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5.

17

Q1, Q2, Q3
Job costing, service sector Consider the following budgeted data for a
client job of Bob Crachits accounting firm. The client wants a fixed price
quotation.
Direct professional labor
Direct support labor
Fringe benefits for direct labor
Photocopying
Telephone calls
Computer equipment

$20,000
10,000
13,000
2,000
2,000
6,000

Overhead is allocated at the rate of 100% of direct labor cost.


REQUIRED:
A. Prepare a schedule of the budgeted total costs for the client. Show subtotals for
total direct labor costs and total costs as a basis for markup.
B. Assume that the partners policy is to quote a fixed fee at 10% above the total
costs. What fee would be quoted?
C. Explain why the listed estimates for costs might not be similar to the actual costs
for the job. What factors could affect the accuracy of these estimates? List as
many factors as you can.
Schedule below with subtotals summarizes the costs.

Direct Professional Labor


Direct Support Labor
Total Direct Labor Costs

$20,000
$10,000
$30,000

Fringe Benefit for Direct Labor


Photocopying
Telephone Calls
Computer Equipment
Total Direct Costs

$13,000
$2,000
$2,000
$6,000
$53,000

+ Overhead
Total Cost

$30,000
$83,000

+ Fixed Fee (10% of Total Cost)


Quoted Price

$8,300
$91,300

The direct labor may be incurred from the estimate as well the other costs, more or
less, because the number of clients is not known. The factors that can affect the
accuracy of the estimates are a proper system for photocopying costs, telephone
costs, and fringe benefit costs. It would seem at the moment the current methods
of recording these costs are too unreliable for these estimates to be credible.

6.55

Q1, Q8

Costs of workplace health and safety Britains Health and Safety


Executive (HSE) is a national regulatory body overseeing workplace health and
safety. In its 2007 performance report, HSE reported the following statistics:

241 workers were killed at work.

141,350 employees suffered serious injuries at work.

2.2 million people were suffering from an illness they believed was
caused or made worse by their current or past work. 646,000 of these were
new cases in the last 12 months.

36 million days were lost overall (1.5 days per worker), 30 million due to
work-related ill health and 6 million due to workplace injury.

20 billion (approximately 2% of GDP) is the estimated annual cost to


society of work-related accidents and ill health.

To promote improved health and safety, HSE provides strategic direction,


investigates and enforces regulations, and works with employers and other
groups to promote better workplace practices. HSE provides guidance for

common sources of injury or illness, including the following.

Slips, trips and falls

Hazardous substances such as chemicals, dust, fumes, and bacteria

Musculoskeletal disorders

Noise

Electricity

Work equipment and machinery

Maintenance and building work

Workplace transport

Fire and explosion

Radiation

Stress

SOURCE: HSE, Performance Report 2007 and An Introduction to Health and


Safety, available atwww.hse.gov.uk (accessed June 2, 2010).
REQUIRED:
A. Employers incur many costs because of health and safety issues, including:

Lost worker time

Employer-paid medical costs

Training to replace workers who are ill or injured

Record-keeping to comply with governmental regulation


How would each of these costs be recognized in a process costing system?

B. Who is responsible for workplace health and safety? Discuss the responsibilities
for each of the following groups:

Governments

Employers

Managers

Workers

Customers

C. What goal should an individual company establish for workplace health and
safety? Should the goal be to meet government regulations? Should the goal be to
experience zero health and safety incidents? Or is some other goal appropriate?
What values did you use to arrive at your answer?
Work place health and safety should be responsibility of all groups involved. The
government needs to be the top when it comes to regulating the activities of
industries. Maintaining a healthy work environment needs to be top priority and be
reflected in the rules and regulations. The worker should show up to work with the
right state of mind and with the proper safety measures that are necessary to
adequately perform tasks required. It is important for each and every worker to be
aware of the risks and to take responsibility for his or her own health as well as
those of their coworkers. The employer is probably the most responsible of all
parties as they have the most control of what conditions exist in the environment at
their job. They are to provide a safe and healthy workplace, follow all rules and
regulations and any recommended guidelines, and ensure that workers are properly
trained and that their managers and supervisor are competent and reliable to deal
with workers. Finally, customers are not really related to the workplace in any way
other than that they are guests and that it should be common sense that any areas
that customers are able to access are safe and healthy at all times, no questions
asked.

The survey shows that every year an unreasonably high amount of people are
suffering death or serious injury as a result of hazardous or unhealthy conditions in
the workplace. The costs for such are astronomical when you realize that such
things can be easily avoided. The industry should provide adequate training to
handle any dangerous equipment, safety training, regular fire drills, etc. In order to
keep the workplace healthy, there should be limited amount of environmental
pollution, as well as any workers who are sick or have severe illnesses should be
encouraged to stay home in order to prevent the spread of the illness throughout

the workplace. The goal should be to follow regulations and to whatever possible to
reduce the health and safety issues. A start would be to slowly decrease the
amount of death and injuries reported in the survey above. However, you must
always be able to adapt as nothing is set in stone and you must be able to handle
any and all health issues that come your way.

7.21

Q1, Q3, Q4
ABC, ABM (CMA) Applewood Electronics manufactures two large-screen
television models, the Monarch, which has been produced for five years and
sells for $900, and the Regal, a new model that sells for $1,140. Applewoods
CEO, Harry Hazelwood, suggested that the company should concentrate its
marketing resources on the Regal model and begin to phase out the Monarch
model.
Applewood currently uses a traditional costing system. The following cost
information has been used as a basis for pricing decisions over the past year.
Per-Unit Data
Direct materials
Direct labor hours
Machine hours
Units produced

Monarch
$208
1.5
8.0
22,000

Regal
$584
3.5
4.0
4,000

Direct labor cost is $12 per hour, and the machine usage cost is $18 per
hour. Manufacturing overhead costs were estimated at $4,800,000 and were
allocated on the basis of machine hours.
Martin Alecks, the new company controller, suggested that an activity-based
costing analysis first be run to get a better picture of the true manufacturing cost.
The following data were collected:
Activity Center
Soldering
Shipments
Quality control
Purchase orders
Machining
Machine setups

Cost Driver
Number of solder joints
Number of shipments
Number of inspections
Number of orders
Machine hours
Number of setups
Total traceable costs

Traceable Costs
$ 942,000
860,000
1,240,000
950,400
57,600
750,000
$4,800,000

Activity Center
Soldering
Shipments

Cost Driver
Number of solder joints
Number of shipments

Traceable Costs
$ 942,000
860,000

Activity
Soldering
Shipments
Quality control
Purchase orders
Machining
Machine setups

Number of Events
Regal
385,000
3,800
21,300
109,980
16,000
14,000

Total
1,570,000
20,000
77,500
190,080
192,000
30,000

Monarch
1,185,000
16,200
56,200
80,100
176,000
16,000

Selling, general, and administrative expenses per unit sold are $265.00 for
Monarch and $244.50 for Regal.
REQUIRED:
A. Calculate the manufacturing cost per unit for Monarch and Regal under:
1. A traditional costing system
2. The ABC system
B. Explain the differences in manufacturing cost per unit calculated in part (A).
C. Calculate the operating profit per unit for Monarch and Regal under:
1. A traditional costing system
2. The ABC system
D. Should Applewood concentrate its marketing efforts on Monarch or on Regal?
Explain how the use of ABC affects your recommendation.
In the traditional method, the cost is allocated based on machine hours regardless
of the driver of the cost being allocated. Also, machine hours used for monarch are
way higher than for Regals, so any cost allocation for Monarch would be way higher
than Regals, as well.
C. The operating profit for Monarch under a traditional costing system would be
$4,598,000 while for Regal it would be substantially less at $678,000. Under the
ABC costing system, Monarch profit increases to $5,837,900 while Regals drops to
$561,900.
D. I mean, it is quite obvious they should focus on Monarch. They are way more
profitable and make good money, while Regal is not as profitable and under the ABC
method is dangerously close to being a loss.

8.25
5

Q2, Q3, Q4, Q5, Q7


Step-down, direct, and reciprocal methods, accuracy of allocation
(Appendix 8A) Software Plus Corporation produces flight and driving
simulations and games for personal computers. The president has a complaint
about the accounting for support department costs. He points to the following
table describing the use of various support departments in the company and
says, According to this table, every department receives services from all the
support departments. But I understand that only some of the support
departments are bearing costs from the other support departments. Why is
that?

Percent Use of Services


Games
Simulation
Support
Administratio Maintenanc Informatio Manufacturin Manufacturin
Department Cost
n
e
n Systems
g
g
Administratio $40,00
0%
10%
50%
10%
30%
n
0
Maintenance 20,000
20
0
10
40
30
Information 50,000
35
5
0
40
20
systems
REQUIRED:
A. What method has Software Plus Corporation been using to allocate support
costs? Explain how you know.
B. Which method would ignore all interactions among support departments?
Explain.
C. Which method would consider all interactions among support departments?
Explain.
D. Allocate the support department costs to Games and Simulations using the stepdown method. Explain how you decided which departments costs to allocate
first.
E. Allocate the support department costs using the direct method.
F. Allocate the support department costs using the reciprocal method.
G. In your own words, explain how the step-down method improves upon the direct
method.
H. In your own words, explain how the reciprocal method improves upon the stepdown method.

A. Software Plus has been using the step-down method which you can tell because
the costs of support departments are allocated one at a time. Once the costs of a
particular support department are allocated, that department does not receive
allocations from the remaining support departments.
B. The direct method ignores all of the support department interactions. The costs
of all support departments are allocated directly to operating departments. No
support department costs are allocated to other support e departments.
C. The reciprocal method uses all of the support department interactions. The costs
of support departments are allocated simultaneously to each other, and then
support department costs are allocated to operating departments.
D. First system would be the Information System because it is largest with respect
to direct support department costs. Administration is the next largest support
department, so it is allocated second. When reviewing the allocation for
Administration, remember that Information Systems is now dropped from the
allocation calculations, so the allocation percentages need to be adjusted. The final
support department allocated is Maintenance because costs for all other support
departments have already been allocated, Maintenance costs are allocated only to
the operating departments.
E.

Direct Method

Direct Support Costs


Allocations:
Administration
Maintenance
Information Systems
Total Allocated Costs

$40,000

$20,000

$50,000

(40,000)
0
0
$0

0
(20,000)
0
$0

0
0
(50,000)
$0

5
F. Reciprocal Method

Direct Support Costs


Allocations:
Information Systems
Administration
Maintenance
Total Allocated Costs

$40,000

$20,000

$50,000

17,500
(57,500)
0
$0

2,500
10,500
(34,000)
$0

(50,000)
0
0
$0

G. The direct method does not reflect any of the interactions among support
departments. The step-down method improves upon this by allocating the costs of
each support department to other support departments and operating departments,
starting with the department that provides the most service. After each
departments cost is allocated, that department drops out of the allocation scheme,
so that not all interactions are reflected, but at least some of them are.
H. The reciprocal method improves upon the step-down method by reflecting all of
the support department interactions.