You have explained to Helen the importance of understanding how indirect costs can be allocated to the
Question:
You have explained to Helen the importance of understanding how indirect costs can be allocated to the cost of finished goods and the problems of using a cost of goods manufactured statement to apply these costs and appropriately cost and price her products. Divine Denim has 2 production departments (Cutting and Machining), and 3 support departments (Administration, IT and Design).
The IT Department's costs are allocated based on the number of computers. The Administration Department's costs are allocated based on the number of employees. The Design Department's costs are allocated 50% to cutting and 50% to Machining. Allocate the support department costs in the following order: Administration then IT. Helen has provided some estimates of costs for the current year (see below).
INPUT DATA | |||||
Direct costs | Administration | IT | Design | Cutting | Machining |
Materials & Labour | 55,000 | 35,000 | 45,000 | 50,000 | 400,000 |
Indirect costs | 10,000 | 7,500 | 10,000 | 7,500 | 25,000 |
Total | 65,000 | 42,500 | 55,000 | 57,500 | 425,000 |
Allocation base | |||||
No of computers | 1 | 1 | 1 | 9 | |
Designs | 0.5 | 0.5 | |||
No. of employees | 1 | 1 | 1 | 1 | 8 |
Required:
- Allocate the support department costs to the operating departments using the direct method. (3 marks)
- Allocate the support department costs to the operating departments using the step-down method. Allocate first the costs for the support department with the largest direct costs. (8 marks)
- Allocate the support department costs to the operating departments using the reciprocal method.
Introduction to Management Accounting
ISBN: 978-0133058789
16th edition
Authors: Charles Horngren, Gary Sundem, Jeff Schatzberg, Dave Burgsta