3 Exercise 9-23, part bNote that Dept SV has state-of-art machines, and the overhead is likely driven by machine use.Examples of costs?Department SV has an overhead allocation rate of $4.20 per machine-hour($105,840 ÷ 25,200 machine hours).Department C has an overhead allocation rateof $1.32 per DLH ($23,760 ÷ 18,000 labor-hours).
4 Exercise 9-23, part bWe expect these to better reflect the OH costs of the three flavors.
5 Ex. 9-23, part eCharlene was correct that she was being allocated some of Department SV’s overhead.Plantwide allocation does not correctly allocate the overhead by department; it simply uses one allocation rate for all products in all departments.Under plantwide allocation, 1,000 gallons of chocolate cost $1,950. Once the overhead was reallocated into department cost pools, the cost of chocolate fell to $1,824.Although it requires more time and skill to collect and process the information, department allocation generally yields more accurate product cost information.
6 Solution to 9-24 (not assigned, but related to 9/25) Allocation based on separate pools for routine matters and transitions:
7 Pr. 9-25First, note that the total to be allocated is $750,000 (= $200*1500 employees + $5625* 80 transitions).If we just compute the variable cost to be allocated to Ohio, the remainder will be allocated to Illinois.50 transition * $2000 = $100,000300 employees* $50 = $15, $115,000So, Illinois gets $750,000 – 115,000 = $635,000
8 Would the allocation be fair? Reasonable? The reason it’s considered an allocation rather than a traced (direct) cost is that there are multiple ways to do it---no “correct” way!Allocations always are arbitrary (because there is no provably “correct” way).But there does exist a hierarchy of reasons, from strongest to weakest:Cause-and-effectBenefits ReceivedFairnessAbility to bear
11 9-27: Activity-Based Costing in a Nonmanufacturing Environment: Cathy’s Catering
12 Per-guest charge to cover costs? If Cathy wants to cover her costs she should charge…$49 per guest for the picnic ($980 ÷ 20 guests)$80.00/guest for dinner ($1,600 ÷ 20 guests).Do we know the cost structure? What is her BEP?
13 9-29: ABC vs. Traditionalc-$15 per machine-hour = $120,000 in production run costs ÷ 8,000 machine-hours.d-$3,500 per run = $70,000 in per-run (setup?) costs ÷ 20 total runs.e-$1,500 per inspection = $90,000 in inspn. costs ÷ 60 inspections.
14 9-29 cont’d: Allocated by DLH Vs. $ and $ for ABCWhich product was “subsidizing” the other?
15 9-29 concludedBy allocating overhead on the basis of direct labor, Doaktown Products has been understating the cost to manufacture M-123, thereby overstating the profits on M-123.Perhaps the basic reel was being charged too much of the overhead costs related to machinery that really is used for the fancy version.