Tariffs Inc. manufactures two product lines in the same plant: AllDomestic and SomeDomestic. Both product lines are
Question:
Besides the domestic direct costs Tariff Inc. incurs to manufacture the two product lines, it also has domestic indirect (common) costs. These domestic indirect costs are in two service departments: S1 and S2. S1 and S2 are domiciled in Tariff Inc. s home country and, hence, are treated as domestic costs in tariff calculations. The total cost of operating S1 is $ 500 and the total cost of operating S2 is $ 2,000. AllDomestic and SomeDomestic require the services of each of these two service centers as part of their manufacturing process. Moreover, each service department uses the services of the other service department. The following table summarizes the number of service units consumed of each service department by the other service department and by the two product lines, AllDomestic and SomeDomestic.
In other words, S2 consumes 100 service units of S1 and AllDomestic consumes 300 service units of S1.
Required:
a. Allocate the costs of S1 ($ 500) and S2 ($ 2,000) to the AllDomestic and the SomeDomestic product lines using the direct allocation method.
b. Allocate the costs of S1 ($ 500) and S2 ($ 2,000) to the AllDomestic and the SomeDomestic product lines using the step- down allocation method where S1 is allocated first and S2 is allocated second.
c. Allocate the costs of S1 ($ 500) and S2 ($ 2,000) to the AllDomestic and the SomeDomestic product lines using the step- down allocation method where S2 is allocated first and S1 is allocated second.
d. Which allocation method (a, b, or c ) should Tariff Inc. use? Explain why. Assume Tariff Inc. does not use indirect cost allocations to measure and reward the performance of managers in Tariff Inc., the allocated costs are not used for any decision- making purposes, and Tariff Inc. pays no other taxes other than possible tariffs.
e. Assume the tariff rate is 20 percent of the total cost of manufacturing the product (domestic content cost plus foreign content cost including all allocated indirect cost). How much tariff will Tariff Inc. pay based on your recommended allocation method in part(d)?
Step by Step Answer:
Accounting for Decision Making and Control
ISBN: 978-0078025747
8th edition
Authors: Jerold Zimmerman