Selecting Cost Allocation Bases and Direct Method Allocations (LO2)

Nevada Company has three producing departments (P1, P2, and P3) for which direct department costs are accumulated. In January, the following indirect costs of operation were incurred.

Plant manager’s salary and office expense...... $14,400 StlanteSCCUnity meemn eeee a e ee ee 2,400

- Plant nurse’s salary and office expense......... 3,000 PIRI CECEo li ward Sere mmomina Soem anacnic = 4,000 BIMAGCMIMETIMAIMLEMAMGCEucrscs..c. -< 1, sl cle alete ee eee 4,800 Pianticaterenaicost SUDSIGY. . - +. = ass eseleneenee 3,600

$32,200 The following additional data have been collected for the three producing departments:

P1 P2 P3

.Number of employees ........... 10 15 5

~Space occupied (square feet) ..... 2,000 5,000 3,000 Directiabomhoursiec...s....+..- 1,600 4,000 750 HvViaonineOurSyoukom naaen.n csae . 4,800 8,000 3,200

* Number of nurse office visits ...... 30 35 10 Required

a. Group the indirect cost items into cost pools based on the nature of the costs and their common basis for allocation. Identify the most appropriate allocation basis for each cost pool and determine the total January costs in the pool. (Hint: A cost pool may consist of one or more cost items.)

b. Allocate the cost pools directly to the three producing departments using the allocation bases selected in requirement (a).

c. How much indirect cost would be allocated to each producing department if Nevada Company were using a plantwide rate based on direct labor hours? Based on machine hours?

Chapter 7 | Additional Topics in Product Costing 237

d. Comment on the benefits of allocating costs in pools compared with using a plantwide rate.