Chapter 4: Problem Solutions

Solution 4.1 (Waldoor Company)

P4.2. Solution (Delta Company)

a) Cost allocation using the direct method.

b) Cost allocation using the step-down method.

Problem 4.2 Solution (continued)

Warehouse has given more service to the Maintenance Department than vice versa. Thus, the Warehouse costs are allocated first.

c) Cost allocation using the reciprocal method.

Under this method, some of the Maintenance costs are allocated to Warehouse and some Warehouse costs are allocated to Maintenance Department. Thus, we must determine the total cost being allocated to both the Maintenance Departments and Warehouse first, as follows

(1) Total Maintenance cost = Maintenance Department cost + Cost allocated to Maintenance from Warehouse.

(2) Total Warehouse cost = Warehouse Department cost + Cost allocated to Warehouse from Maintenance.

Step 1: Determining allocation bases:

Problem 4.2 Solution (continued)

Step 2: Setting up the equations:

Cost allocated to Warehouse from Maintenance is 20% of total Maintenance cost (M).

Cost allocated to Maintenance from Warehouse is 7/32 of total Warehouse cost (W).

W = $48,000 + 0.2M

M = $90,000 + (7/32)W

W = $48,000 + 0.2[$90,000 + (7/32)W]

W = $48,000 + $18,000 + 0.04375W

0.95625W = $66,000

W = Total Cost of Warehouse = $69,020

M = $90,000 + (7/32)($69,020)

M = Total Cost of Maintenance Department = $105,098

Step 2: Allocation of the computed total cost of each service department in Step 2 to all other departments using the proportions (percentages) computed in Step 1:

Allocation of Warehouse’s total cost:

To Maintenance Department = (7/32)($69,020) = $15,098

To Department A = (10/32)($69,020) = $21,569

To Department B = (15/32)($69,020) = $32,353

Allocation of Maintenance Department’s total cost:

To Warehouse Department = (20%)($105,098) = $21,020

To Department A = (30%)($105,098) = $31,529

To Department B = (50%)($105,098) = $52,549

P4.3. Solution (MKATZ Company)

The costs of indirect materials, indirect labor and repairs are recoded in the work-sheet as they are given:

Allocating payroll taxes, based the indirect labor cost: ($2,460/$12,300 = $0.20 per $) × (Indirect Labor Cost).

The $1,134 fuel cost charged to the Maintenance department only.

Allocation of light and power cost: $3,400/100,000 = $0.034 per kW-hr light

Allocation of rent and fire Insurance costs ($6,000 and $1,200, respectively), based on floor space occupied:

Problem 4.3 Solution (continued)

Allocation of the sundry (miscellaneous) expenses of total $1,800 based on the number of employees:

Depreciation of machinery are recorded as have been computed according the company’s depreciation schedules: All distributed costs are recorded as shown in the "work-sheet for allocation of factory overhead" below.

Then, the finalized costs of the service departments are reallocated to the production departments using the step-down methods, starting with the Warehouse Department that has provided more services to the Maintenance Department than the services received from.

Problem 4.3 Solution (continued)

MKATZ Company

Work-Sheet for Allocation of Factory Overhead For the Month of July, 20XX

See the computations for reallocation of the service departments below:

The $18,600 final costs of the Warehouse Department are reallocated according to the number of requisitions filled, as shown in the following table.

The $70,200 final costs of the Maintenance Department are reallocated according to floor space occupied to the production departments (not to the Warehouse):