MGAC03H3 Chapter 14: Chapter 14 Notes

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lavenderdonkey6

18 Oct 2011

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Purpose of cost allocation four possible reasons for allocating period costs are: to provide information for economic decisions. 3) to justify costs or compute reimbursement to measure income and assets for reporting to external parties. Identify the direct inputs that are already measured. Assign the indirect costs to each cost object. Analyze the alternatives and select the best one for the denominator. Calculate the cost- allocation rate for each indirect cost pool. Identify indirect costs included in cost pool(s) or numerator(s) Two key decisions related to indirect cost pools are the number of pools to form and the individual items of cost to be included to ensure each cost pool is homogenous. The single-rate cost-allocation method allocates costs in each cost pool to cost objects using the same rate per unit of the single allocation base. In the dual-rate method, costs are grouped into a variable-cost pool and a fixed-cost pool; each pool uses a different cost-allocation base.

Related Questions

Raphael Hotelâ & Casino is situated on beautiful Lake Tahoe in Nevada. The complex includes aâ 300-room hotel, aâ casino, and a restaurant. As Raphael's newâ controller, your manager asks you to recommend the basis the hotel should use for allocating fixed overhead costs to the three divisions in 2017. You are presented with the following income statement information for 2016:

	Hotel	Restaurant	Casino
Revenues	$16,850,000	$7,150,000	$12,430,000
Direct Costs	$9,675,000	$4,392,000	$4,624,900
Segment Margin	$7,175,000	$2,757,900	$7,805,100

You are given the following data on the three divisions.

	Hotel	Restaurant	Casino
Floor Space (Square Feet)	75,000	15,000	60,000
Number of Employees	360	90	450

Requirement 1. Calculate division margins in percentage terms prior to allocating fixed overhead costs. â (Round your answers to two decimalâ places, X.XX.)

	Hotel		Restaurant		Casino
Division margin		%		%		%

Requirement 2.

Allocate indirect costs to the three divisions using each of the three allocation bases suggested. For each allocation base, calculate division operating margins after allocations in dollars and as a percentage of revenues.

Allocate the indirect costs, then calculate the division operating margin in dollars and as a percentage of revenue for each segment.

Begin with cost allocation based on direct costs

	Hotel	Restaurant	Casino	Raphael (Total)
Allocated Fixed Overhead Costs	?	?	?	?
Operating Margin	?	?	?	?
Operating Margin %	?%	?%	?%

Next, allocate costs based on floor space

And finally costs based on number of employers based on the Table above

	Hotel	Restaurant	Casino	Raphael (Total)
Allocated Fixed Overhead Costs	?	?	?	?
Operating Margin	?	?	?	?
Operating Margin %	?%	?%	?%

Now allocate costs based on number of employees

	Hotel	Restaurant	Casino	Raphael (Total)
Allocated Fixed Overhead Costs	?	?	?	?
Operating Margin	?	?	?	?
Operating Margin %	?%	?%	?%

There is (a dramatic difference/no difference) in the operating margin percentages depending upon which allocation base is chosen. Where cost allocation is required, the (cause-and-effect/direct cost/non-financial) and (benefits received/division-costs/floor-space) criteria are recommended. The $14,600,000 is (fixed/variable) overhead cost. This means that on a short-run basis the (cause-and-effect/direct cost/non-financial) criterion is not appropriate but Smith could attempt to identify the cost drivers for these costs in the long run. Smith should look at how the $14,610,000 cost (benefits/is a detriment to) the three divisions.

salmonworm477

Woh Che Co. has four departments: materials, personnel,manufacturing, and packaging. In a recent month, the fourdepartments incurred three shared indirect expenses. The amounts ofthese indirect expenses and the bases used to allocate themfollow.

Value of assets in use

Total

155,000

Departmental data for the companyâs recent reporting periodfollow.

1. Use this information to allocate each of thethree indirect expenses across the four departments.
2. Prepare a summary table that reports theindirect expenses assigned to each of the four departments.

Supervision expenses	Allocation Base	Percent of Allocation Base			Cost to be Allocated	Allocated Cost
Department	Number of employees	Numerator	Denominator	% ofTotal
Materials				0
Personnel				0
Manufacturing				0		0
Packaging				0
Totals				0
Utilities	Allocation Base	Percent of Allocation Base			Cost to be Allocated	Allocated Cost
Department		Numerator	Denominator	% of Total
Materials				0
Personnel				0
Manufacturing				0		0
Packaging				0
Totals				0
Insurance	Allocation Base	Percent of Allocation Base			Cost to be Allocated	Allocated Cost
Department		Numerator	Denominator	% of Total
Materials				0
Personnel				0
Manufacturing				0		0
Packaging				0
Totals				0

	Supervision	Utilities	Insurance	Total
Materials				$0
Personnel				0
Manufacturing				0
Packaging				0
Totals	$0	$0	$0	$0

lemonjackal901

Georgia Orchards produced a good crop of peaches this year. After preparing the following income statement, the company believes it should have given its No. 3 peaches to charity and saved its efforts.

GEORGIA ORCHARDS Income Statement For Year Ended December 31, 2015
		No. 1		No. 2		No. 3		Combined
Sales (by grade)
No. 1: 234,000 Ibs. @ $2.10/lb	$	491,400
No. 2: 234,000 Ibs. @ $1.90/lb			$	444,600
No. 3: 936,000 Ibs. @ $0.25/lb					$	234,000
Total sales								$	1,170,000
Costs
Tree pruning and care @ $0.30/Ib		70,200		70,200		280,800			421,200
Picking, sorting, and grading @ $0.20/Ib		46,800		46,800		187,200			280,800
Delivery costs		17,000		17,000		39,500			73,500

Total costs		134,000		134,000		507,500			775,500

Net income (loss)	$	357,400	$	310,600	$	(273,500	)	$	394,500

In preparing this statement, the company allocated joint costs among the grades on a physical basis as an equal amount per pound. The companyâs delivery cost records show that $34,000 of the $73,500 relates to crating the No. 1 and No. 2 peaches and hauling them to the buyer. The remaining $39,500 of delivery costs is for crating the No. 3 peaches and hauling them to the cannery.

Prepare reports showing cost allocations on a sales value basis to the three grades of peaches. Separate the delivery costs into the amounts directly identifiable with each grade. Then allocate any shared delivery costs on the basis of the relative sales value of each grade. (Do not round intermediate calculations.)

Tree Pruning and Care:
Grade	Allocation Base	Percent of Allocation Base			x Indirect Cost	Allocated Cost
Nos.		Numerator	Denominator	% of Total
No. 1
No. 2
No. 3
Totals
Picking, Sorting, and Grading:
Grade	Allocation Base	Percent of Allocation Base			x Indirect Cost	Allocated Cost
Nos.		Numerator	Denominator	% of Total
No. 1
No. 2
No. 3
Totals
Delivery:
Grade	Allocation Base	Percent of Allocation Base			x Indirect Cost	Allocated Cost
Nos.		Numerator	Denominator	% of Total
No. 1
No. 2

No. 3
Totals

Using your answers to part 1, prepare an income statement using the joint costs allocated on a sales value basis. (Do not round intermediate calculations.)

GEORGIA ORCHARDS
Income Statement
For Year Ended December 31, 2015
	No. 1	No. 2	No. 3	Combined

Costs



Total costs

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MGAC03H3 Chapter 14: Chapter 14 Notes

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