Problems And Exercises 2 | EssayIvy.com

Problems and Exercises 2

Running head: PROBLEMS AND EXERCISES #2 1
Problems and Exercises #2
7-18
Budgeted overhead rate = Budgeted overhead/budgeted allocation base
a. Calculate the profitability of each of the three regional offices after allocating the
corporate expenses to the three offices using revenues as the allocation base.
PROBLEMS AND EXERCISES #2 2
The data above was inputted into Microsoft Excel. The table shows that corporate
expenses ($3,780,000) should be apportioned to the regional offices based off of each of their
individual revenues, which means that the net profit should be apportioned in the same way.
b. What is the relative profitability of the three regional offices (first, second, and third
most profitable) after allocating corporate expenses?
After allocating the corporate expenses of the three regional offices, the highest relative
profitability would first be Boston: $737,926, second Atlanta: $301,286, and third Chicago:
$288,588.
c. At the end of last year, ETB acquired a similar ERM consulting firm in San
Francisco. To support the expanded operations, ETB expects to incur an additional
$500,000 of corporate expenses. The following table provides information regarding
the operations of ETB as if the SF office had been part of ETB for the entire year.
Boston
Atlanta
Chicago
San Francisco
Revenue
$3,450,000
2,900,000
3,440,000
3,100,00
Direct cost
1,035,000
1,015,000
1,238,400
1,240,000
PROBLEMS AND EXERCISES #2 3
Own indirect cost
345,000
464,000
584,800
558,000
Calculate the profitability of each of the four regional offices after allocating the total
corporate expenses ($4,280,000) to the four offices using revenues as the allocation base.
The corporate expenses should be apportioned by revenue. The table above includes the
San Francisco regional data. With this acquisition, the company has incurred corporate expenses
in excess of $500,000 with a total of $4,280,000 corporate expenses to be allocated among four
regional offices.
d. What is the relative profitability of the four regional offices (first, second, third, and
fourth most profitable) after allocating corporate expenses?
In ranking relative profitability, first would be Boston: $924,461, second Chicago:
$474,581, third Atlanta: $458,083, and fourth San Francisco: $272,675.
e. Compare the relative profitability of the three original offices (Boston, Chicago, and
Atlanta) before (part b) and after the acquisition of the SF office [part d]. Analyze and
discuss why the relative profitability of the three original offices (Boston, Chicago, and
Atlanta) does or doesn’t change with the acquisition of the SF office.
Before the acquisition of San Francisco, the relative profitability was Boston, Atlanta,
and Chicago. After the acquisition, the relative profitability was Boston, Chicago, Atlanta,
followed by San Francisco. There was a minimal difference between the net profits of Chicago
PROBLEMS AND EXERCISES #2 4
and Atlanta (474,581 and 458,083 respectively) with a $16,498 profit difference. The change
takes into account the excess corporate expenses of $500,000 incurred. This change should be
allocated to the specific unit to which it was acquired. However, they were charged and allocated
to all of the regional offices.
f. Comment on the appropriateness or inappropriateness of ETB’s current cost allocation
methodology.
ETB’s current cost allocation methodology would be deemed as inappropriate. This
would be explained because the fixed overhead rates are allocated based on revenue. Since
revenue is not equal across all regions, especially since some regions make much more than
others, this would be an inappropriate action. In order to create a more appropriate source of cost
allocation methods, the cost pool should be allocated based on the regional activities, and
therefore utilize the cost pool of $4,280,000 rather than the current method and allocate based on
a case-by-case basis and perhaps vary in some cases per region.
8-9
a. Critically evaluate the analysis underlying the pricing decisions of $900 for Q and
$750 for Y.
In the problem, the pricing decisions are incorrect as it takes into account the joint fixed
costs while allocating them to the products and then treating the allocated costs as marginal
costs. The demand curves for the enzymes are PQ = 1,300 - 2Q and PY = 950 - 4Y. The only
costs that should be considered for the pricing decision would be the $200,000 joint cost (fixed
cost), the marginal cost Q of $100, and the marginal cost Y of $150. Q generates a profit of
$80,000 and Y with $10,000 totaling $90,000 but the profit does not take the fixed costs of the
250 ounces that remain unsold into account and only half of the output ends up being sold. The
PROBLEMS AND EXERCISES #2 5
remaining 250 ounces are allocated by calculating [250oz. * ($200,000/500)] which amounts to
$100,000 of the joint costs yet are not included in the $90,000 profit. Therefore, the company is
in fact losing $10,000 per batch after $90,000 - 100,000. If 200 ounces of Q and 50 ounces of Y
are sold, this will yield a contribution margin of:
($800 * 200 + $600 * 50)
= $190,000
If we subtract the joint cost of $200,000 from this amount, it also results in the $10,000 loss per
batch.
b. What should management do if the cost per batch rises to $225,000
Quantity
#
Price of
Q $
Price of
Y $
Revenue
of Q $
Inc. cost
of Q $
Total
profit of
Q $
Revenue
of Y $
Inc. cost
of Y $
Total
profit of
Y $
50
1200
750
60000
5000
55000
37500
7500
30000
100
1100
550
110000
10000
100000
55000
15000
40000
150
1000
350
150000
15000
135000
52500
22500
30000
200
900
150
180000
20000
160000
30000
30000
0
250
800
N/A
200000
25000
175000
300
700
N/A
210000
30000
180000
In the table, the maximum profit is seen by taking the cost per batch of $200,000 and the
maximum profit after the batch costs of $20,000 which amounts to $220,000 maximum profit.
PROBLEMS AND EXERCISES #2 6
Since the maximum profits of $220,000 does not exceed the cost per batch of $225,000, the firm
should stop producing once the batch costs reach $225,000.
8-22
a. Allocate the three service departments’ costs (HR, accounting, and
Janitorial/Maintenance) to the two patient units (Clinic and Hospital) using the
direct allocation method.
Service
departments
Dept cost
Clinics
Hospital
Total
Human Res.
$1,200
2,000
3,000
5,000
Accounting
$1,600
6,000
4,000
10,000
Janitorial/Maint.
$2,400
150,000
400,000
550,000
Total
$5,200
Service Dept
Human Res.
$1,200
40%
60%
100%
Accounting
$1,600
60%
40%
100%
Janitorial/Maint.
$2,400
27.27%
72.73%
100%
Human Res.
$480
$720
$1,200
Accounting
$960
$640
$1,600
PROBLEMS AND EXERCISES #2 7
Janitorial/Maint
$654.55
$1,745.45
$2,400
Total allocated
cost
$2,094.55
$3,105.45
$5,200
b. Allocate the three service departments’ costs (HR, Acct, and Jan/Maint) to the two
patient units (clinic and hospital) using the step-down allocation method. The order
of the three departments’ is 1) HR, 2) accounting, 3) Jan/Maint.
Service Dept
Dept cost
$
HR
Acct
Jan/Maint
Clinics
Hospital
Total
HR
$1,200
$50
$150
2000
3000
$5200
Acct
$1600
$50
$100
6000
4000
$10100
Jan/Maint
$2400
$8000
$9000
150000
400000
550000
Total
$5200
Step Down Allocation
HR
$1200
0.96%
2.88%
38.46%
57.69%
100%
$11.54
$34.62
$461.54
$692.31
$1200
Acct
(1600 +
11.54) =
0.99%
27.27%
72.73%
100%
PROBLEMS AND EXERCISES #2 8
$1611.54
$15.96
$957.35
$638.23
$1611.54
Jan/Maint
(2400 +
34.62 +
15.96) =
$2450.57
27.27%
72.73%
100%
$668.34
$1782.23
$2450.57
Total
allocated
cost
$2087.23
$3112.77
$5200
c. What are the primary advantages of the step-down method compared to the direct
allocation method?
“Step-down cost accounting (SDCA) offers a relatively simple method for generating
cost and unit cost data at the facility level” (Conteh & Walker, 2004). The steps of the step-down
method include defining the final product, defining cost centers, identifying the full cost of each
input, assigning inputs to cost centers, allocating all costs to final cost centers, computing total
and unit costs for each final cost center, and reporting the results. “The step-down method
partially overcomes the problems with direct allocations” (Zimmerman, 2017, pg. 337). This
method allows a breakdown of each of the departments and their use of other departments as
seen in part b. With the direct allocations method, the company would instead allocate the
PROBLEMS AND EXERCISES #2 9
overhead from each of the service departments into the inventory, despite the fact that there is a
presence of cross-costs between the departments (Bank, n.d.). It is a table of all the charges that
each of the departments utilized for the other departments such as Janitorial/Maintenance usage
of Accounting or Accounting use of HR and Janitorial/Maintenance. This method allows
accountability for the work that is done by other departments for other departments so they can
get compensated accordingly. This method gives management a record of the allocation of costs
within the department and gives them an understanding of what service departments may be of
most utility to the company or to other departments.
PROBLEMS AND EXERCISES #2 10
References
Bank, E. (n.d.). The Direct Method of Cost Allocation. Retrieved April 11, 2017 from Chron,
http://smallbusiness.chron.com/advantages-direct-method-cost-allocation-66081.html
Conteh, L., & Walker, D. (2004). Cost and unit cost calculations using step-down accounting.
Health, Policy and Planning, 19(2). 127-135.
Zimmerman, J. (2017). Accounting for Decision Making and Control (4
th
ed.). New York, NY:
McGraw-Hill Education.

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