Solutions to questions due on 19th Dec 2014

Question 1:
a) False
b) True
c) True
Question 2: The reciprocal method is the most correct approach from a conceptual
viewpoint. This method fully recognizes all services provided by service departments.
The direct method completely ignores the fact that service departments service each other.
The step-down method recognizes only some of these services, as once a department is
closed out, no cost is reallocated back to it.
Question 3:
a) Predetermined Overhead Rate = $1,330,000/175,000 DLH = $7.60 per DLH. Add the
budgeted overhead for the two departments, and divide by the total expected direct labor
hours (DLH = 150,000 + 25,000).
b)
Direct materials
Direct labor ($12 5,400 DLH)
Overhead ($7.60 5,400 DLH)
Total manufacturing costs
Unit cost ($835,840/10,000 units)

$730,000
64,800
41,040
$835,840
$83.58

$330, 000
$2.20per DLH
150, 000
$1, 000, 000

$8 per machine hour

125, 000

Predetermined Rate for Assembly

c).

Predetermined Rate for Finishing

Direct materials
Direct labor
Overhead:
Assembly ($2.20 5,000 DLH)
Finishing ($8 1,200 mhrs)
Total manufacturing costs
Unit cost ($815,400/10,000 units)

$730,000
64,800
11,000
9,600
$815,400
$81.54

Question 4
a)

Initial allocation
Reallocate S1
Reallocate S2

S1
$84,000
(84,000)
-

S2
$63,000
(63,000)

P1
$90,000
$35 000
49 000
174 000

P2
$120,000
$49 000
$14 000
183 000

b)

Initial
allocation
Reallocate S1
Reallocate S2

c)

S1
$84,000
(84,000)
-

S2
$63,000
$33 600
(96,600)

P1
$90,000

P2
$120,000

$21 000
75 133
186 133

$29 400
$21 467
170 867

S1 = 0.1S2 + 84000
S2 = 0.4S1 + 63000
Substituting:
S1 = 0.1(0.4S1 + 63000) + 84000
S1 = 0.04S1 + 6300 + 84000
0.96S1 = 90300
S1 = $94,062.50
S2 = $100,625.00

Initial
allocation
Reallocate S1
Reallocate S2

S1
$84,000

S2
$63,000

P1
$90,000

P2
$120,000

(94,062.50)
10,062.50
-

37,625
(100,625)
-

23,515.63
70,437.50
183,953.13

32,921.88
20,125.00
173,046.88

In class question solutions:

P7.31 from textbook:
1
Total budgeted overhead
= $180 000 + $90 000 = $270 000
Budgeted direct labour hours = 15 000 + 60 000 = 75 000
Predetermined overhead rate = $270 000/75 000 = $3.60 per direct labour hour
2

Laser:
21 000 hours $3.60 = $75 600 (overhead)
[$75 600 + $60 000 (prime costs)]/7500 units = $18.08 per unit
Inkjet:
62 000 hours $3.60 = $223 200 (overhead)
[223 200 + $450 000 (prime costs)]/75 000 units = $8.98 per unit (rounded)

Departmental overhead rates:

Fabrication = $180 000/30 000
Assembly
= $90 000/60 000

Laser:

= $6 per machine hour

= $1.50 per direct labour hour

Applied overhead
= (10 000 $6) + (20 000 $1.50) = $90 000
Cost per unit = 90 000 + 60 000
= 150 000/7500
= $20 per unit
Inkjet:
Applied overhead
= (20 000 $6) + (48 000 1.50)
= $192 000
Cost per unit = 192 000 + 450 000 = 642 000/75 000
= $8.56 per unit
5
(a)
Plantwide overhead rate:
Applied overhead (83 000 labour hours $3.60)
Actual overhead
300 000
Underapplied overhead
$1 200

(b) Departmental overhead rates:

Applied overhead (30 000 machine hours $6)
Applied overhead (68 000 labour hours $1.50)
Total applied overhead
$282 000
Actual overhead
300 000
Underapplied overhead
$18 000
6

$298 800

$180 000 in Fabrication

$102 000 in Assembly

One would expect the departmental overhead rates to be the best approach. However, in
this case the plantwide rate results in less underapplied/overapplied overhead. Perhaps
direct labour hours is a better cost driver for Fabrication than machine hours. As the
question does not identify the actual overhead costs for each department separately, it is
not possible to identify which department contributes most to the underapplied
overhead and, therefore, assess the appropriateness of each departments cost driver.

E7.27

Direct customer service departments using services

Deposit
Loan
Provider of service
Human Resources
Computing
Total
Grand total

Cost to be
allocated
$360 000
600 000
$960 000

Proportion
Amount
(50/80)
$225 000
(60/80)
450 000
$675 000

Proportion
(30/80)
(20/80)

$960 000

Amount
$135 000
150 000
$285 000

E7.28

Costs prior to allocation

Allocation of Human
Resources Department
costs
Allocation of Computing
Department costs
Total costs allocated to
each department
Total cost allocated to
direct customer service
departments

Human
resources Computing
$360 000 $600 000

$360 000

Direct customer service departments

using services
Deposit
Loan

72 000 (2/10) $180 000 (5/10)

$672 000

504 000(60/80)
$684 000

$108 000

(3/10)

168 000 (20/80)

$276 000

$ 960 000

E7.29
First, specify equations to express the relationships between the support departments.
Notation:
H denotes the total cost of Human Resources
C denotes the total cost of Computing
Equations:
H = 360 000 + 0.20C (1)
C = 600 000 + 0.20H (2)
Solution of equations: Substitute from equation (2) into equation (1).
H = 360 000 + 0.20(600 000 + 0.20H)
= 360 000 + 120 000 +0 .04H
0 .96H = 480 000
H = 500 000
Substitute the value of H into equation (2).
C = 600 000 + 0.20(500 000)
C = 700 000
Next, use the calculated total allocation figures in the cost allocation using the reciprocal
services method:

Traceable costs
Allocation of Human
Resources Department
costs
Allocation of
Computing Department
costs
Total cost allocated to
each direct customer
service department
Total costs allocated

Support departments
Human
Resources
Computing
$360 000
$600 000

Direct customer service

departments
Deposit

Loan

(500 000)

100 000(0.2)

$250 000(0.5) $150 000(0.3)

140 000(0.2)

(700 000)

420 000(0.6) 140 000(0.2)

$670 000

$290 000

$960 000