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Accounting: Cost allocation.

EXERCISE 6- 5.Auburn Banking and Loan Company has six service departments:
1. Human Resources ( hires employees and manages benefits)
2. Duplicating ( performs copy services)
3. Janitorial ( provides routine cleaning services)
4. Accounting ( provides accounting services)
5. Graphic Design ( designs forms)
6. Food Services ( provides free breakfast and lunch to employees)
The services are used by the company's two subsidiaries, Auburn Personal Banking and Auburn Business Banking.
A. Suggest allocation bases to be used in allocating the service department costs to the two subsidiaries.
B. B. Food services are used by employees in the human resources department. Would a share of food service costs be allocated to human resources under the direct method of allocation?
EXERCISE 6- 8. Marvin Company has three ser-vice departments, S1, S2, and threeser-vicedepartments,S1,S2,and S3, and two production departments, P1 and P2. The following data relate to Marvin's allocation of service department costs:
Budgeted Costs Number of Employees
S1 $ 4,000,000 80
S2 3,000,000 60
S3 2,000,000 30
P1 200
P2 300
Service department costs are allocated by the direct method. The number of employees is used as the allocation base for all service department costs.
A. Allocate service department costs to production departments.
B. Calculate the total service department cost allocated to each production department.
EXERCISE 6- 9. Custom Metal Works received an offer from a big- box retail company to purchase 3,000 metal outdoor tables for $ 200 each. Custom Metal Works accountants determine that the following costs apply to the tables:
Direct material $ 100
Direct labor 45
Manufacturing overhead 70
Total $ 215
Of the $ 70 of overhead, $ 14 is variable and $ 56 relates to fixed costs. The $ 56 of fixed overhead is allocated as $ 1.25 per direct labor dollar.
A. What will be the real effect on profit if the order is accepted?
B. Explain why managers who focus on reported cost per unit may be inclined to turn down the order.

EXERCISE 6- 15. Power Electronics manufactures portable power supply units. Power has recently decided to use an activity-based approach to cost its products. Production line setups is a major activity at Power. Next year Power expects to perform 2,000 setups at a total cost of $ 4,000,000. Power plans to produce 800 units of product EP150, which will require two setups.
How much setup cost will be allocated to each unit of EP150 produced?
EXERCISE 6- 18. Hearthstone Appliances supplies parts for laundry and kitchen appliances. Customer orders are placed over the Internet and are gener-ally filled in one or two days using express mail services.
Angela Farnsworth, a consultant with ABM Services, has been asked to conduct an ABM study of inventory management at Hearthstone Appliances. In this regard she has determined that the cost of filling customer orders in the past year consisted primarily of $ 300,000 of salary expense related to five workers who pick parts from the warehouse and $ 450,000 of salary expense related to six workers who pack the orders for shipment. In the past year, the company filled 150,000 orders. Based on work performed for a very large chain of auto supply stores, Angela has determined a benchmark cost of $ 4 per order.
A. Comment on the advisability of comparing the costs at Hearthstone Appliances to those at an auto supply chain store.
B. Angela has observed the following: Workers go to a box that contains individual customer order sheets. They take the bottom order ( the oldest) and go into the warehouse with a hand-cart and a box. They ahand-cartandabox.They then fill the order and carry the parts to a packing station. Can you suggest ways of improving this process?
PROBLEM 6- 3. Binder Manufacturing produces small electric motors used by appliance manufacturers. In the past year, the company has experi-enced severe excess capacity due to competition from a foreign company that has entered Binder's market. The company is currently bidding on a potential order from Dacon Appliances for 6,000 Model 350 motors. The estimated cost of each motor is $ 40, as follows:
Direct material $ 20
Direct labor 5
Overhead 15
Total $ 40

The predetermined overhead rate is $ 3 per direct labor dollar. This was estimated by divid-ing estimated annual overhead ($ 15,000,000) by estimated annual direct labor ($ 5,000,000). The $ 15,000,000 of overhead is composed of $ 6,000,000 of variable costs and $ 9,000,000 of fixed costs. The largest fixed cost relates to depreciation of plant and equipment.
A. With respect to overhead, what is the opportunity cost of producing a Model 350 motor?
B. Suppose Binder can win the Dacon business by bidding a price of $ 37 per motor ( but no higher price will result in a winning bid). Should Binder bid $ 37?
C. Discuss how an allocation of overhead based on opportunity cost would facilitate an appro-priate bidding decision.
PROBLEM 6- 5. Pelton Instruments man-ufactures a variety of electronic instruments that are used in military and civilian applications. Sales to the military are generally on a cost- plus- profit basis with profit equal to 10 percent of cost.
Instruments used in military applications require more direct labor time because " fail- safe" devices must be installed. ( These devices are generally omitted in civilian applications.)
At the start of the year, Pelton estimates that the company will incur $ 60,000,000 of over-head, $ 6,000,000 of direct labor, and 600,000 machine hours. Consider the Model KV10 gauge that is produced for both civilian and military uses:

Civilian Military
Direct material $ 3,000 $ 3,500
Direct labor $ 900 $ 1,200
Machine hours 100 100


A. Calculate the cost of civilian and military versions of Model KV10 using both direct labor dol-lars and machine hours as alternative allocation bases.

A. Explain why Pelton Instruments may decide to use direct labor as an overhead allocation base. c. Is it ethical for Pelton to select an allocation base that tends to allocate more of overhead costs to government contracts? Explain.


Solution Summary

The problem set deal with questions which require that costs be allocated to departments and services.