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

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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:
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
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:
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 _________ ___________ __________