95) Nisota Motors is a small motor supply outlet that sells motors to companies that make

various small motorised appliances. The fixed operating costs of the company are $300 000

per year. The controlling shareholder, interested in product profitability and pricing, wants

all costs allocated to the motors and wants to review the company status on a quarterly

basis. The shareholder is trying to determine whether the costs should be allocated each

quarter based on the 25% of the annual fixed operating costs ($75 000) or by using an

annual forecast budget to allocate the costs. The following information is provided for the

operations of the company:

Forecast Actual

Sales for First Quarter 5000 4850

Sales for Second Quarter 8000 7900

Sales for Third Quarter 8000 8125

Sales for Fourth Quarter 3000 3125

Required:

a. What amount of fixed operating costs are assigned to each motor by quarter when

actual sales are used as the allocation base and $75 000 is allocated?

b. How much fixed cost is recovered each quarter under requirement a.?

c. What amount of fixed operating costs are assigned to each motor by quarter when

forecast sales are used as the allocation base and the rate is calculated annually as part

of the budgetary process?

d. How much fixed cost is recovered each quarter under requirement c.?

e. Which method seems more appropriate in this case? Explain.

95)

43

96) The fixed costs of operating the maintenance facility of Yarra Hospital are $4 500 000

annually. Variable costs are incurred at the rate of $40 per maintenance-hour. The facility

averages 40 000 maintenance-hours a year. Budgeted and actual hours per user for 2014

are as follows:

Budgeted hours Actual hours

Building and grounds 10 000 12 000

Operating and emergency 8000 8000

Patient care 21 000 22 000

Administration 1000 1200

Total 40 000 43 200

Assume that budgeted maintenance-hours are used to calculate the allocation rates.

Required:

a. If a single-rate cost-allocation method is used, what amount of maintenance cost will

be budgeted for each department?

b. If a single-rate cost-allocation method is used, what amount of maintenance cost will

be allocated to each department based on actual usage? Based on budgeted rate.

c. If a dual-rate cost-allocation method is used, what amount of maintenance cost will be

budgeted for each department?

d. If a dual-rate cost-allocation method is used, what amount of maintenance cost will be

allocated to each department based on actual usage? Based on budgeted usage for fixed

operating costs and actual usage for variable operating costs?

96)

44

97) Frenhs Forest Publishing Company has two service departments, S1 and S2, and two

production departments, P1 and P2.

The data for May were as follows:

Services provided to:

Activity Costs S1 S2 P1 P2

S1 $90 000 10% 40% 50%

S2 $60 000 20% 55% 25%

Fixed Costs

P1 $360 000

P2 $520 000

Required:

a. Set up algebraic equations in linear form for each activity.

b. Determine total costs for each department by solving the equations from part (a) using

the reciprocal method.

97)

 

98) The Maintenance Department has been servicing Bondi Production for four years.

Beginning next year, the company is adding a Scrap-Processing Department to recycle the

materials from Bondi Production. As a result, maintenance costs are expected to increase

from $480 000 per year to $500 000 per year. The Scrap-Processing Department will use

25% of the maintenance efforts.

Required:

a. Using the stand-alone cost-allocation method, identify the amount of maintenance

cost that will be allocated to Bondi Production and the Scrap-Processing Department next

year.

b. Using the incremental cost-allocation method, identify the amount of maintenance

cost that will be allocated to Bondi Production and the Scrap-Processing Department next

year.

98)

 

 

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