Reference no: EM133049308
Discussions
DQ 1. Describe the process of two-stage cost allocation in the development of departmental overhead rates, using the terms overhead cost distribution, support department cost allocation and overhead application.
DQ 2. "The reciprocal method is the most appropriate method of support department cost allocation as it takes into account all service flows between departments." Do you agree? Explain your answer.
Exercises
Question 1. MAC. Ltd manufacturers sheet music stands in two separate departments, cutting and welding. The following data relate to the year just ended:
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|
Cutting department
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Welding department
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Total plant
|
|
Budgeted manufacturing overhead
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$60 000
|
$140 000
|
$200 000
|
|
Actual manufacturing overhead
|
54 000
|
108 000
|
162 000
|
|
Budgeted machine hours
|
50 000
|
110 000
|
160 000
|
|
Actual machine hours
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27 000
|
90 000
|
117 000
|
|
Budgeted direct labour hours
|
30 000
|
20 000
|
50 000
|
|
Actual direct labour hours
|
29 400
|
11 700
|
41 100
|
One of MAC's major products, the B Frame, has the following production requirements:
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Cutting Department
|
Welding Department
|
Total plant
|
|
Machine hours
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3.5
|
5.0
|
8.5
|
|
Direct labour hours
|
5.0
|
2.0
|
7.0
|
Required:
Calculate the manufacturing overhead cost of the B Frame using:
a) a predetermined plantwide rate based on direct labour hours
b) a predetermined plantwide rate based on machine hours
c) predetermined departmental rates based on direct labour hours for the cutting department and on machine hours for the welding department.
Which of these three estimates of overhead cost is likely to be the most accurate? Explain.
Problems
1. Hoolloo manufactures two types of piggy banks, a kangaroo-shaped piggy bank and a platypus-shaped piggy bank, in two separate production departments. The plant is highly automated and contains only two other support departments: (1) engineering and design (ED); and (2) information systems (IS). Hoolloo allocates support department costs according to estimated service use. Information for the year just ended was as follows.
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Support
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Production
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|
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ED
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IS
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Kangaroo-shaped
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Platypus-shaped
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|
Direct costs
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$6,200
|
$9,500
|
$15,000
|
$22,000
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|
Service used
|
|
|
|
|
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ED
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0
|
10%
|
50%
|
40%
|
|
IS
|
20%
|
0
|
20%
|
60%
|
Required:
Using the information provided:
a) Determine the total cost of operations for each production department under the direct method.
b) Determine the total cost of operations for each production department under the step-down method.
c) Determine the total cost of operations for each production department under the reciprocal method.