ACCT 301 SEU Cost Accounting Static and Flexible Budget Performance Worksheet

ACCT 301 SEU Cost Accounting Static and Flexible Budget Performance Worksheet
College of Administrative and Financial Sciences
Assignment 3
Deadline: 21/11/2020 @ 23:59
Course Name: Cost accounting
Student’s Name:
Course Code: ACCT 301
Student’s ID Number:
Semester: 1
CRN:
Academic Year: 1441/1442 H
For Instructor’s Use only
Instructor’s Name:
Students’ Grade: Marks Obtained/Out of
Level of Marks: High/Middle/Low
Instructions

The Assignment must be submitted on Blackboard (WORD format only) via allocated
folder.

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for poor presentation. This includes filling your information on the cover page.

Students must mention question number clearly in their answer.

Late submission will NOT be accepted.

Avoid plagiarism, the work should be in your own words, copying from students or other
resources without proper referencing will result in ZERO marks. No exceptions.

All answered must be typed using Times New Roman (size 12, double-spaced) font. No
pictures containing text will be accepted and will be considered plagiarism).

Submissions without this cover page will NOT be accepted.
Page 1 of 2
Q 1 Provide numerical example of assigning support department cost and discuss the
purpose of assigning support department costs (Week 10: Chapter 8, Measuring and
Assigning Support Department Costs).
(2 marks)
Q 2 LMN Compagny produces three products K, L and M. During the year, the joint costs
of processing the three products were $480,000.
Production and sales value information were as follows:
Sales Value
Product
Units
at Split-Off
Separable Costs
Selling Price
K
500,000
$13 per unit
$6.00 per unit
$40 per unit
L
300,000
$12 per unit
$4.00 per unit
$37 per unit
M
200,000
$8 per unit
$3.00 per unit
$28 per unit
Allocate the joint costs using the physical output method.
(Week 11: Chapter 9, Joint product and by – Product costing)
(1.5 marks)
Q 3 Provide numerical examples of static and flexible budget and discuss how these
budgets could be used to evaluate the performance of the managers (Week 12: Static and
flexible budgets).
(1.5 marks)
.
Page 2 of 2
Cost Management
Measuring, Monitoring, and Motivating Performance
Chapter 8
Measuring and Assigning Support
Department Costs
© John Wiley & Sons, 2011
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 1
Chapter 8: Measuring and Assigning Support
Department Costs
Learning objectives







Q1: What are support departments, and why are their costs
allocated to other departments?
Q2: What process is used to allocate support department costs?
Q3: How is the direct method used to allocate support costs to
operating departments?
Q4: How is the step-down method used to allocate support costs
to operating departments?
Q5: How is the reciprocal method used to allocate support costs to
operating departments?
Q6: What is the difference between single- and dual-rate
allocations?
Q7: How do support cost allocations affect decisions and
managerial incentives?
© John Wiley & Sons, 2011
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 2
Q1: Support versus Operating Departments
• The operating departments of an organization
produce products or services that generate
revenue.
• The support departments of an organization
produce products or provide services to the
operating and other support departments.
• The support department costs are common
costs that are shared between two or more
other departments.
© John Wiley & Sons, 2011
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 3
Q1: Reasons for Allocating Support
Department Costs
• External reporting
• Motivation
• appropriate consumption of support
department resources
• efficiency of support department
• monitor consumption of support
department services
• Decision making
• product pricing
• make or buy decisions
© John Wiley & Sons, 2011
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 4
Q1: Support Department Allocation Process
© John Wiley & Sons, 2011
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 5
Q2: Process for Allocating Support
Department Costs
1. Clarify allocation purpose
2. Identify cost pools
3. Assign costs to cost pools
4. Choose allocation bases for each cost pool
5. Choose allocation method; allocate support
department costs
6. Allocate updated operating department costs to
units of goods or services, if relevant
© John Wiley & Sons, 2011
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 6
Q2: Process for Allocating Support
Department Costs
1. Clarify allocation purpose

if the purpose is to motivate the use of the services
of a newly formed department, perhaps no costs
should be allocated

if the purpose is to discourage operating department
managers from over-use of the services of support
departments, then a rate per unit of service might be
large and not based on actual costs

if the purpose is to determine the full cost of products
or services for long-term pricing decisions, then all
support costs should be allocated
© John Wiley & Sons, 2011
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 7
Q2: Process for Allocating Support
Department Costs
2. Identify cost pools
• the purpose will determine whether both fixed
and variable support department costs
should be allocated
• the purpose will determine which costs
should be allocated
© John Wiley & Sons, 2011
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 8
Q2: Process for Allocating Support
Department Costs
3. Assign costs to cost pools
• some costs will be direct to the cost pool
(e.g. toner cartridge costs would be direct to
the “variable copying costs” cost pool)
• some costs will be indirect to the cost pool
(e.g. rent costs for an entire facility would be
indirect to the “information technology costs”
cost pool)
© John Wiley & Sons, 2011
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 9
Q2: Process for Allocating Support
Department Costs
4. Choose allocation bases for each cost pool
• an allocation base with a good cause-andeffect relationship with the cost pool provides
a reasonable allocation rate
• users of support department services will
carefully monitor their consumption of the
allocation base
© John Wiley & Sons, 2011
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 10
Q2: Process for Allocating Support
Department Costs
5. Choose allocation method and allocate support
department costs
• in this chapter we cover three allocation
methods
• each of these three methods could be
implemented using
• a single- or dual-rate approach (covered later)
• actual or budgeted costs and allocation bases
(covered later)
© John Wiley & Sons, 2011
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 11
Q2: Process for Allocating Support
Department Costs
6. Allocate updated operating department costs to
units of goods or services, if relevant
• for some decisions, this may not be relevant
• for long-term pricing decisions, this is likely to
be relevant
© John Wiley & Sons, 2011
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 12
Q3: The Direct Method of Allocating
Support Department Costs
• The direct method ignores the fact that
support departments use each others’
services.
• Each support department’s costs are
allocated only to operating departments.
• This method is the easiest
computationally and the easiest to
explain.
© John Wiley & Sons, 2011
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 13
Q3: The Direct Method Example
Philco Toys makes metal and plastic toys in separate departments. It has
two support departments, Accounting and Information Systems. Philco has
decided to allocate Accounting department costs based on the number of
employees in each department and Information Systems costs based on
the number of computers in each department. Given the information below,
use the direct method to allocate support department costs.
Support Dep’ts
Total department costs
Number of employees
Number of computers
Operating Departments
AccInfo
Plastic
ounting Systems Products
$48,000 $72,000 $386,000
3
4
22
4
6
3
Metal
Products
$182,000
16
3
Total
$688,000
45
16
Allocate costs:
Accounting
(48,000)
Information Systems
Totals
© John Wiley & Sons, 2011
(72,000)
$0
$0
27,789
20,211
$0
36,000
36,000
$0
$449,789
$238,211
$688,000
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 14
Q3: The Direct Method Example
Plastic
PlasticProducts
Productsisisallocated
allocated
Plastic
Plasticand
andMetal
MetalProduct
Productshare
share
22/(22+16)
of
Accounting
22/(22+16) of Accounting
Info
InfoSystems
Systemscosts
costsequally
equally
department
costs,
and
Metal
department costs, and Metal
because
becausethey
theyhave
havethe
thesame
same
Products
is
allocated
Products is allocated
number
numberof
ofcomputers
computersinineach
each
16/(22+16).
Notice
that
the
16/(22+16). Notice that the
department.
department. Notice
Noticethat
thatthe
the
number
of
employees
in
the
number of employees in the
number
numberof
ofcomputers
computersininthe
the
support
departments
is
ignored
support departments is ignored
support
departments
isisignored
support
departments
ignored
Support
Dep’ts
Operating
Departments
under
the
direct
method.
under the direct method.
under
underthe
thedirect
directmethod.
method.
Total department costs
Number of employees
Number of computers
AccInfo
Plastic
ounting Systems Products
$48,000 $72,000 $386,000
3
4
22
4
6
3
Metal
Products
$182,000
16
3
Total
$688,000
45
16
Allocate costs:
Accounting
(48,000)
Information Systems
Totals
© John Wiley & Sons, 2011
(72,000)
$0
$0
27,789
20,211
$0
36,000
36,000
$0
$449,789
$238,211
$688,000
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 15
Q4: The Step-Down Method of Allocating
Support Department Costs
• The step-down method allocates some (but not all)
support department costs to other support
departments.
• The first support department’s costs are allocated
to all operating and support departments that use
its services.
• Each subsequent support department’s costs are
allocated to all operating and support departments
that use its services, except any support
department whose costs were already allocated.
• Allocation order must be determined.
© John Wiley & Sons, 2011
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 16
Q4: The Step-Down Method Example
Given the information for Philco, use the step-down method to allocate
support department costs. Allocate the costs of the support department that
provides the largest percentage of its services to the other support
department first.
First determine
allocation order:
Accounting provided 4/(4+22+16) = 4/42
= 9.5% of its services to Info Systems.
Information Systems provided 4/(4+3+3) = 4/10 = 40% of its
services to Accounting, so Information Systems goes first.
Support Dep’ts
Total department costs
Number of employees
Number of computers
© John Wiley & Sons, 2011
Operating Departments
AccInfo
Plastic
ounting Systems Products
$48,000 $72,000 $386,000
3
4
22
4
6
3
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Metal
Products
$182,000
16
3
Total
$688,000
45
16
Slide # 17
Q4: The Step-Down Method Example
Given the information for Philco, use the step-down method to allocate
support department costs.
Now perform the allocation:
Support Dep’ts
Total department costs
Number of employees
Number of computers
Operating Departments
AccInfo
Plastic
ounting Systems Products
$48,000 $72,000 $386,000
3
4
22
4
6
3
Metal
Products
$182,000
16
3
Total
$688,000
45
16
44,463
27,789
32,337
20,211
$0
$0
21,600
21,600
21,600
$0
$0
$435,389
$452,063
$223,811
$235,937
$659,200
$688,000
Allocate costs:
Accounting
Information Systems
Totals
© John Wiley & Sons, 2011
(76,800)
(48,000)
28,800
$0
(72,000)
$0
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 18
Q4: The Step-Down Method Example
Info
Accounting
InfoSystems
Systemscosts
costsare
areallocated
allocated
Accountingcosts
costsare
areallocated
allocated
to
only
toAccounting,
Accounting,Plastic,
Plastic,&&Metal
Metal
onlyto
toPlastic
Plastic&&Metal
Metalbased
basedon
on
based
each
basedon
oneach
eachdepartment’s
department’s
eachdepartment’s
department’snumber
numberof
of
number
employees
numberof
ofcomputers
computerscompared
compared
employeescompared
comparedto
tototal
total
to
non-Accounting
tototal
totalnon-Info
non-InfoSystems
Systems
non-Accountingand
andnon-Info
non-Info
Support Dep’ts Systems
Operating
Departments
computers:
employees:
22+16=38
computers:4+3+3=10.
4+3+3=10.
Systems
employees:
22+16=38
Total department costs
Number of employees
Number of computers
AccInfo
Plastic
ounting Systems Products
$48,000 $72,000 $386,000
3
4
22
4
6
3
Metal
Products
$182,000
16
3
Total
$688,000
45
16
Allocate costs:
Accounting
Information Systems
Totals
(76,800)
28,800
$0
(72,000)
$0
44,463
32,337
$0
21,600
21,600
$0
$452,063
$235,937
$688,000
Total
Totalcosts
costsallocated
allocatedout
outof
ofAccounting
Accountingare
arenow
nowhigher
higherbecause
becauseof
of
the
theInfo
InfoSystems
Systemscosts
costsallocated
allocatedto
toAccounting.
Accounting.
© John Wiley & Sons, 2011
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 19
Q4: The Step-Down Method Example
(22/38)
(22/38)xx$76,800
$76,800
(4/10)
(4/10)xx$72,000
$72,000
(16/38)
(16/38)xx$76,800
$76,800
(3/10)
(3/10)xx$72,000
$72,000
Support Dep’ts
Total department costs
Number of employees
Number of computers
(3/10)
(3/10)xx$72,000
$72,000
Operating Departments
AccInfo
Plastic
ounting Systems Products
$48,000 $72,000 $386,000
3
4
22
4
6
3
Metal
Products
$182,000
16
3
Total
$688,000
45
16
Allocate costs:
Accounting
Information Systems
Totals
© John Wiley & Sons, 2011
(76,800)
28,800
$0
(72,000)
$0
44,463
32,337
$0
21,600
21,600
$0
$452,063
$235,937
$688,000
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 20
Q5: The Reciprocal Method of Allocating
Support Department Costs
• The reciprocal method allocates all support
department costs to other support
departments.
• The first step is to compute the total costs of
each support department when its usage of
other support department services is taken
into consideration.
• Support department costs are then allocated
to all other operating and support
departments that consume its services.
© John Wiley & Sons, 2011
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 21
Q5: The Reciprocal Method Example
Given the information for Philco, use the reciprocal method to allocate
support department costs.
First determine total costs for each support department by writing an equation for its
costs (use A and IS as abbreviations).
A = $48,000 + [4/(4+3+3)] x IS; IS = $72,000 + [4/(4+22+16)] x A
Then solve: A = $48,000 + (4/10) x [$72,000 + (4/42) x A]
A = $48,000 + $28,800 + (16/420) x A]
(404/420) x A = $76,800
A = $76,800 x (420/404) = $79,842
IS = $72,000 + (4/42) x $79,842 = $79,604
Support Dep’ts
Total department costs
Number of employees
Number of computers
© John Wiley & Sons, 2011
Operating Departments
AccInfo
Plastic
Metal
ounting Systems Products
Products
$48,000 $72,000 $386,000 $182,000
3
4
22
16
4
6
3
3
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Total
$688,000
45
16
Slide # 22
Q5: The Reciprocal Method Example
Given the information for Philco, use the reciprocal method to allocate
support department costs.
Now perform the allocation:
Support Dep’ts
Total department costs
Number of employees
Number of computers
Operating Departments
AccInfo
Plastic
ounting Systems Products
$48,000 $72,000 $386,000
3
4
22
4
6
3
Metal
Products
$182,000
16
3
Total
$688,000
45
16
Allocate costs:
Accounting
Information Systems
Totals
© John Wiley & Sons, 2011
(79,842)
7,604
41,822
(79,842)
7,604
41,822
31,842 (79,604)
(79,604)
23,881
31,842
23,881
$0
$0 $451,703
$451,703
$0
$0
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
30,416
30,416
23,881
23,881
$0
$0
$236,297
$236,297
$688,000
Slide # 23
Q5: The Reciprocal Method Example
These
Thesenumbers
numbersare
arethe
the
solutions
solutionsto
tothe
the
simultaneous
simultaneousequations.
equations.
(4/42)
(4/42)xx$79,842
$79,842
Support Dep’ts
Total department costs
Number of employees
Number of computers
(22/42)
(22/42)xx$79,842
$79,842
(16/42)
(16/42)xx$79,842
$79,842
Operating Departments
AccInfo
Plastic
ounting Systems Products
$48,000 $72,000 $386,000
3
4
22
4
6
3
Metal
Products
$182,000
16
3
Total
$688,000
45
16
Allocate costs:
Accounting
Information Systems
Totals
© John Wiley & Sons, 2011
(79,842)
7,604
41,822
(79,842)
7,604
41,822
31,842 (79,604)
(79,604)
23,881
31,842
23,881
$0
$0 $451,703
$451,703
$0
$0
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
30,416
30,416
23,881
23,881
$0
$0
$236,297
$236,297
$688,000
Slide # 24
Q5: The Reciprocal Method Example
(4/10)
(4/10)xx$79,604
$79,604
(3/10)
(3/10)xx$79,604
$79,604
(3/10)
(3/10)xx$79,604
$79,604
Support Dep’ts
Total department costs
Number of employees
Number of computers
Operating Departments
AccInfo
Plastic
ounting Systems Products
$48,000 $72,000 $386,000
3
4
22
4
6
3
Metal
Products
$182,000
16
3
Total
$688,000
45
16
Allocate costs:
Accounting
Information Systems
Totals
© John Wiley & Sons, 2011
(79,842)
7,604
41,822
(79,842)
7,604
41,822
31,842 (79,604)
(79,604)
23,881
31,842
23,881
$0
$0 $451,703
$451,703
$0
$0
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
30,416
30,416
23,881
23,881
$0
$0
$236,297
$236,297
$688,000
Slide # 25
Q6: Single- versus Dual-Rate Allocation
• In single-rate allocation, each cost pool
includes fixed and variable costs.
• In dual-rate allocation, fixed and variable
costs are in separate cost pools.
• Both methods can be employed with the
direct, step-down, or reciprocal methods.
• The prior three examples used the singlerate allocation method.
© John Wiley & Sons, 2011
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 26
Q6: Single- versus Dual-Rate Example
Philco has decided to use the direct method and allocate variable
Accounting costs based on the number of transactions and fixed
Accounting costs based on the number of employees. The Info Systems
variable costs will be allocated based on the number of service re …
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