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CHAPTER 7 Download Full “Solution Manual for Cornerstones of Cost Management 3rd Edi-tion” at: https://getbooksolutions.com/download/solution-manual-for-cornerstones-of-cost-management-3rd-edition

Allocating Costs of Support Departments and Joint Products COLLABORATIVE LEARNING EXERCISE SOLUTION 1. a. Direct method

Packaging Cooking and Freezing Machine hours ................................ 0.6667 0.3333 Kilowatt-hours ............................... 0.5556 0.4444

Maintenance: (0.6667 × $340,000) ................. $ 226,678 (0.3333 × $340,000) ................. $ 113,322 Power: (0.5556 × $200,000) ................. 111,120 (0.4444 × $200,000) ................. 88,880 Direct costs ..................................... 75,000 55,000 $ 412,798 $ 257,202

Cooking: $412,798/40,000 = $10.32 per machine hour Packaging and freezing: $257,202/30,000 = $8.57 per direct labor hour

Prime costs ........................................................ $ 16.00 Cooking ($10.32 × 2) ........................................ 20.64 Packaging and freezing ($8.57 × 0.5) ............... 4.29 Total cost ...................................................... $ 40.93 Markup (20%) ................................................... 8.19 Bid price ...................................................... $ 49.12

b. Sequential method: Packaging and Maintenance Power Cooking Freezing Machine hours ....................... — 0.4000 0.4000 0.2000 Kilowatt hours ....................... — — 0.5556 0.4444

Direct costs ............................ $ 340,000 $ 200,000 $ 75,000 $ 55,000 Maintenance:

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(0.4000 × $340,000) ........ (136,000) 136,000 (0.4000 × $340,000) ........ (136,000) 136,000 (0.2000 × $340,000) ........ (68,000) 68,000

Power: (0.5556 × $336,000) ........ (186,682) 186,682 (0.4444 × $336,000) ........ $ (149,318) 149,318

$ 0 $ 0 $ 397,682 $ 272,318

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7–37 Continued

Cooking: $397,682/40,000 = $9.94 per machine hour Packaging and freezing: $272,318/30,000 = $9.08 per direct labor hour

Prime costs ........................................................ $ 16.00 Cooking ($9.94 × 2) .......................................... 19.88 Packaging and freezing ($9.08 × 0.5) ............... 4.54 Total cost ...................................................... $ 40.42 Markup (20%) ................................................... 8.08 Bid price ....................................................... $ 48.50

c. Reciprocal method:

Packaging and Maintenance Power Cooking Freezing Machine hours ....................... — 0.4 0.4 0.2 Kilowatt-hours ...................... 0.1 — 0.5 0.4

M = $340,000 + 0.1P P = $200,000 + 0.4M M = $340,000 + 0.1($200,000 + 0.4M) P = $200,000 + 0.4($375,000) M = $340,000 + $20,000 + 0.04M P = $200,000 + $150,000 0.96M = $360,000 P = $350,000 M = $375,000

Packaging Total Cooking and Freezing From: Maintenance: $375,000 (0.4 × $375,000) ......................... $ 150,000 (0.2 × $375,000) ......................... $ 75,000 Power: 350,000 (0.5 × $350,000) ......................... 175,000 (0.4 × $350,000) ......................... 140,000 Direct costs ....................................... 75,000 55,000 $ 400,000 $ 270,000

Cooking: $400,000/40,000 = $10 per machine hour Packaging and freezing: $270,000/30,000 = $9 per direct labor hour

Prime cost .......................................................... $ 16.00 Cooking ($10 × 2) ............................................. 20.00 Pack/freeze ($9 × 0.5) ....................................... 4.50 Total cost ...................................................... $ 40.50 Markup (20%) ................................................... 8.10 Bid price ....................................................... $ 48.60

7–37 Concluded

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2. No, the direct method did not produce a winning bid. The direct method fails to consider the in-terrelationships of the support centers and, as a consequence, assigns too much of the support center costs to the cooking department. Since the job spends more time in the cooking depart-ment than in the packaging and freezing department, it receives too much overhead and is over-priced. The reciprocal method is the most accurate as it takes into account the use of support de-partments by other support departments.