000
$480,000
The joint cost allocated to MSB is $75,000.
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17-17

3.
Net-realizable-value method of allocation:
Sales
Joint
Joint
Value of
Cost Products Final Product
$300,000 MSB ... $300,000*.......
CBL .... 800,000.......
Total ...
Net
Additional Cost Realizable
Relative Allocation of
of Processing
Value
Proportion Joint Cost
$100,000 ........ $200,000 25%........... $75,000
200,000 ........ 600,000 75%........... 225,000
$800,000
*$5 60,000
$10 (90,000 10,000)

The unit cost of CBL is computed as follows:
Joint cost allocation ..................................................................
Additional processing costs .....................................................
Total cost ....................................................................................
$225,000
200,000
$425,000
Quantity (good units) .................................................................
80,000
Cost per unit ($425,000 80,000)..............................................

4.
Sales value if coated (60,000 $5) ...........................................

Additional cost of coating .........................................................
Incremental contribution if coated ...........................................
Sales value if uncoated (60,000 $2) ......................................
Decline in contribution if uncoated ..........................................
$5.31(rounded)
$300,000
100,000
$200,000
120,000
$80,000
The contribution would decrease by $80,000 if the mine support braces are not
processed further.
5.
The allocation of joint costs is irrelevant to the decision about coating the mine
support braces. The decision should be based entirely on information pertaining to
events from the split-off point forward. Thus, the joint cost allocation results were
not used in making this production decision.
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17-18

Solutions Manual

1.
Plantwide overhead rates:

Departments (numbers in thousands)
Molding Component Assembly
Total
Manufacturing departments:
Variable overhead ......................
Fixed overhead ...........................
Total manufacturing
department overhead ..........
Service departments:
Power ..........................................
Maintenance ...............................
Total estimated overhead......
Estimated direct-labor hours (DLH):
Molding .......................................
Component .................................
Assembly ....................................
Total estimated
direct-labor hours ................
Plantwide overhead rate
$10,000
6,200
$16,500
6,100
$30,000
29,800
$21,000
$16,200
$22,600
$59,800
18,400
4,000
$82,200
500
2,000
1,500
4,000
estimated overhead
estimated DLH
$82,200
4,000
McGraw-Hill/Irwin
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$3,500
17,500
$20.55 per direct-labor hour

17-19

2.
Departmental overhead rates:

Departments (numbers in thousands)
Service
Manufacturing
Power Maintenance Molding
Component Assembly
Departmental overhead
costs ................................... $18,400
a.Allocation of maintenance costs
(direct method)
Proportions: 90/125,
25/125, 10/125 ............
b.Allocation of power
costs (dual, direct
method)
Fixed costs
($12,000):
Proportions:
500/1000, 350/1000,
150/1000 ................... (12,000)
Variable costs
($6,400):
Proportions:
360/800, 320/800,
120/800
(6,400)
Total allocated
departmental
overhead costs ....... $0
$ 4,000
$21,000
$16,200
$22,600
(4,000)
2,880
800
320
6,000
4,200
1,800
2,880
2,560
960
$32,760
$23,760
$25,680
875
MH
2,000
DLH
1,500
DLH
$37.44
per
MH
$11.88
per
DLH
$17.12
per
DLH
$0
c.Cost driver .......................
Rate (departmental overhead

units of cost driver).......................................
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17-20

Solutions Manual

3.
Memorandum
Date:
Today
To:
President, Travelcraft Company
From:
I.M. Student
Subject: Use of departmental overhead rates

Travelcraft should use departmental rates to assign overhead to its products. The
criterion for choosing an allocation base is a close relationship between cost
incurrence and use of the base. This relationship exists with different bases in
different departments, necessitating the use of departmental rates. The companys
production departments are dissimilar in that the Molding Department is machineintensive while the other two departments are labor-intensive.

1.
Net-realizable-value method of allocation:
Joint
Cost
per Run
Joint
Sales Value of Additional Cost
Products Final Product* of Processing
HTP-3 ....... $2,800,000........$874,000 .......
$1,400,000 PST-4 ....... 2,100,000........816,000 .......
RJ-5 ......... 850,000........60,000 .......
Total
Net
Realizable
Value
$1,926,000 .....48.15% ..... $ 674,100
1,284,000 .....32.10% ..... 449,400
790,000 .....19.75% ..... 276,500
$4,000,000
$1,700,000
*Sales price quantity produced
Net realizable value $4,000,000, which is the sum of the net realizable values of the three joint
products, rounded
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17-21

2.
October production cost per liter:

Product
Joint cost allocation .................................
Additional processing costs ....................
Total cost
HTP-3
$ 674,100
874,000
$1,548,100
PST-4
$ 449,400
816,000
$1,265,400
RJ-5
$276,500
60,000
$336,500
Quantity produced (liters) ........................

Cost per liter (rounded) ............................
700,000
$2.21
350,000
$3.62
170,000
$1.98
HTP-3
18,000
700,000
718,000
650,000
68,000
$2.21
$150,280
PST-4
52,000
350,000
402,000
325,000
77,000
$3.62
$278,740
RJ-5
3,000
170,000
173,000
150,000
23,000
$1.98
$45,540
Inventory valuation:
Product
October 1 inventory (liters) ........................
October production (liters) .......................
Quantity available (liters) ...........................
October sales (liters) ..................................
October 31 inventory (liters) ......................
Cost per liter .........................................
October 31 inventory (dollars) ..................
3.
Biondi Industries should sell PST-4 at the split-off point. The incremental revenue of
sales beyond the split-off point is less than the incremental cost of further
processing.
Per liter sales value beyond the split-off point ...........................
Per liter sales value at the split-off point .....................................
Incremental sales value ................................................................
Less: Additional processing costs per liter
($816,000 350,000 liters) ..........................................................
Per liter gain (loss) of further processing ...................................
McGraw-Hill/Irwin
Inc.
17-22
$6.00
3.80
$2.20
2.33 (rounded)
$ (.13)

Solutions Manual

1.
Joint cost allocations using the relative-sales-value method:

Omega: joint cost allocation
Omega' s sales value at split - off
total sales value at split - off
joint cost
$15,000
= $100,000 $60,000 = $9,000
Kappa: joint cost allocation
= total joint cost Deltas allocation

Omegas allocation
= $60,000 $36,000 $9,000 = $15,000
Summary of joint cost allocations:

Delta ....................................................................................................
Kappa ..................................................................................................
Omega .................................................................................................
Total ....................................................................................................
2.
Deltas joint cost allocation =
$36,000(given)
15,000
9,000
$60,000
Delta' s sales value at split - off
total sales value at split - off
joint cost
$36,000 = $100,000 $60,000
$100,000
X = $36,000 $60,000
X = $60,000
Deltas sales value at split-off = $60,000
McGraw-Hill/Irwin
Inc.

17-23

3.
Joint cost allocation using the net-realizable-value method:
Joint
Cost
Joint
Sales Value of
Products Final Product
$70,000
Delta
25,000
$60,000 Kappa
Omega
20,000
Total
$115,000
McGraw-Hill/Irwin
Inc.
17-24
Separable
Cost of
Processing
$7,000
5,000
3,000
$15,000
Net
Realizable
Value
$63,000
20,000
17,000
$100,000
.63
$37,800
.20
12,000
.17
10,200
$60,000

Solutions Manual

1.
Joint costs arise from the simultaneous processing or manufacturing of two or more
products made from the same process. These joint costs are not traceable to any
single product.
The split-off point is the stage in the manufacturing process at which joint products
can be identified as individual units. Future costs are then accounted for separately.
2.
The dollar value of the finished-goods inventories on November 30 for VX-4 and HD10 are calculated as follows:
Joint costs to be allocated:
Total joint costs incurred.................................................................
Less: Net realizable value (NRV) of FT-5*.......................................
Joint costs to be allocated...............................................................
$1,568,000
68,000
$1,500,000
*NRV = 85,000 gal. ($.90$.10)

Allocation of joint costs:
VX-4
November production (in liters)...............................
600,000
Final sales value per liter.........................................
$4.00
Total sales value....................................................... $2,400,000
Less: Separable-costs..............................................
720,000
NRV at split-off.................................................... $1,680,000
Divided by total NRV at split-off.............................. 2,800,000
Percentage allocation...............................................
.60
Joint cost to be allocated......................................... $1,500,000
Joint cost allocation................................................. $ 900,000
HD-10
320,000
$6.375
$2,040,000
920,000
$1,120,000
2,800,000*
.40
$1,500,000
$ 600,000
*Total NRV at split-off equals $2,800,000 ($1,680,000 + $1,120,000).
McGraw-Hill/Irwin
Inc.

17-25

Inventory values on November 30:
VX-4
Joint cost allocation................................................. $ 900,000
Additional processing costs....................................
720,000
Total cost............................................................. $1,620,000
Liters produced......................................................... 600,000
Cost per liter.............................................................. $
2.70
Finished-goods inventory (liters)............................
9,000
Inventory value................................................... $ 24,300
3.
HD-10
$ 600,000
920,000
$1,520,000
320,000
$
4.75
26,000
$ 123,500
Xian Chemicals should continue to process HD-10 beyond the split-off point, since
the incremental revenue is $.50 greater per liter than the incremental cost. The joint
cost is irrelevant to the decision because it will not change regardless of the
decision to sell as is or process further. The analysis follows:
Per Unit
Per-liter sales value after split-off...........................
Per-liter sales value at split-off................................
Incremental sales value............................................
Additional processing cost......................................
Incremental revenue.................................................
$6.375
3.000
$3.375
2.875
$ .500
Total
$1,080,000*
920,000
$ 160,000
*320,000 liters $3.375
$920,000/320,000 liter
McGraw-Hill/Irwin
Inc.
17-26

Solutions Manual

1.
Physical-units method:
Joint
Cost
Joint
Quantity at
Relative
Allocation of
per Run
Products
Split-Off Point
Proportion
Joint Cost
$250,000 Compod ......... 120,000 liters............. 60%................... $150,000
Ultrasene ....... 80,000 liters............ 40%................... 100,000
Total
200,000 liters
$250,000
The joint cost allocated to Compod is $150,000.

2.
Relative-sales-value method:
Joint
Cost
Joint
per Run
Products
$250,000 Compod .........
Ultrasene .......
Total
Sales Value at
Relative
Allocation of
Split-Off Point
Proportion
Joint Cost
$240,000 ............. 48% ..................... $120,000
260,000 ............. 52% ..................... 130,000
$500,000
$250,000
The joint cost allocated to Ultrasene is $130,000.

3.
Now there are additional processing costs beyond the split-off point.
a. Additional processing costs have no effect on the physical-units method of
allocation. The joint cost allocated to Ultrasene is $100,000, as calculated in
requirement (1).
b. Net-realizable-value method:
Joint
Cost
Joint
Sales Value of
per Run Products Final Product
$250,000 Compod .... $240,000.........
Ultrasene... 260,000.........
Net
Allocation of
Separable Cost Realizable
Relative Joint Cost
of Processing
Value
Proportion
$12,000 .......... $228,000 57%........... $142,500
88,000 .......... 172,000 43%........... 107,500
Total
$400,000
$250,000
The joint cost allocated to Compod is $142,500.

McGraw-Hill/Irwin
Inc.

17-27

4.
Incremental revenue per liter from further processing

into Compodalene ($2.60 $2.00) .....................................................................
Incremental cost per liter from further processing:
Processing cost .................................................................................
$.40
Sales commission ($2.60 10%) .....................................................
.26
Incremental loss per liter from further processing
into Compodalene ...............................................................................
$.60
.66
$(.06)
Conclusion: Do not process Compod into Compodalene. The firm should sell
Compod. (Note that the $.10 per liter separable processing cost to obtain Compod is
irrelevant. The question is what to do with the Compod after it has been obtained.
The relevant data are the incremental costs and benefits associated with turning
Compod into Compodalene.)
5.
The director of research, Charles LaMarque, acted improperly in asking the assistant
controller to alter her analysis in favor of producing Compodalene. If he believes the
further processing of Compod is in Montpelier Cie.s best interests, he should try to
back up his claim with some projected cost reductions and the potential impact on
the companys market. He could present his own estimates to Anne-Marie Guillotin,
or directly to the managers responsible for making the final decision.
Guillotin should not alter her analysis to support the production of Compodalene. In the
absence of any further information, she should recommend against the further
processing of Compod. Several ethical standards for management accountants
(listed in Chapter 1) are relevant, including the following:
Competence
Provide decision support information and recommendations that are accurate,
clear, concise, and timely.
Objectivity
Communicate information fairly and objectively.
Disclose fully all relevant information that could reasonably be expected to
influence an intended users understanding of the reports, analyses, and
recommendations.
McGraw-Hill/Irwin
Inc.
17-28

Solutions Manual

6.
It is preferable to sell Compod than to sell Compodalene, as the solution to

requirement (4) showed. Nevertheless, it is preferable to sell Compodalene than to
sell nothing, since each liter of Compodalene makes a positive contribution toward
covering the joint production cost, fixed costs, and profit.
Incremental revenue from sale of a liter of
Compodalene (if the alternative is no sale) .....................................................
Incremental cost (if the alternative is to stop
production at the split-off point):
Separable processing to produce Compod after
the split-off point .................................................................................. $.10
Further processing cost to turn Compod into Compodalene ............. .40
Sales commission .................................................................................. .26
Total ........................................................................................................
Contribution to the joint production cost, fixed costs,
and profit ...................................................................................................
$2.60
.76
$1.84

1.
Reciprocal-services method:
Equations:
M = 48,000 + .2C
C = 250,000 + .1M
Where M denotes the total cost of the Maintenance Department

C denotes the total cost of the Computing Department
McGraw-Hill/Irwin
Inc.

17-29

Solution of equations:
M = 48,000 + .2 (250,000 + .1M)
M = 48,000 + 50,000 + .02M
.98 M = 98,000
M = 100,000
C = 250,000 + .1 (100,000)
C = 260,000
Allocation:
Service Departments
Maintenance Computing
Traceable costs ....................... $48,000
$250,000
Allocation of Maintenance
Department costs ................. (100,000)
10,000(.1)
Department costs .................
52,000(.2) (260,000)
Total service department costs allocated .............................
Overhead costs traceable to production departments ........
Total overhead cost ................................................................
(20 2,000) .........................................................................
(80 2,000) .........................................................................
Overhead rate per hour (total overhead DLH) ...................
Service department costs allocated to Etching ...............
Service department costs allocated to Finishing ............
Total .....................................................................................
2.
Etching
Finishing
$10,000(.1)
$80,000(.8)
182,000(.7)
$192,000
200,000
$392,000
26,000(.1)
$106,000
320,000
$426,000
40,000
$9.80
160,000
$2.663
$192,000
106,000
$298,000
The direct allocation method ignores any service rendered by one service
department to another. Allocation of each service departments total cost is made
directly to the production departments. The step-down method recognizes one
service departments usage of services, but ignores the others usage of services.
The reciprocal services allocation method recognizes all service department support
to other service departments through the use of simultaneous equations. This
McGraw-Hill/Irwin
Inc.
17-30

Solutions Manual
allocation procedure should lead to more accurate results that would be of greater
value to management.
1.
Variable costs:
Notation:
R denotes the total variable cost of Patient Records

H denotes the total variable cost of Human Resources
A denotes the total variable cost of Administration and Accounting
Equations:
R = 24,000 + .05H(1)
H = 15,000 + .05A(2)
A = 47,500 + .20H(3)
These equations are based on the variable costs and short-run usage proportions
given in Exhibit 17-2.
H=15,000 + .05(47,500 + .20H)
.99H=17,375
H=17,551 (rounded)
Substitute the value of H into equations (1) and (3).
R=24,000 + .05(17,551)
R=24,878 (rounded)
A=47,500 + .20(17,551)
A=51,010 (rounded)
McGraw-Hill/Irwin
Inc.

17-31

Allocation of variable costs:
Human
Resources
(HR)
Traceable costs ........................ $15,000
Allocation of HR
Department costs ................... (17,551)
Allocation of Administration
and Accounting
Department costs ................... 2,551*(.05)
Allocation of Patient
Records Department costs ....
(0)
Total variable cost allocated
to each direct-patient-care
department ................................
Service Departments
Administration
and
Patient
Accounting
Records
$47,500
$24,000
3,510(.20)
(51,010)
(0)
878*(.05)
-0-(0)
(24,878)
Direct-Patient-Care
Departments
Orthopedics
Internal Medicine
$4,388*(.25)
$8,776*(.50)
17,854*(.35)
30,606(.60)
7,463*(.30)
17,415*(.70)
$29,705
$56,797
*Rounded
$29,705 + $56,797 = $86,502; differs from the total variable cost ($86,500) because of cumulative rounding error.
McGraw-Hill/Irwin
17-32

Solutions Manual

2.
Fixed costs:
Notation:
R denotes the total fixed cost of Patient Records

H denotes the total fixed cost of Human Resources
A denotes the total fixed cost of Administration and Accounting
Equations:
R = 76,000 + .10H
H = 45,000 + .10A
A = 142,500 + .10H
(4)
(5)
(6)
These equations are based on the fixed costs given in Exhibit 17-2 and the long-run
usage proportions given in Exhibit 17-5.
H=45,000 + .10(142,500 + .10H)
.99H=59,250
H=59,848 (rounded)
Substitute the value of H into equations (4) and (5).
R=76,000 + .10(59,848)
R=81,985 (rounded)
A=142,500 + .10(59,848)
A=148,485 (rounded)
McGraw-Hill/Irwin
Inc.

17-33

Allocation of fixed costs:
Human
Resources
(HR)
Traceable costs ........................ $45,000
Allocation of HR
Department costs ................... (59,848)
Allocation of Administration
and Accounting
Department costs ................... 14,849*(.10)
Allocation of Patient
Records Department costs ....
-0-(0)
Total fixed cost allocated
to each direct-patient-care
department .........................
Direct-Patient-Care
Departments
Service Departments
Administration
and
Patient
Accounting
Records
$142,500
$76,000
5,985*(.10)
(148,485)
-0-(0)
Orthopedics
Internal Medicine
5,985*(.10)
$11,970*(.20)
$35,909*(.60)
-0-(0)
66,818*(.45)
66,818*(.45)
32,794(.40)
(81,985)
$111,582
*Rounded
$111,582 + $151,918 = $263,500
McGraw-Hill/Irwin
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Solutions Manual
49,191(.60)
$151,918

Total costs allocated:
Orthopedics
Variable costs ...................................................................... $29,705
Fixed costs ........................................................................... 111,582
Total costs ............................................................................ $141,287
Grand total ............................................................................
Internal
Medicine
$56,797
151,918
$208,715
$350,002*
*Differs from the total cost to be allocated ($350,000) due to cumulative rounding
error in the allocation of the variable costs.
McGraw-Hill/Irwin
Inc.

17-35
SOLUTIONS TO CASES
CASE 17-35 (40 MINUTES)
1.
Product output in kilograms:
Product
Slices..
Crushed.
Juice
Animal feed
Total.
Proportion
.35
.28
.27
.10
Total
Kilograms
94,500
75,600
72,900
27,000
270,000
Kilograms
Lost in
Processing
5,400*

5,400
Net
Kilograms
94,500
75,600
67,500*
27,000
264,600
*Evaporation loss is 8% of the remaining good output. Let X denote the remaining
quantity of juice:
72,900 .08X
72,900
1.08 X
67,500
Check: evaporation loss = (8%)(67,500) = 5,400

2.
Net realizable value at the split-off point:
Product
Slices
Crushed
Juice.
Total..
McGraw-Hill/Irwin
Inc.
17-36
Kilograms of
Production
94,500
75,600
67,500
Selling
Price
.60
.55
.30
Sales
Revenue
$56,700
41,580
20,250
$118,530
Separable Net Realizable Value

Cost
Amount Percent
$4,700
$ 52,000
52%
10,580
31,000
31%
3,250
17,000
17%
$18,530
$100,000
100%

Solutions Manual
CASE 17-35 (CONTINUED)

3.

Cutting department costs .........................................................
Less net realizable value of by-product
Sales value .............................................................................
Separable cost .......................................................................
Net realizable value of animal feed ..................................
Balance of joint cost to be allocated to main products
in proportion to net realizable value ......................................
Allocation of joint cost:
Slices.. 52% ........................................................
Crushed.. 31% ........................................................
Juice 17% ........................................................
Total ............................................................................................
McGraw-Hill/Irwin
Inc.
$60,000
$2,700
(700)
2,000
$58,000
$30,160
17,980
9,860
$58,000

17-37
CASE 17-36 (50 MINUTES)

1.
Diagram of joint production process:
10,000 liters
of input
costing
$60,000
Joint
production
process costing
$150,000
Total joint cost:

$210,000 for
a 10,000 liter
batch
McGraw-Hill/Irwin
17-38
Resoline,
sales value:
$200,000
(8,000 x $25)
Separable
process
costing: $40,000
(8,000 x $5)
Resolite,
sales value:
$280,000
(8,000 x $35)
Separable
process costing:
$30,000
(2,000 x $15)
Kryptite,
sales value:
$190,000
(2,000 x $95)
Split-off point
Krypto,
sales value:
$100,000
(2,000 x $50)

Solutions Manual

2.

a. Physical-units method:
Joint
Cost
$210,000
Joint
Products
Resoline
Krypto
Total
Quantity at
Split-Off Point
8,000 kilograms
2,000 kilograms
10,000 kilograms
Relative
Proportion
8/10
2/10
Allocation of
Joint Cost
$168,000
42,000
$210,000
Sales Value at
Split-Off Point
$200,000
100,000
$300,000
Relative
Proportion
2/3
1/3
Allocation of
Joint Cost
$140,000
70,000
$210,000
b. Relative-sales-value method:
Joint
Cost
$210,000
Joint
Products
Resoline
Krypto
Total
c. Net-realizable-value method:
Joint
Cost
Joint
Products
Resolite
$210,000 Kryptite
Sales
Value of
Final Product
$280,000
190,000
Total
McGraw-Hill/Irwin
Inc.
Separable
Cost of
Processing
$40,000
30,000
Net
Realizable
Value
$240,000
160,000
$400,000
.60
$126,000
.40
84,000
$210,000

17-39

3.
Decision analysis:
Incremental revenue per kilogram:
Sales price of Omega ............................................................
Sales price of Kryptite ...........................................................
Incremental revenue ..............................................................
$130
95
$35
Incremental cost per kilogram:*

Separable processing ...........................................................
Packaging ..............................................................................
Incremental cost ....................................................................
$40
6
Incremental loss per kilogram...................................................
46
$(11)
Conclusion: The Kryptite should not be processed further into Omega.

*Notice that these are the separable costs incurred after Kryptite has already been
produced. The separable costs of processing Krypto into Kryptite are properly
excluded.
4.
The joint cost allocation should not be used in the decision analysis. The total joint
cost will not be affected by the decision.
4.
[Final version]
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CHAPTER 17

Allocation of Support Activity Costs and Joint

A service department is a unit in an organization that is not involved directly in

2011 The McGraw-Hill Companies,

The dual-allocation approach improves the resulting cost allocations because

17-9 (a) Joint-production process: A production process in which the processing of a

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2011 The McGraw-Hill Companies,

Cost allocation using direct method:

EXERCISE 17-16 (15 MINUTES)

Cost allocation using step-down method:

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EXERCISE 17-16 (CONTINUED)

EXERCISE 17-17 (15 MINUTES)

Costs prior to allocation

Direct Customer Service

EXERCISE 17-19 (30 MINUTES)

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EXERCISE 17-20 (10 MINUTES)

*$36,000 = $60,000 .60

$24,000 = $60,000 .40

$25,740 = $60,000 .429

Incremental revenue per kilogram:

2011 The McGraw-Hill Companies,

EXERCISE 17-22 (CONTINUED)

Joint cost allocation using net-realizable-value method:

$21,600 = $60,000 .36

First, specify equations to express the relationships between the service

H denotes the total cost of Human Resources (HR)

Solution of equations: Substitute from equation (2) into equation (1).

153,000 + .15(229,500 + .10H)

Substitute the value of H into equation (2).

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EXERCISE 17-23 (CONTINUED)

Cost allocation using the reciprocal-services method:

Direct Customer Service

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Sequence for step-down method:

HR (serves 2 other service departments)

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PROBLEM 17-24 (CONTINUED)

Total cost allocated to production departments

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PROBLEM 17-25 (70 MINUTES)

Direct method combined with dual allocation:

*Short-run usage proportions (from preceding problem).

$97,055 + $82,945 = $180,000

Total fixed cost.

*Long-run proportions (from this problem)

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PROBLEM 17-25 (CONTINUED)

Variable costs ............................................................................

Step-down method combined with dual allocation:

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PROBLEM 17-25 (CONTINUED)

*Short-run usage proportions are used (from preceding problem).

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PROBLEM 17-25 (CONTINUED)

*Long-run usage proportions are used (from this problem).

Check: $402,320 + $177,680 = $580,000

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PROBLEM 17-25 (CONTINUED)

PROBLEM 17-26 (40 MINUTES)

Direct-labor hours (DLH)