ACCT112 Management Accounting: WEEK 3 (Textbook Suggested Solution)

12.2

Some of the costs of cost allocation include:

additional bookkeeping;
additional management costs in selecting allocation methods and allocation bases; and
costs of making the wrong decision if the allocations provide misleading information.

12.3

Some of the benefits of cost allocation include:

instilling responsibility for all costs of the company in the division managers;
relating indirect costs to contracts, jobs and products; and
constructing performance measures (net profit) for a division that may be more
meaningful to management than contribution margins.

12.8

Allocations usually begin from the service department that has provided the greatest
proportion of its services to other departments, or that services the greatest number of
other service departments. This criterion is used to minimize the unrecognized portion of
reciprocal service department costs. (Recall that the amount of service received by the first
department to allocate in the step allocation sequence is ignored.)

12.11 The allocation of Jacks overhead costs to the counter space is, for the most part, foolish.
Jack faces a business decision, not an allocation problem. The key issues that Jack should
consider are (1) the incremental costs and benefits of adding the crisps and (2) the
opportunity costs of the counter space. In addition to the costs of the crisps and the rack,
Jack might incur a small cost for ordering crisps, stocking the rack, recording the sales and
keeping that part of the counter clean. But these costs are likely to be minimal. Jack
should consider the impact of the sale of crisps on other products. Does having the rack of
crisps mean that some customers will buy a bag instead of buying food from the kitchen?
Finally, Jack should consider the opportunity cost of the counter space. If the crisps truly
take up a dead spot, then the opportunity cost might be zero. However, presumably, Jack
could put something else for sale, such as candy or newspapers, at the dead spot.

12.32 (45 min) Step method with three service departments

a.

Allocation of costs using the step method

Building
Human
Equipment Mechanical Body Work
Occupancy resources Maintenance
Repair
500
1,200
1,000
1,400
4,500
10
6
7
40
50
500
1,200
1,000
1,400
4,500
10
6
7
40
50

Allocation Base
Building area, m2
Employees
Equipment value
Budgeted departmental
costs
Allocation of service
Building
Human
Equipment
Mechanical Body Work Total
costs
Occupancy resources Maintenance Repair
Building area, m2
1,200
1,000
1,400
4,500
8,100
Proportion of Building
14.81%
12.35%
17.28%
55.56%
100.00%
area m2
Allocation of Building
(600,000)
88,889
74,074
103,704
333,333
occupancy cost
Number of employees
0
0
7
40
50
97
Proportion of number of
7.22%
41.24%
51.55%
100.00%
employees
Human resources direct
787,500
cost
Allocation of adjusted
(876,389)
63,245
361,397
451,747
Human resources cost
Value of equipment
0
0
0
810,000
748,500 1,558,500
Proportion value of
51.97%
48.03%
100.00%
equipment
Equipment direct cost
465,000
Allocation of adjusted
Equipment cost
Total allocated service
costs to jobs
b.

(602,319)
0

313,043

289,275

--

778,145 1,074,355

Calculation of service costs per unit

Department

Mechanical Repair
Body Work

Allocated service
costs
778,145
1,074,355

Units
produced

Unit cost

1,250
1,250

The company met managements standards of keeping service department

costs below 750 per unit in Mechanical Repair, but not in Body Work.

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