Cost Allocation
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Cost Allocation
ACC/561 ACCOUNTING
October 26, 2009
Cost Allocation
12.59. EXCEL Application Exercise 12-59.
This problem is an Excel exercise. Please see Excel spreadsheet attached.
We have used both methods for allocating costs from two servicing departments: Personnel and Administrative to two producing departments: Residential and commercial.
Direct method ignores other service departments when allocating services of given departments costs to producing departments.
Step-down method recognizes that other service departments support activity in other service departments as well as in producing departments.
The total costs for the Residential department using the direct method-$315,750
Total costs for the Commercial department using the direct method-$484,250
The total costs for the Residential department using the step-down method-$313,500
The total costs for the Commercial department using the step-down method-$486,500
Residential appears to be more expensive operation using the direct method than if we use step-down method.
On a contrary Commercial appears to be more expensive when using step-down method.
I would recommend the company to use step-down method as it counts effects of other service departments provided to both service and producing departments.
13-B2.
Application of Overhead Using Budgeted Rates
Budgeted
Actual
Pharmacy
Medical Records
Pharmacy
Medical Records
Department overhead cost
$225,000
$300,000
$217,000
$325,000
Number of prescriptions filled
90,000
Number of patient visits
60,000
Budgeted Overhead Rate per number of prescriptions filled: $225,000/90,000
$2.50
Budgeted Overhead Rate per number of patient visits $300,000/60,000
Actual number of prescriptions filled
85,000
Actual number of patient visits
63,000
Overapplied/underapplied overhead
-$4,500.00
-$10,000.00
Pharmacy overhead rate is $2.50 per number of prescriptions filled.
Medical Records Department overhead rate is $5.00 per number of patient visits.
Overhead costs applied to patient David Li in June 20X7 would be 2 visits X $5.00 overhead rate =$10.00. Plus 4 prescriptions X $2.50 overhead cost =$10.00. Total Overhead cost for David Li is $20.00
For Pharmacy Department underapplied overhead is $4,500 because the amount applied is less than amount incurred. We find out if we have overapplied or underapplied overhead by multiplying actual prescriptions filled by budgeted rate and subtracting from the result actual overhead applied.
For Medical Records Department under applied overhead is $10,000 because the amount applied is less than amount.
13-45
Sales: 12,000 units at $17 each
Actual Production
15,000
Expected volume of
18,000
Manufacturing costs incurred
Variable
$120,000
Fixed
$63,000
Nonmanufacturing costs incurred
Variable
$24,000
Fixed
$18,000
1. Operating Income using variable-costing approach
Sales
$204,000
Variable cost per unit of production
Variable cost of goods manufactured at standard
$144,000
Ending Inventory
$28,800
Total variable expenses
$115,200
Contribution Margin
$88,800
Fixed expenses
$81,000
Operating Income, variable costing
$7,800
Comment: Formulas and calculations