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Summary Chapter 15 Cost Allocation - Problems Step by Step Solutions with full explanations
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- Adm3346 (ADM3346)
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- University Of Ottawa (U Of O )
Problems Step by Step Solutions with full explanations of chapter 15
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CHAPTER 15ALLOCATION OF SUPPORT-DEPARTMENT COSTS,
COMMON COSTS, AND REVENUES
15-1 The single-rate (cost-allocation) method makes no distinction between fixed costs and
variable costs in the cost pool. It allocates costs in each cost pool to cost objects using the same
rate per unit of the single allocation base. The dual-rate (cost-allocation) method classifies costs
in each cost pool into two pools—a variable-cost pool and a fixed-cost pool—with each pool
using a different cost-allocation base.
15-2 The dual-rate method provides information to division managers about cost behavior.
Knowing how fixed costs and variable costs behave differently is useful in decision making.
15-3 Budgeted cost rates motivate the manager of the support department to improve
efficiency because the support department bears the risk of any unfavorable cost variances.
15-4 Examples of bases used to allocate support department cost pools to operating
departments include the number of employees, square feet of space, number of direct labor
hours, and machine-hours.
15-5 The use of budgeted indirect cost allocation rates rather than actual indirect rates has
several attractive features to the manager of a user department:
a. the user knows the costs in advance and can factor them into ongoing operating
choices,
b. the cost allocated to a particular user department does not depend on the amount of
resources used by other user departments, and
c. inefficiencies at the department providing the service do not affect the costs allocated
to the user department.
15-6 Disagree. Allocating costs on “the basis of estimated long-run use by user department
managers” means department managers can lower their cost allocations by deliberately
underestimating their long-run use (assuming all other managers do not similarly underestimate
their usage).
15-7 The three methods differ in how they recognize reciprocal services among support
departments:
a. The direct (allocation) method ignores any services rendered by one support
department to another; it allocates each support department’s costs directly to the
operating departments.
b. The step-down (allocation) method allocates support-department costs to other
support departments and to operating departments in a sequential manner that
partially recognizes the mutual services provided among all support departments.
c. The reciprocal (allocation) method allocates support-department costs to operating
departments by fully recognizing the mutual services provided among all support
departments.
15-1
,15-8 The reciprocal method is theoretically the most defensible method because it fully
recognizes the mutual services provided among all departments, irrespective of whether those
departments are operating or support departments.
15-9 The stand-alone cost-allocation method uses information pertaining to each user of a cost
object as a separate entity to determine the cost-allocation weights.
The incremental cost-allocation method ranks the individual users of a cost object in the
order of users most responsible for the common costs and then uses this ranking to allocate costs
among those users. The first-ranked user of the cost object is the primary user and is allocated
costs up to the costs of the primary user as a stand-alone user. The second-ranked user is the first
incremental user and is allocated the additional cost that arises from two users instead of only the
primary user. The third-ranked user is the second incremental user and is allocated the additional
cost that arises from three users instead of two users, and so on.
The Shapley Value method calculates an average cost based on the costs allocated to each
user as first the primary user, the second-ranked user, the third-ranked user, and so on.
15-10 All contracts with U.S. government agencies must comply with cost accounting standards
issued by the Cost Accounting Standards Board (CASB).
15-11 Areas of dispute between contracting parties can be reduced by making the “rules of the
game” explicit and in writing at the time the contract is signed.
15-12 Companies increasingly are selling packages of products or services for a single price.
Revenue allocation is required when managers in charge of developing or marketing individual
products in a bundle are evaluated using product-specific revenues.
15-13 The stand-alone revenue-allocation method uses product-specific information on the
products in the bundle as weights for allocating the bundled revenues to the individual products.
The incremental revenue allocation method ranks individual products in a bundle
according to criteria determined by management—such as the product in the bundle with the
most sales—and then uses this ranking to allocate bundled revenues to the individual products.
The first-ranked product is the primary product in the bundle. The second-ranked product is the
first incremental product, the third-ranked product is the second incremental product, and so on.
15-14 Managers typically will argue that their individual product is the prime reason why
consumers buy a bundle of products. Evidence on this argument could come from the sales of the
products when sold as individual products. Other pieces of evidence include surveys of users of
each product and surveys of people who purchase the bundle of products.
15-15 A dispute over allocation of revenues of a bundled product could be resolved by (a)
having an agreement that outlines the preferred method in the case of a dispute, or (b) having a
third party (such as the company president or an independent arbitrator) make a decision.
15-2
,15-16 (20 min.) Single-rate versus dual-rate methods, support department.
Bases available (kilowatt hours):
Rockford Peoria Hammond Kankakee Total
Practical capacity 10,000 20,000 12,000 8,000 50,000
Expected monthly usage 8,000 9,000 7,000 6,000 30,000
1a. Single-rate method based on practical capacity:
Total costs in pool = $6,000 + $9,000 = $15,000
Practical capacity = 50,000 kilowatt hours
Allocation rate = $15,000 ÷ 50,000 = $0.30 per hour of capacity
Rockford Peoria Hammond Kankakee Total
Practical capacity in hours 10,000 20,000 12,000 8,000 50,000
Costs allocated at $0.30 per hour $3,000 $6,000 $3,600 $2,400 $15,000
1b. Single-rate method based on expected monthly usage:
Total costs in pool = $6,000 + $9,000 = $15,000
Expected usage = 30,000 kilowatt hours
Allocation rate = $15,000 ÷ 30,000 = $0.50 per hour of expected usage
Rockford Peoria Hammond Kankakee Total
Expected monthly usage in hours 8,000 9,000 7,000 6,000 30,000
Costs allocated at $0.50 per hour $4,000 $4,500 $3,500 $3,000 $15,000
2. Variable-Cost Pool:
Total costs in pool = $6,000
Expected usage = 30,000 kilowatt hours
Allocation rate = $6,000 ÷ 30,000 = $0.20 per hour of expected usage
Fixed-Cost Pool:
Total costs in pool = $9,000
Practical capacity = 50,000 kilowatt hours
Allocation rate = $9,000 ÷ 50,000 = $0.18 per hour of capacity
Rockford Peoria Hammond Kankakee Total
Variable-cost pool
$0.20 × 8,000; 9,000; 7,000, 6,000 $1,600 $1,800 $1,400 $1,200 $ 6,000
Fixed-cost pool
$0.18 × 10,000; 20,000; 12,000, 8,000 1,800 3,600 2,160 1,440 9,000
Total $3,400 $5,400 $3,560 $2,640 $15,000
The dual-rate method permits a more refined allocation of the power department costs; it permits
the use of different allocation bases for different cost pools. The fixed costs result from decisions
most likely associated with the scale of the facility, or the practical capacity level. The variable
costs result from decisions most likely associated with monthly usage.
15-3
, 15-17 (20–25 min.) Single-rate method, budgeted versus actual costs and quantities.
Budgeted indirect costs
1. a. Budgeted rate = = $115,000/50 trips = $2,300 per round-trip
Budgeted trips
Indirect costs allocated to Dark C. Division = $2,300 per round-trip × 30 budgeted round trips
= $69,000
Indirect costs allocated to Milk C. Division = $2,300 per round-trip × 20 budgeted round trips
= $46,000
b. Budgeted rate = $2,300 per round-trip
Indirect costs allocated to Dark C. Division = $2,300 per round-trip × 30 actual round trips
= $69,000
Indirect costs allocated to Milk C. Division = $2,300 per round-trip × 15 actual round trips
= $34,500
Actual indirect costs
c. Actual rate = = $96,750/ 45 trips = $2,150 per round-trip
Actual trips
Indirect costs allocated to Dark C. Division = $2,150 per round-trip × 30 actual round trips
= $64,500
Indirect costs allocated to Milk C. Division = $2,150 per round-trip × 15 actual round trips
= $32,250
2. When budgeted rates/budgeted quantities are used, the Dark Chocolate and Milk
Chocolate Divisions know at the start of 2012 that they will be charged a total of $69,000 and
$46,000 respectively for transportation. In effect, the fleet resource becomes a fixed cost for each
division. Then, each may be motivated to over-use the trucking fleet, knowing that their 2012
transportation costs will not change.
When budgeted rates/actual quantities are used, the Dark Chocolate and Milk Chocolate
Divisions know at the start of 2012 that they will be charged a rate of $2,300 per round trip, i.e.,
they know the price per unit of this resource. This enables them to make operating decisions
knowing the rate they will have to pay for transportation. Each can still control its total
transportation costs by minimizing the number of round trips it uses. Assuming that the budgeted
rate was based on honest estimates of their annual usage, this method will also provide an
estimate of the excess trucking capacity (the portion of fleet costs not charged to either division).
In contrast, when actual costs/actual quantities are used, the two divisions must wait until year-
end to know their transportation charges.
The use of actual costs/actual quantities makes the costs allocated to one division a
function of the actual demand of other users. In 2012, the actual usage was 45 trips, which is 5
trips below the 50 trips budgeted. The Dark Chocolate Division used all the 30 trips it had
budgeted. The Milk Chocolate Division used only 15 of the 20 trips budgeted. When costs are
allocated based on actual costs and actual quantities, the same fixed costs are spread over fewer
15-4
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