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Managerial Accounting

Problem A.

The building maintenance department for Packard Manufacturing Corp. budgets annual costs of $3,000,000 based on the expected operating level for the coming year. The costs are allocated to two production departments. Packard Manufacturing Corp. is considering 2 allocation bases for assignment of costs to departments:

A) square footage and B) direct labor hours. The following data relate to the potential allocation bases:

Production Dept. 1 Production Dept. 2
Square footage 20,000 30,000
Direct labor hours 30,000 20,000

1) Calculate the costs allocated to the production departments using each allocation base. Comment on which allocation base is preferrable and why. Explain the calculation.

Problem B.

The editor of SportsWorld Magazine is considering three alternative prices for the new monthly sports magazine. The estimate of price and quantity demanded are:

Price Quantity Demanded
Alternative 1 $6.95 20,000
Alternative 2 $5.95 25,000
Alternative 3 $4.95 32,000

Monthly costs of producing and delivering the magazine include $80,000 of fixed costs and variable costs of $1.50 per issue.

1) Which price should the editor of SportsWorld Magazine select to potentially generate the most profit? Explain the calculation.

2) Should factors be considered in the decision-making process other than just profit? Discuss briefly.

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Solution Preview

Problem A
Total overhead cost is 3,00,000.
First we allocate based on square footage. The total area is 20,000+30,000=50,000. The proportion of area of Dept 1 is 20,000/50,000=40%. Proportion of area of Dept 2 is 30,000/50,000=60%
Cost allocated to Dept 1 is 3,000,000X0.4=1,200,000
Cost allocated to Dept 2 is 3,000,000X0.6=1,800,00
In the same way, using direct labor hours, the proportion of Dept 1 is 30,000/50,000=0.6 and for Dept 2 is 20,000/50,000=0.4
Cost allocated to Dept 1 is 3,000,000X0.6=1,800,000
Cost allocated to Dept 2 is 3,000,000X0.4=1,200,00

The cost allocation base should be such that the overhead costs should vary with the ...

Solution Summary

The solution has two problems relating to cost allocation and profit maximization