16-1. Distinguish between the single-rate and the dual-rate methods.
16-2. Describe how the dual-rate method is useful to division managers in decision making.
16-3. How do budgeted cost rates motivate the support-department manager to improve efficiency?
16-4. Give examples of allocation bases used to allocate support-department cost pools to operating departments.
16-5. Why might a manager prefer that budgeted rather than actual cost-allocation rates be used for costs being allocated to his or her department from another department?
16-6. “To ensure unbiased cost allocations, fixed costs should be allocated on the basis of estimated long-run use by user-department managers.” Do you agree? Why?
16-7. Distinguish among the three methods of allocating the costs of multiple support departments to operating departments.
16-8. What is conceptually the most defensible method for allocating multiple support-department costs? Why?
16-9. Distinguish between two methods of allocating common costs.
16-10. What are the challenges of using the incremental cost allocation method when allocating common costs and how might they be overcome?
16-11. What role does the Cost Accounting Standards Board play when companies contract with the U.S. government?
16-12. What is one key way to reduce cost-allocation disputes that arise with government contracts?
16-13. Describe why companies are increasingly facing revenue-allocation decisions.
16-14. Distinguish between the stand-alone and the incremental revenue-allocation methods.
16-15. Identify and discuss arguments that individual product managers may put forward to support their preferred revenue-allocation method.
Exercises
16-16. SINGLE-RATE VERSUS DUAL-RATE METHODS, SUPPORT DEPARTMENT. The Cincinnati power plant that services all manufacturing departments of Eastern Mountain Engineering has a budget for the coming year. This budget has been expressed in the following monthly terms:
The table depicts kilowatt-hours needed at practical capacity production level and average expected monthly usage in kilowatt-hours for the Loretta, Bently, Melboum, and Eastmoreland departments, as well as the totals. The details of the table are as follows:
1. Loretta manufacturing department
• Kilowatt-hours needed at practical capacity production level: 13,000• Average expected monthly usage in kilowatt-hours: 10,000
2. Bently manufacturing department
• Kilowatt-hours needed at practical capacity production level: 21,000• Average expected monthly usage in kilowatt-hours: 9,000
3. Melboum manufacturing department
• Kilowatt-hours needed at practical capacity production level: 14,000• Average expected monthly usage in kilowatt-hours: 10,000
4. Eastmoreland manufacturing department
• Kilowatt-hours needed at practical capacity production level: 32,000• Average expected monthly usage in kilowatt-hours: 11,000
5. Total
• Kilowatt-hours needed at practical capacity production level: 80,000• Average expected monthly usage in kilowatt-hours: 40,000
The expected monthly costs for operating the power plant during the budget year are $20,000: $8,000 variable and $12,000 fixed.
Required
1. Assume that a single cost pool is used for the power plant costs. What budgeted amounts will be allocated to each manufacturing department if (a) the rate is calculated based on practical capacity and costs are allocated based on practical capacity and (b) the rate is calculated based on expected monthly usage and costs are allocated based on expected monthly usage?
2. Assume the dual-rate method is used with separate cost pools for the variable and fixed costs. Variable costs are allocated on the basis of expected monthly usage. Fixed costs are allocated on the basis of practical capacity. What budgeted amounts will be allocated to each manufacturing department? Why might you prefer the dual-rate method?
16-17. SINGLE-RATE METHOD, BUDGETED VERSUS ACTUAL COSTS AND QUANTITIES. Chocolat Inc. is a producer of premium chocolate based in Palo Alto. The company has a separate division for each of its two products: dark chocolate and milk chocolate. Chocolat purchases ingredients from Wisconsin for its dark chocolate division and from Louisiana for its milk chocolate division. Both locations are the same distance from Chocolat’s Palo Alto plant.
Chocolat Inc. operates a fleet of trucks as a cost center that charges the divisions for variable costs (drivers and fuel) and fixed costs (vehicle depreciation, insurance, and registration fees) of operating the fleet. Each division is evaluated on the basis of its operating income. For 2020, the trucking fleet had a practical capacity of 50 round-trips between the Palo Alto plant and the two suppliers. It recorded the following information:
Details of cost and number of round-trips for dark chocolate and milk division.
Budgeted
Costs of truck fleet: $115,000
Number of round-trips for dark chocolate division (Palo Alto plant—Wisconsin): 30
Number of round-trips for milk chocolate division (Palo Alto plant—Louisiana): 20
Actual
Costs of truck fleet: $96,750
Number of round-trips for dark chocolate division (Palo Alto plant—Wisconsin): 30
Number of round-trips for milk chocolate division (Palo Alto plant—Louisiana): 15
Required
Using the single-rate method, allocate costs to the dark chocolate division and the milk chocolate division in these three ways.
Calculate the budgeted rate per round-trip and allocate costs based on round-trips budgeted for each division.
Calculate the budgeted rate per round-trip and allocate costs based on actual round-trips used by each division.
Calculate the actual rate per round-trip and allocate costs based on actual round-trips used by each division.
Describe the advantages and disadvantages of using each of the three methods in requirement 1. Would you encourage Chocolat Inc. to use one of these methods? Explain and indicate any assumptions you made.
16-18. DUAL-RATE METHOD, BUDGETED VERSUS ACTUAL COSTS AND QUANTITIES (CONTINUATION OF 16-17). Chocolat Inc. decides to examine the effect of using the dual-rate method for allocating truck costs to each round-trip. At the start of 2020, the budgeted costs were
The table depicts budgeted costs for 2020 for Chocolat Inc. The details of the table are as follows:
1. Variable cost per round-trip: 1,350 dollars
2. Fixed costs: 47,500 dollars
The actual results for the 45 round-trips made in 2020 were
The table depicts actual costs for the 45 round-trips made in 2020 for Chocolat Inc. The details of the table are as follows:
1. Variable costs: 58,500 dollars
2. Fixed costs: 38,250 dollars
3. Total: 96,750 dollars
Assume all other information to be the same as in Exercise 16-17.
Required
Using the dual-rate method, what are the costs allocated to the dark chocolate division and the milk chocolate division when (a) variable costs are allocated using the budgeted rate per round-trip and actual round-trips used by each division and when (b) fixed costs are allocated based on the budgeted rate per round-trip and round-trips budgeted for each division?
From the viewpoint of the dark chocolate division, what are the effects of using the dual-rate methodrather than the single-rate method?
16-19. SUPPORT-DEPARTMENT COST ALLOCATION; DIRECT AND STEP-DOWN METHODS. Phoenix Partners provides management consulting services to government and corporate clients. Phoenix has two support departments—administrative services (AS) and information systems (IS)—and two operating departments—-government consulting (GOVT) and corporate consulting (CORP). For the first quarter of 2020, Phoenix’s cost records indicate the following:
Details of the services and consultancies are as follows:
Support department: Administrative services (AS)
Budgeted overhead costs before any interdepartment cost allocations: $600,000
Support work supplied by Administrative Services (budgeted head count): Nil
Support work supplied by Information Services (budgeted computer time): 10%
Support department: Information services (AS)
Budgeted overhead costs before any interdepartment cost allocations: $2,400,000
Support work supplied by Administrative Services (budgeted head count): 25%
Support work supplied by Information Services (budgeted computer time): Nil
Operating department: Government consulting (GOVT)
Budgeted overhead costs before any interdepartment cost allocations: $8,756,000
Support work supplied by Administrative Services (budgeted head count): 40%
Support work supplied by Information Services (budgeted computer time): 30%
Operating department: Corporate consulting (CORP)
Budgeted overhead costs before any interdepartment cost allocations: $24,208,000
Support work supplied by Administrative Services (budgeted head count): 100%
Support work supplied by Information Services (budgeted computer time): 100%
Required
Allocate the two support departments’ costs to the two operating departments using the following methods:
Direct method
Step-down method (allocate AS first)
Step-down method (allocate IS first)
2. Compare and explain differences in the support-department costs allocated to each operating department.
3. What approaches might be used to decide the sequence in which to allocate support departments when using the step-down method?
REQUIRED
16-20. SUPPORT-DEPARTMENT COST ALLOCATION, RECIPROCAL METHOD (CONTINUATION OF16-19). Refer to the data given in Exercise 16-19.
Required
1. Allocate the two support departments’ costs to the two operating departments using the reciprocal method. Use (a) linear equations and (b) repeated iterations.
2. Compare and explain differences in requirement 1 with those in requirement 1 of Exercise 16-19. Which method do you prefer? Why?
16-21.DIRECT AND STEP-DOWN ALLOCATION.E-books, an online book retailer, has two operating departments—corporate sales and consumer sales—and two support departments—human resources and information systems. Each sales department conducts merchandising and marketing operations independently. E-books uses number of employees to allocate human resources costs and processing time to allocate information systems costs. The following data are available for September 2020:
The details of cost, employees, and work supplied are as follows:
Support Department: Human resources
Budgeted costs incurred before any interdepartment cost allocations: $72,700
Support work supplied by human resources department
Budgeted number of employees: Nil
Support work supplied by information systems department
Budgeted processing time (in minutes): 320
Support Department: Information systems
Budgeted costs incurred before any interdepartment cost allocations: $234,400
Support work supplied by human resources department
Budgeted number of employees: 21
Support work supplied by information systems department
Budgeted processing time (in minutes): Nil
Operating Department: Corporate sales
Budgeted costs incurred before any interdepartment cost allocations: $998,270
Support work supplied by human resources department
Budgeted number of employees: 42
Support work supplied by information systems department
Budgeted processing time (in minutes): 1,920
Operating Department: Consumer sales
Budgeted costs incurred before any interdepartment cost allocations: $489,860
Support work supplied by human resources department
Budgeted number of employees: 28
Support work supplied by information systems department
Budgeted processing time (in minutes): 1,600
Required
1. Allocate the support departments’ costs to the operating departments using the direct method.
2. Rank the support departments based on the percentage of their services provided to other support departments. Use this ranking to allocate the support departments’ costs to the operating departments based on the step-down method.
3. How could you have ranked the support departments differently?
16-22. RECIPROCAL COST ALLOCATION (CONTINUATION OF 16-21). Consider E-books again. The controller of E-books reads a widely used textbook that states that “the reciprocal method is conceptually the most defensible.” He seeks your assistance.
Required
1. Describe the key features of the reciprocal method.
2. Allocate the support departments’ costs (human resources and information systems) to the two operating departments using the reciprocal method. Use (a) linear equations and (b) repeated iterations.
3. In the case presented in this exercise, which method (direct, step-down, or reciprocal) would you recommend? Why?
16-23. ALLOCATION OF COMMON COSTS. Evan and Brett are students at Berkeley College. They share an apartment that is owned by Brett. Brett is considering subscribing to an Internet provider that has the following packages available:
Package
Per Month
A. Internet access
$75
B. Phone services
25
C.
90
Evan spends most of his time on the Internet (“everything can be found online now”). Brett prefers to spend his time talking on the phone rather than using the Internet (“going online is a waste of time”). They agree that the purchase of the $90 total package is a “win–win” situation.
Required
1. Allocate the $90 between Evan and Brett using (a) the stand-alone cost-allocation method, (b) the incremental cost-allocation method, and (c) the Shapley value method.
2. Which method would you recommend they use and why?
16-24. ALLOCATION OF COMMON COSTS. John Wilkes, a self-employed consultant near Miami, receives an invitation to consult with a client in San Francisco and another client in Chicago. He decides to combine his visits, traveling from Miami to San Francisco, San Francisco to Chicago, and Chicago to Miami.
Wilkes wonders how he should allocate his travel costs between the two clients. He has collected the following data for regular round-trip fares with no stopovers:
Miami to San Francisco
$450
Miami to Chicago
$300
Wilkes paid $600 for his three-leg flight (Miami–San Francisco, San Francisco–Chicago, Chicago–Miami).
Required
1. How should Wilkes allocate the $600 airfare between the clients in San Francisco and Chicago using (a) the stand-alone cost-allocation method, (b) the incremental cost-allocation method, and (c) the Shapley value method?
2. Which method would you recommend Wilkes use and why?
16-25. REVENUE ALLOCATION, BUNDLED PRODUCTS. Couture Corp sells Samsung 10 cases. It has a Men’s Division and a Women’s Division. Couture is now considering the sale of a bundled product called Dynamic Duo consisting of Smarty, a men’s case, and Sublime, a women’s case. For the most recent year, Couture sold equal quantities of Smarty and Sublime and reported the following:
Product: Smarty
Retail price: $40.00
Product: Sublime
Retail price: $60.00
Product: Dynamic Duo (Smarty and Sublime)
Retail price: $90.00
Required
1.Allocate revenue from the sale of each unit of Dynamic Duo to Smarty and Sublime using the following:
a. The stand-alone revenue-allocation method based on selling price of each product
b. The incremental revenue-allocation method, with Smarty ranked as the primary product
c. The incremental revenue-allocation method, with Sublime ranked as the primary product
d. The Shapley value method
2. Of the four methods in requirement 1, which one would you recommend for allocating Couture’s revenues to Smarty and Sublime? Explain.
16-26. ALLOCATION OF COMMON COSTS. Jim Dandy Auto Sales uses different media to advertise its products (television, radio, newspaper, Internet, and so on). At the end of 2019, the company president, Jim McKinnley, decided that corporate headquarters would negotiate and pay for all advertising costs and allocate these costs to each of the company’s four sales locations based on number of vehicles sold. The managers had already drawn up their advertising plans for 2020 so the corporate plan would do the same advertising for them as they had planned. McKinnley budgeted $1.6 million of total advertising cost for 2020, which was also the actual advertising costs in 2020. If managers had done the same advertising on their own, their advertising costs and the actual number of cars sold would be as follows:
The table depicts actual number of cars sold in 2020 and advertising costs in 2020 if divisions had bought the advertising rather than the corporate headquarters for the east, west, north, and south sales locations. The details of the table are as follows:
1. East sales location
• Actual number of cars sold in 2020: 5,600• Advertising costs in 2020 if divisions had bought the advertising: 279,500 dollars
2. West sales location
• Actual number of cars sold in 2020: 1,440• Advertising costs in 2020 if divisions had bought the advertising: 473,000 dollars
3. North sales location
• Actual number of cars sold in 2020: 3,200• Advertising costs in 2020 if divisions had bought the advertising: 580,500 dollars
4. South sales location
• Actual number of cars sold in 2020: 5,760• Advertising costs in 2020 if divisions had bought the advertising: 817,000 dollars
5. Total
• Actual number of cars sold in 2020: 16,000• Advertising costs in 2020 if divisions had bought the advertising: 2,150,000 dollars
The manager of the East sales location, Tom Stevens, was not happy. He complained that the new allocation method was unfair and increased his advertising costs significantly. The East location sold high volumes of low-priced used cars and most of the corporate advertising budget related to new car sales.
Required
1. Show the amount of the 2020 advertising cost ($1,600,000) that would be allocated to each of the divisions under the following criteria:
a. McKinnley’s allocation method based on actual number of cars sold
b. The stand-alone method based on the amounts divisions would have spent on their own advertising
c. The incremental-allocation method, with divisions ranked on the basis of dollars they would have spent on advertising in 2020
2. Which method do you think is most equitable to the divisional sales managers? What other options might President Jim McKinnley have for allocating the advertising costs?
Problems
16-27. SINGLE-RATE, DUAL-RATE, AND PRACTICAL CAPACITY ALLOCATION. Henry Jackson, the new controller of United Manufacturing Company (UMC) believes that the company should use the dual rate method of allocating overhead costs of its Materials Management Department to its Machining and Assembly Departments instead of the single rate method, which the company has used since its inception 20 years ago. Jackson’s Materials Management Department has an annual capacity of 6,000 labor-hours and a budgeted fixed cost of $240,000. The budgeted variable cost per labor-hour of the Materials Management Department is $20. Jackson gathers the following information:
Machining Department
Assembly Department
Total
Budgeted usage of Materials Management labor-hours
1,250
3,750
5,000
Actual usage of Materials Management labor-hours
1,200
3,600
4,800
Required
1. Using the single-rate method, allocate Materials Management Department costs to the Machining and Assembly Departments in these three ways:
a. Calculate the budgeted rate based on the budgeted number of Materials Management Department labor-hours and allocate costs based on the budgeted use of Materials Management labor-hours in the Machining and Assembly Departments.
b. Calculate the budgeted rate based on the budgeted number of Materials Management Department labor-hours and allocate costs based on actual usage.
c. Calculate the budgeted rate based on the practical capacity of Materials Management Department labor-hours and allocate costs based on actual usage.
2. Using the dual-rate method, compute the amount allocated to the Machining and Assembly Departments when (a) the budgeted fixed-cost rate is calculated using budgeted fixed costs and practical capacity of the Materials Management Department, (b) fixed costs are allocated based on the budgeted fixed-cost rate and budgeted usage of Materials Management Department services by the Machining and Assembly Departments, and (c) variable costs are allocated using the budgeted variable-cost rate and actual usage.
3. Comment on your results in requirements 1 and 2. Discuss the advantages of the dual-rate method.
16-28. REVENUE ALLOCATION. Fang Inc. produces and sells DVDs to businesspeople and students who are planning extended stays in China. It has been very successful with two DVDs: Beginning Mandarin and Conversational Mandarin. The company is introducing a third DVD, Reading Chinese Characters. It has also decided to market its new DVD in two different packages grouping the Reading Chinese Characters DVD with each of the other two language DVDs. Information about the separate DVDs and the packages follow.
The table depicts selling prices for separate DVDs and packages from Fang Inc. The details of the table are as follows:
1. Beginning Mandarin: 63 dollars
2. Conversational Mandarin: 108 dollars
3. Reading Chinese characters: 27 dollars
4. Beginning Mandarin and reading Chinese characters package: 70 dollars
5. Conversational Mandarin and reading Chinese characters package: 125 dollars
Required
1. Using selling prices, allocate revenues from the package to each DVD in that package using (a) the stand-alone method; and (b) the incremental method, with BegM and RCC in turn as the primary product.
2. Using the selling prices, allocate revenues from the package to each DVD in that package using (a) the stand-alone method; and (b) the incremental method, with ConM and RCC in turn as the primary product.
3. Which method is most appropriate for allocating revenues among the DVDs? Why?
16-29. FIXED-COST ALLOCATION. Central University completed construction of its newest administrative building at the end of 2020. The university’s first employees moved into the building on January 1, 2021. The building consists of office space, common meeting rooms (including a conference center), a cafeteria, and even a workout room for its exercise enthusiasts. The total 2021 building space of 250,000 square feet was utilized as follows:
Usage of Space
% of Total Building Space
Office space (occupied)
52%
Vacant office space
8%
Common area and meeting space
17%
Workout room
8%
Cafeteria
15%
The new building cost the university $40 million and was depreciated using the straight-line method over 20 years with zero residual value so $2,000,000 per year. At the end of 2021, three departments occupied the building: executive offices of the president, accounting, and human resources. Each department’s usage of its assigned space was as follows:
Department
Actual Office Space Used (sq. ft.)
Planned Office Space (sq. ft.)
Practical Capacity Office Space (sq. ft.)
Executive
29,900
27,500
36,000
Accounting
54,600
50,000
64,500
Human resources
45,500
47,500
49,500
Required
1. How much of the total annual building cost of $2,000,000 will be allocated in 2021 to each of the departments, if the cost is allocated to each department on the basis of the following?
a. Actual usage of the three departments
b. Planned office space of the three departments
c. Practical capacity of the three departments
2. Assume that Central University allocates the total annual building cost of $2,000,000 in the following manner:
a. All vacant office space is absorbed by the university and is not allocated to the departments.
b. All occupied office space costs are allocated on the basis of actual square footage used by each department.
c. All costs of the common area and meeting space, workout room, and cafeteria are allocated on the basis of a department’s practical capacity.
Calculate the cost allocated to each department in 2021 under this plan. Do you think the allocation method used here is appropriate? Explain.
16-30. ALLOCATING COSTS OF SUPPORT DEPARTMENTS; STEP-DOWN AND DIRECT METHODS. The Eastern Summit Company has prepared department overhead budgets for budgeted-volume levels before allocations as follows:
The table depicts department overhead budgets for budgeted-volume levels before allocations for Eastern Summit Company. The details of the table are as follows:
1. Support departments
• Building and grounds: 45,000 dollars• Personnel: 7,800 dollars• General plant administration: 36,120 dollars• Cafeteria, operating loss: 20,670 dollars• Storeroom: 18,300 dollars• Total: 127,890 dollars
3. Total for support and operating departments: 223,890 dollars
Management has decided that the most appropriate inventory costs are achieved by using individual-department overhead rates. These rates are developed after support-department costs are allocated to operating departments.
The table depicts direct manufacturing labor-hours, number of employees, square feet of floor space occupied, indirect manufacturing labor-hours, and number of requisitions for the building and grounds, personnel, general plant administration, cafeteria: operating loss, storeroom, machining, and assembly departments, as well as the total. The details of the table are as follows:
1. Building and grounds
• Direct manufacturing labor-hours: 0• Number of employees: 0• Square feet of floor space occupied: 0• Indirect manufacturing labor-hours: 0• Number of requisitions: 0
2. Personnel (basis used is number of employees):
• Direct manufacturing labor-hours: 0• Number of employees: 0• Square feet of floor space occupied: 2,500• Indirect manufacturing labor-hours: 0• Number of requisitions: 0
3. General plant administration
• Direct manufacturing labor-hours: 0• Number of employees: 40• Square feet of floor space occupied: 12,000• Indirect manufacturing labor-hours: 0• Number of requisitions: 0
4. Cafeteria: operating loss
• Direct manufacturing labor-hours: 0• Number of employees: 10• Square feet of floor space occupied: 4,500• Indirect manufacturing labor-hours: 3,000• Number of requisitions: 0
5. Storeroom
• Direct manufacturing labor-hours: 0• Number of employees: 5• Square feet of floor space occupied: 6,000• Indirect manufacturing labor-hours: 2,000• Number of requisitions: 0
6. Machining
• Direct manufacturing labor-hours: 10,000• Number of employees: 55• Square feet of floor space occupied: 22,000• Indirect manufacturing labor-hours: 13,000• Number of requisitions: 10,000
7. Assembly
• Direct manufacturing labor-hours: 30,000• Number of employees: 140• Square feet of floor space occupied: 203,000• Indirect manufacturing labor-hours: 26,000• Number of requisitions: 8,300
8. Total
• Direct manufacturing labor-hours: 40,000• Number of employees: 250• Square feet of floor space occupied: 250,00• Indirect manufacturing labor-hours: 44,000• Number of requisitions: 18,300
Required
1. Using the step-down method, allocate support-department costs. Develop overhead rates per direct manufacturing labor-hour for machining and assembly. Allocate the costs of the support departments in the order given in this problem. Use the allocation base for each support department you think is most appropriate.
2. Using the direct method, rework requirement 1.
3. Based on the following information about two jobs, determine the total overhead costs for each job by using rates developed in (a) requirement 1 and (b) requirement 2.
Direct Manufacturing Labor-Hours
Machining
Assembly
Job 88
18
8
Job 89
10
20
4. The company evaluates the performance of the operating department managers on the basis of how well they managed their total costs, including allocated costs. As the manager of the Machining Department, which allocation method would you prefer from the results obtained in requirements 1 and 2? Explain.
16-31. SUPPORT-DEPARTMENT COST ALLOCATIONS; SINGLE-DEPARTMENT COST POOLS; DIRECT, STEP-DOWN, AND RECIPROCAL METHODS. The Martinez Company has two products. Product 1 is manufactured entirely in department X. Product 2 is manufactured entirely in department Y. To produce these two products, the Martinez Company has two support departments: A (a materials-handling department) and B (a power-generating department).
An analysis of the work done by departments A and B in a typical period follows:
Used by
Supplied by
A
B
X
Y
A
—
400
1,000
600
B
1,500
—
250
750
The work done in department A is measured by the direct labor-hours of materials-handling time. The work done in department B is measured by the kilowatt-hours of power. The budgeted costs of the support departments for the coming year are as follows:
The table depicts variable indirect labor and indirect materials costs, supervision, and depreciation costs for Department A, materials handling, and Department B, power generation, as well as totals. The details of the table are as follows:
1. Variable indirect labor and indirect materials costs, supervision, and depreciation
• Department A, materials handling: 300,000 dollars• Department B, power generation: 30,000 dollars
2. Supervision
• Department A, materials handling: 90,000 dollars• Department B, power generation: 50,000 dollars
3. Depreciation
• Department A, materials handling: 30,000 dollars• Department B, power generation: 100,000 dollars
4. Totals
• Department A, materials handling: 420,000 dollars plus power costs• Department B, power generation: 180,000 dollars plus materials-handling costs
The budgeted costs of the operating departments for the coming year are $2,500,000 for department X and $1,900,000 for department Y.
Supervision costs are salary costs. Depreciation in department B is the straight-line depreciation of power-generation equipment in its 19th year of an estimated 25-year useful life; it is old, but well-maintained, equipment.
Required
1. What are the allocations of costs of support departments A and B to operating departments X and Y using (a) the direct method, (b) the step-down method (allocate department A first), (c) the step-down method (allocate department B first), and (d) the reciprocal method?
2. An outside company has offered to supply all the power needed by the Martinez Company and to provide all the services of the present power department. The cost of this service will be $80 per kilowatt-hour of power. Should Martinez accept this offer? Explain.
16-32. COMMON COSTS. Jeana’s Cupcake Shop and Jody’s Cakes each operate a bakery close to each other in a small town in Florida. If Jeana rents ovens on her own, it will cost $40,000. If Jody rents ovens on her own, it will cost $60,000. If they consolidate baking operations and share ovens, the total cost will be $80,000.
Required
1. Calculate Jeana’s and Jody’s respective cost of the shared ovens under the stand-alone cost-allocation method.
2. Calculate Jeana’s and Jody’s respective cost of the shared ovens using the incremental cost-allocation method assuming (a) Jeana is the primary party and (b) Jody is the primary party.
3. Calculate Jeana’s and Jody’s respective cost of the shared ovens using the Shapley value method.
4. Which method would you recommend Jeana and Jody use to share the cost of the ovens? Why?
The table depicts individual selling price per unit and cost per unit for sofas, easy chairs, and coffee tables, as well as individual selling price per unit for bundle purchase price. The details of the table are as follows:
1. Sofas
• Individual selling price per unit: 1,200 dollars• Cost per unit: 500 dollars
2. Easy chairs
• Individual selling price per unit: 500 dollars• Cost per unit: 300 dollars
3. Coffee tables
• Individual selling price per unit: 300 dollars• Cost per unit: 200 dollars
4. Bundle purchase price: 1,600 dollars
16-33. STAND-ALONE REVENUE ALLOCATION. Marble Company has three departments that sell furniture: the Sofa Department, the Easy Chair Department, and the Coffee Table Department. These products are sold individually and in a bundle. Marble Company sells roughly equal quantities of the three products. Managers of the three departments are evaluated on the performance of their individual departments. The individual selling prices and per unit costs of the products are as follows:
The table depicts individual selling price per unit and cost per unit for sofas, easy chairs, and coffee tables, as well as individual selling price per unit for bundle purchase price. The details of the table are as follows:
1. Sofas
• Individual selling price per unit: 1,200 dollars• Cost per unit: 500 dollars
2. Easy chairs
• Individual selling price per unit: 500 dollars• Cost per unit: 300 dollars
3. Coffee tables
• Individual selling price per unit: 300 dollars• Cost per unit: 200 dollars
4. Bundle purchase price: 1,600 dollars
Required
1. Allocate the revenue from the furniture bundle purchase to each of the products using the stand-alone method based on the individual selling price per unit.
2. Allocate the revenue from the furniture bundle purchase to each of the products using the stand-alone method based on cost per unit.
3. Allocate the revenue from the furniture bundle purchase to each of the products using the stand-alone method based on physical units (that is, the number of individual units of product sold per bundle).
4. Which basis of allocation makes the most sense in this situation? Explain your answer.
16-34. SUPPORT-DEPARTMENT COST ALLOCATIONS; SINGLE-DEPARTMENT COST POOLS; DIRECT, STEP-DOWN, AND RECIPROCAL METHODS. Sportz, Inc., manufactures athletic shoes and athletic clothing for both amateur and professional athletes. The company has two product lines (clothing and shoes), which are produced in separate manufacturing facilities; however, both manufacturing facilities share the same support services for information technology and human resources. The following shows costs (in thousands) for each manufacturing facility and for each support department.
The table depicts variable costs, fixed costs, and total costs by department for information technology (IT), human resources (HR), clothing, and shoes departments, as well as total costs. The details of the table are as follows:
1. Information technology (IT):
• Variable costs: 1,200 dollars• Fixed costs: 4,000 dollars• Total costs by department: 5,200 dollars
2. Human resources (HR)
• Variable costs: 800 dollars• Fixed costs: 2,000 dollars• Total costs by department: 2,800 dollars
3. Clothing
• Variable costs: 5,000 dollars• Fixed costs: 16,000 dollars• Total costs by department: 21,000 dollars
4. Shoes
• Variable costs: 6,000 dollars• Fixed costs: 9,000 dollars• Total costs by department: 15,000 dollars
5. Total costs
• Variable costs: 13,000 dollars• Fixed costs: 31,000 dollars• Total costs by department: 44,000 dollars
The total costs of the support departments (IT and HR) are allocated to the production departments (clothing and shoes) using a single rate based on the following:
Information technology:
Number of IT labor-hours worked by department
Human resources:
Number of employees supported by department
Data on the quantity of the cost-allocation bases, by department, are given as follows:
Department
IT Hours Used
Number of Employees
Clothing
10,080
440
Shoes
7,920
176
Information technology
—
184
Human resources
6,000
—
Required
1. What are the total costs of the production departments (clothing and shoes) after the support-department costs of information technology and human resources have been allocated using (a) the direct method, (b) the step-down method (allocate information technology first), (c) the step-down method (allocate human resources first), and (d) the reciprocal method?
2. Assume that all of the work of the IT department could be outsourced to an independent company for $97.50 per hour. If Sportz no longer operated its own IT department, 30% of the fixed costs of the IT department could be eliminated. Should Sportz outsource its IT services?
16-35. REVENUE ALLOCATION, BUNDLED PRODUCTS. Lintner Hotels (LH) is a five-star hotel with a world-class spa. LH has a decentralized management structure, with three divisions:
• Lodging (rooms, conference facilities)
• Food (restaurants and in-room service)
• Spa
Starting next month, LH will offer a 2-day, two-person “getaway package” for $1,200.
This deal includes the following:
The table depicts line items for the two-day, two-person “getaway package” from Lintner Hotels. The details of the table are as follows:
1. Two nights’ stay, as priced separately: 900 dollars, 450 dollars per night
2. Two spa treatments, as priced separately: 360 dollars, 180 dollars per treatment
3. Candlelight dinner, as priced separately: 240 dollars, 120 dollars per person
4. Total package value: 1,500 dollars
Christine Maple, president of the spa division, wants to know how her division would share in the $1,200 revenue from the getaway package. The spa is operating at 100% capacity. Currently, anyone booking the package is guaranteed access to a spa appointment. Maple noted that every “getaway” booking would displace $360 of other spa bookings not related to the package. She emphasized that the high demand reflected the work done by her team to keep the spa rated as one of the best spas in the world. The lodging and food divisions were not as busy and had excess capacity that the package would help them fill.
Required
1. Using selling prices, allocate the $1,200 getaway-package revenue to the three divisions using
a. The stand-alone revenue-allocation method
b. The incremental revenue-allocation method (with spa first, then lodging, and then food)
2. What are the pros and cons of the two methods in requirement 1?
3. Because the spa division is able to book the spa at 100% capacity, the company chief executive officer has decided to revise the getaway package to only include the lodging and food offerings shown previously. The new package will sell for $950. Allocate the revenue to the lodging and food divisions using the following:
a. The Shapley value method
b. The weighted Shapley value method, assuming that lodging is three times as likely to sell as the food
16-36. SUPPORT-DEPARTMENT COST ALLOCATIONS; DIRECT, STEP-DOWN, AND RECIPROCAL METHODS. Ballantine Corporation has two operating departments: Eastern Department and Western Department. Each of the operating departments uses the services of the company’s two support departments: Engineering and Information Technology. Additionally, the Engineering and Information Technology departments use the services of each other. Data concerning the past year are as follows:
The table depicts budgeted overhead costs before any interdepartment cost allocations and support work furnished. The details of the table are as follows:
1. Budgeted overhead costs before any interdepartment cost allocations
Support department, engineering: 300,000 dollars
Support department, information technology: 250,000 dollars
Operating department, western department: 35 percent
Total: 100 percent
Required
1. What are the total overhead costs of the operating departments (Eastern and Western) after the support-department costs of Engineering and Information Technology have been allocated using (a) the direct method, (b) the step-down method (allocate Engineering first), (c) the step-down method (allocate Information Technology first), and (d) the reciprocal method?
2. Which method would you recommend that Ballantine Corporation use to allocate service-department costs? Why?
