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12-59 Allocating Costs Using Direct and Step-Down Methods

Goal: Create an Excel spreadsheet to allocate costs using the direct method and the stepdown method. Use the results to answer questions about your findings.

Scenario: Antonio Cleaning has asked you to help them determine the best method forallocating costs from their service departments to their producing departments. Additional background information for your spreadsheet appears in Fundamental Assignment Material

12-B2. Exhibit 12-4 on page 532 illustrates the types of calculations that are used for allocating costs using the direct method and the step-down method.

When you have completed your spreadsheet, answer the following questions:

1. What are the total costs for the Residential department using the direct method? What are the total costs for the Commercial department using the direct method?

2. What are the total costs for the Residential department using the step-down method?

3. What are the total costs for the Commercial department using the step-down method?

4. Which method would you recommend that Antonio Cleaning use to allocate their service departments' costs to their producing departments? Why?

Step-by-Step:

1. Open a new Excel spreadsheet.

2. In column A, create a bold-faced heading that contains the following:
Row 1: Chapter 12 Decision Guideline
Row 2: Dallas Cleaning
Row 3: Cost Allocations from Service Departments to Producing Departments
Row 4: Today's Date

3. Merge and center the four heading rows across columns A through H.

4. In row 7, create the following bold-faced, center-justified column headings:
Column B: Personnel
Column C: Administrative
Column D: Residential
Column E: Commercial
Column F: Total Res/Comm
Column G: Total Admin/Res/Comm
Column H: Grand Total

5. Change the format of the column headings in row 7 to permit the titles to be displayed on multiple lines within a single cell.
Alignment tab: Wrap Text: Checked
Note: Adjust column widths so that headings use only two lines.
Adjust row height to ensure that row is same height as adjusted headings.

6. In column A, create the following row headings:
Row 8: Direct Department Costs
Row 9: Number of Employees
Skip 2 rows
Note: Adjust the width of column A to 27.14.

7. In column A, create the following bold-faced, underlined row heading:
Row 12: Direct Method:

8. In column A, create the following row headings:
Row 13: Direct Department Costs
Row 14: Personnel Allocation
Row 15: Administrative Allocation
Row 16: Total Costs
Skip 2 rows

9. In column A, create the following bold-faced, underlined row heading:
Row 19: Step-down Method:

10. In column A, create the following row headings:
Row 20: Direct Department Costs
Row 21: Step 1-Personnel Allocation
Row 22: Step 2-Administrative Allocation
Row 23: Total Costs

11. Use data from Fundamental Assignment 12-B2 to enter the amounts in columns B through E for rows 8, 9, 13, and 20.

12. Use the appropriate calculations to do the totals in row 8 for columns F and H. Use the appropriate calculations to do the totals in row 9 for columns F and G.

13. Use the appropriate formulas to allocate the costs from the service departments to the producing departments using each of the methods.

14. Use the appropriate calculations to do the totals in columns B through E and in column H, rows 16 and 23.

Introduction to Management Accounting: Chapters 1-17, Fourteenth Edition, by Charles T. Horngren, Gary L. Sundem, William O. Stratton, David Burgstahler, and Jeff Schatzberg.

586 Part 4: Product Costing

15. Format amounts in columns B through H, rows 8, 13, 16, 20, and 23 as
Number tab: Category: Accounting
Decimal: 0
Symbol: $

16. Format the amount in columns B through E, rows 14, 15, 21, and 22 as
Number tab: Category: Accounting
Decimal: 0
Symbol: None

17. Change the format of the total costs amounts in columns B through E, rows 16 and 23, to display a top border, using the default line style.
Border tab: Icon: Top Border

18. Change the format of the amounts in row 9, columns B through G to center justified.

19. Save your work to disk, and print a copy for your files.
Note: Print your spreadsheet using landscape in order to ensure that all columns appear on one page..

13-B3 Comparison of Variable Costing and Absorption Costing

Consider the following information pertaining to a year's operations of Youngstown Manufacturing:
Units sold 1,400
Units produced 1,600
Direct labor $4,200
Direct materials used 3,500
Fixed manufacturing overhead 2,200
Variable manufacturing overhead 300
Selling and administrative expenses (all fixed) 700
Beginning inventories 0
Contribution margin 5,600
Direct-material inventory, end 800
There are no work-in-process inventories.

1. What is the ending finished-goods inventory cost under absorption costing?

2. What is the ending finished-goods inventory cost under variable costing?

13-45 Variable and Absorption Costing

Chan Manufacturing Company data for 20X7 follow:
Sales: 12,000 units at $17 each
Actual production 15,000 units
Expected volume of production 18,000 units
Manufacturing costs incurred
Variable $120,000
Fixed 63,000
Nonmanufacturing costs incurred
Variable $ 24,000
Fixed 18,000

1. Determine operating income for 20X7, assuming the firm uses the variable-costing approach to product costing. (Do not prepare a statement.)

2. Assume that there is no January 1, 20X7, inventory; no variances are allocated to inventory; and the firm uses a "full absorption" approach to product costing. Compute (a) the cost assigned to December 31, 20X7, inventory; and (b) operating income for the year ended December 31, 20X7. (Do not prepare a statement.)

13-48 Overhead Variances

Study Appendix 13. Consider the following data for the Rivera Company:
Factory Overhead
Fixed Variable
Actual incurred $14,200 $13,300
Budget for standard hours allowed
for output achieved 12,500 11,000
Applied 11,600 11,000
Budget for actual hours of input 12,500 11,400
From the above information, fill in the blanks below. Be sure to mark your variances F for favorable
and U for unfavorable.

a. Flexible-budget variance $______ Fixed $______
Variable $______

b. Production-volume variance $______ Fixed $______
Variable $______

c. Spending variance $______ Fixed $______
Variable $______

d. Efficiency variance $______ Fixed $______
Variable $______

13-49 Variances

Study Appendix 13. Consider the following data regarding factory overhead:
Variable Fixed
Budget for actual hours of input $45,000 $70,000
Applied 41,000 64,800
Budget for standard hours allowed for actual output achieved ? ?
Actual incurred 48,500 68,500
Using the above data, fill in the following blanks with the variance amounts. Use F for favorable or U for unfavorable for each variance.

Total Overhead Variable Fixed
1. Spending variance ______ ______ ______
2. Efficiency variance ______ ______ ______
3. Production-volume variance ______ ______ ______
4. Flexible-budget variance ______ ______ ______
5. Underapplied overhead ______ ______ ______

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Solution Summary

The solution explains some questions relating to cost allocation, absorption and variable costing and calculating variances.

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Cost allocations: Jane's Peanut Brittle; Jerry's Furniture

Week Five Problems
1) The CEO of Jane's Peanut Brittle has decided that she wants to see the financial statements of her two product divisions presented in a way that allows her to add them up to the total financial statement of the company. In order to accomplish that, the CFO must allocate the expenses of the company's two support departments to the two product divisions. The CFO knows that there are two approaches that he could use. One is the direct method and the other is the step down method. He has asked you to prepare an Excel spreadsheet that demonstrates the result of the allocation under each approach. The Data for the involved divisions is as follows:
Personnel Headquarters Peanut Brittle Cookies
Direct Department Costs $200,000 $1,500,000 $2,000,000 $500,000
Employees 7 20 50 30

All agree that Personnel Division costs should be allocated on the basis of employee headcount. The Headquarters costs are to be allocated on the basis direct department costs. The question is whether Personnel should be allocated to Headquarters too, as is accomplished in the step down method.

Prepare a spreadsheet that illustrates the two allocation methods and the results for the CFO. You can find instructions for preparation of a spreadsheet with problem 12-59 in the text. Remember that these instructions are for the 2003 version of Excel. Exhibit 12-4 on page 532 illustrates the types of calculations that are used for allocating costs using the direct method and the step down method.
2) Consider the following information pertaining to a year's operation of Jerry's Furniture:
Units Sold 3,000
Units Produced 3,500
Direct Labor $9,500
Direct Materials Used $9,250
Fixed Manufacturing Overhead $3,500
Variable Manufacturing Overhead $500
Selling and Administrative Exp. (All Fixed) $1,500
Beginning Inventories 0
Contribution Margin $11,000
Direct-Material Inventory, end $1,600
There are no work-in-process inventories.
a. What is the ending finished-goods inventory under absorption costing?
b. What is the ending finished-goods inventory under variable costing?

3) Sasha's Frozen Pizza data for 20x8 follow:
Sales: 25,000 units at $8.50 each.
Actual production 30,000 units
Expected Production 36,000 Units
Manufacturing Costs Incurred
Variable $125,000
Fixed $ 65,000
Nonmanufacturing Costs Incurred
Variable $ 23,000
Fixed $ 17,000
a. Determine operating income for 20x8, assuming the firm uses the variable-cosing approach to product costing. (You are not required to prepare a statement, but you may if you prefer.)
b. Assume that there was no inventory at the beginning of 20x8, no variances are allocated to inventory and the firm uses a "full absorption" approach to product costing. Compute (1) the cost assigned to the December 31, 20x8 inventory; and (2) the operating income for the year ended December 31, 20x8. (You are not required to prepare a statement, but you may if you prefer.)

4) Consider the following data for Said's Toothbrush Company:
Factory Overhead
Fixed Variable
Actual Costs Incurred $28,000 $26,500
Flex Budget for Standard Inputs
And Actual Outputs $25,000 $22,500
Costs Applied to Product $23,200 $22,500
Flex Budget for Actual Inputs $25,000 $22,300

From the above information, fill in the blanks below. Be sure to mark your variances F for favorable and U for Unfavorable.
a. Flexible-budget variance $_________ Fixed $__________________
Variable $_______________
b. Production volume variance$_________ Fixed $__________________
Variable $________________
c. Spending variance $__________ Fixed $__________________
Variable $________________
d. Efficiency variance $ __________ Fixed $__________________
Variable $________________

5) Study Appendix 13 (At the end of Chapter 13). Consider the following data regarding factory overhead:
Variable Fixed
Flex Budget for Actual Inputs $90,000 $140,000
Costs Applied to Product $80,000 $128,000
Flex Budget for Standard Inputs
& Actual Outputs ? Fill in ? Fill In
Actual Costs Incurred $96,500 $137,000
Using the data above, fill in the following blanks with the variance amounts. Use F for favorable or U for unfavorable for each variance.

Total Variable Fixed
a. Spending Variance _________ __________ __________
b. Efficiency Variance _________ __________ __________
c. Production-Volume Variance _________ ___________ __________
d. Flexible-Budget Variance _________ ___________ __________
e. Underapplied Overhead _________ ___________ __________

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