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CHAPTER 13

ALLOCATING COSTS TO RESPONSIBILITY CENTERS

Questions, Exercises, Problems, and Cases: Answers and Solutions

13.1 See text or glossary at the end of the book.

13.2 No product for external consumption passes through service departments.Service departments exist to provide services to the productiondepartments which produce goods and services.

13.3 A direct cost is one that rms can identify specically with a particularproduct! department! or process. An indirect cost! in contrast! results

from the "oint use of a facility or a service by several products!departments! or processes.

13.# $he three steps in the cost allocation process are%

&1' allocate direct costs to all departments(

&2' allocate indirect costs to all departments( and

&3' allocate service department costs to production departments.

13.) *oint production processes are characteri+ed by the transformation of

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&" i ' i i l i l d h h f h

13.; $he di?erent methods give the same results when service departments donot provide services to other service departments.

13.11 Suppose production employees! andthe Service >>. ach productiondepartment will be allocated @)>>. Now suppose that production employees. Now B )>'C1)>' total employees and to @333.33.

13.12 $his problem relates to the distinction between resources usedand resources supplied that we discussed in 8hapter 3. $hecompany should separate

use of service department resources from the capacity to supply theresources. Dor example! suppose a repair department has 1> employees.

$here may be times when all 1> employees are providing repair services( atother times! some of the 1> employees are simply waiting to get repair calls.

roduction department should be charged with the use of repair

personnel!that part is clear. /ut what about the cost of repair personnel who arewaiting idly for production departments to call for repair help. $his lattercase is an example of excess capacity &which the company might want

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13.13 Some of the costs inclue!

&1' additional bookkeeping(

&2' additional management costs in selecting allocation methods andallocation bases( and

&3' costs of making the wrong decision because of the use of counter-productive information.

Some of the "ene#ts a$e!

&1' instilling responsibility for all costs of the company in the divisionmanagers(

&2' relating indirect costs to products under contract( and

&3' constructing performance measures &Enet protE' for a division thatmay be more meaningful to management than contribution margins!particularly for measuring divisional performance rather than theperformance of individual managers.

13.1# Allocating +ero costs is another allocation method. 4t too is an arbitrarymethod. Fowever! an advantage of no cost allocation is that it reducescosts of cost allocation.

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13.1,

Costs Bene#ts

Hoss of current contribution to 4mproved overall eIciency if less

prot eIcient divisions are dropped

8ost of decommissioning and dis- 0se of talented employees in moreposing of physical assets &inven- e?ective divisiontories! plant! property and e6uip-ment'

ossible environmental cleanup 4mproved reputation for eIciencycosts may attract better physical and

human capital

7etaining! relocating! or termi- 8losing may get other divisionsJnating employees attention and cause them to be-

come more eIcient

Host income to surrounding com-

munity! with numerous adversee?ects on commercial and publicsectors

Hoss of community goodwill andpossible adverse e?ects on com-pany reputation

13.1 Sharing the cost e6ually is certainly the easiest approach. Fowever! ifone student causes most of the cleaning needs! sharing costs e6ually isnot necessarily fair &unless all students agree on this approach'. Another

lt ti i ht b t f t f h b d

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13.1: &Allocating overhead to departments and "obs.'

a. %ilmin& Eitin& P$intin&'e(a$tment 'e(a$tment 'e(a$tmentHabor Fours /asis............... @12 per hr. @1, per hr. @2> per hr.

b. %ilmin& Eitin& P$intin&'e(t) 'e(t) 'e(t) Total

Gaterial......................... @ 1!2>> -- @ 1,> @ 1!3,>Habor............................. 3!>>> @ #!>>> #>> !#>>verhead....................... 3!>>> ,!#>> ,> 1>!1,>

$otal........................... @ !2>> @ 1>!#>> @ 1!32> @ 1:!;2>

13.1; &Allocating overhead.'

'e(a$tment *ain+ Gene$alNo) 1 No) , tenance Plant

8harged > @ 2:!>>> @ #)!>>> @ #>!>>>4ndirect Gaterial............ 1:!>>> 1#!>>> 1!:>> 1,!>>>Giscellaneous................ ,!>>> 1>!>>> 3!2>> 1>!>>>

@ :>!>>> @ )2!>>> @ )>!>>> @ ,,!>>>Allocations%

Keneral lanta............... 33!>>> 1;!:>> 13!2>> &,,!>>>'

Gaintenanceb................ 2)!2:> 3!;2> &,3!2>>'

$otal verheadc................... @ 13:!2:> @ 1>;!2> > >

a$otal costs for the Keneral lant &@,,!>>>' are allocated )>L toL to L to Gaintenance.

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13.2> &Allocating overhead to "obs.'

a. HA*ILTON- INC).o" O$e$ P$ouction Reco$*onth of .anua$/

.o" .o"s in .o"s in O$e$ P$ocess 'i$ect La"o$ 'i$ect *ate$ial A((lie O0e$hea TotalP$ocessCom(lete

No) 11 'e(t) A 'e(t) B 'e(t) A 'e(t) B 'e(t) Aa 'e(t) B" Costs 131 .o"s:: @2!#>> @ ,>> @ #>> @ )>> @ 3>> @ 3>> @ 3>> @ #!:>> @ #!:>>

---:; 1!>> 1!2>> ,>> ;>> ,>> ,>> #)> ,!>)> ---@ ,!>)>

;> --- 1!,>> :>> 1!1>> >> :>> ,>> )!,>> ---)!,>>

;1 --- 2!>>> 1!2>> 1!2>> ;>> 1!>>> ;>> !2>> ---!2>>

;2 --- 2!#>> 1!,>> 1!:>> :>> 1!2>> 1!2>> ;!>>> ;!>>> ---$otal @ #!1>> @ !:>> @ #!,>> @ )!)>> @ 3!3>> @ 3!;>> @ 3!#)> @ 32!,)> @ 13!:>>

@ 1:!:)>

aAmount )>L of direct labor.bAmount )L of direct labor.

b. O0e$hea 'e(t) A 'e(t) B TotalApplied.............................. @3!;>> @3!#)> @!3)>

Actual ............................... #!,>> a 3!#>> b :!>>>ver &0nder' Applied........ @ &>>' @ )> @ &,)>'

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a@#!,>> @#!2>> B &X@,>>'.b@3!#>> @3!2>> B &X@,>>'.

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13.21 &Allocating service department costs using the step method.'

Gene$al%acto$/ *ain+Amin) tenance Cuttin& Assem"l/

Service > @ #!:>> NA NA

Gaintenance Allocationa...... ;,> &1C)' !:>>' @ ;,> &1C)' @ 2!::> &3C)'Keneral Dactory Admin-

istration Allocation............ &3!3,>' 1!3## &2C)' 2!>1, &3C)'

$otal 8osts Allocated............ @ 2!3># @ #!:;,

aAllocated rst according to the problem.

13.22 &0sing multiple cost drivers to allocate costs.'

Ste( 1! >> M #> parts @:>> M 1> parts

@1>> per part @:> per part

Gachine Fours @2>:!>>> M 1,!>>> hours @,>!>>> M 1!)>>hours

@13.>> per machine @#> per machinehour hour

Setup Fours @2#!>>> M 3>> hours @:!>>> M 1>>hours

@:> per setup @:> per setup

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13.23 &0sing multiple cost drivers to allocate costs.'

Ste( 1! >> M #> parts @1!,>> M 1> parts @2>> per part @1,> per part

Gachine Fours @2>:!>>> M 32!>>> hours @,>!>>> M 3!>>>hours

@,.)> per machine @2> permachine

hour hour

Setup Fours @2#!>>> M 3>> hours @:!>>> M 1>>hours

@:> per setup @:> per setuphour hour

Ste( ,! Apply overhead to *ob 8HP#3>

'e(a$tment A! &@2>> X1> parts' B &@,.)> X1!>>> machine hours'

B &@:> X2> setup hours'

@1>!1>>.

'e(a$tment B! &@1,> X# parts' B &@2> X#>> machine hours'

B &@:> X1> setup hours'

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13.2# Solutions will vary.

13.2) &*oint-process costing and net reali+able method.'

$otal "oint costs are @1)>!>>> &based on the @)>!>>> materials plus @1>>!>>> conversion'. $hese costs are allocatedas follows%

To Out(ut L!@2>>!>>>C@2)>!>>> X@1)>!>>> @12>!>>>

To Out(ut T!&@2)>!>>> - @2>>!>>>'C@2)>!>>> X@1)>!>>> @3>!>>>

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13.2, &0sing "oint-process costing to measure product costs.'

a. $otal 0nits of O 1#!>>> 0nits$otal 0nits roduced 2:!>>> 0nits*oint roduct 8osts @,3!>>>

Amount Allocated from *oint 8osts% 1#!>>>C2:!>>> X@,3!>>> ................................................. @ 31!)>>Additional rocessing 8osts.................................................. 1:!>>>$otal 8osts of roduct O........................................................ @ #;!)>>

b. Net 7eali+able 5alue of Q at Split-? @>!>>>$otal Net 7eali+able 5alue at Split-? @2>>!>>>

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*oint roduct 8osts @,3!>>>

Amount Allocated from *oint 8osts%@>!>>>C@2>>!>>> X@,3!>>> ........................................... @ 22!>)>

Additional rocessing 8osts.................................................. 1#!>>>$otal 8osts Allocated to Q..................................................... @ 3,!>)>

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13.2 $he focus should be on di?erential revenues and costs &and! therefore! di?erential prots' as they apply toalternative uses of the counter space. 4f the di?erential prots for selling peanuts are higher than any otheralternative! then *oe is taking the correct course of action. Note that opportunity costs are important.

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13.2: &Allocating overhead.'

*achinin& Assem"l/ Total4ndirect Habor.............................. @ ,!,>> @ 3!,>> @ 1>!2>>Supplies....................................... 1!)>> ;>> 2!#>>$axes%

Gachinery and 6uipmenta..... #2 3> 2

/uildingb.................................. ): : 1#)

8ompensation 4nsurancec........... 3)1 ))) ;>,

owerd......................................... 12> 1:> 3>>

Feat and Hightb........................... 1;2 2:: #:>

Gachinery and 6uipmenta..... 21> 1)> 3,>$otal.................................. @ ;!22; @ ,!>2# @ 1)!2)3

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aAllocated on the basis of the cost of machinery and e6uipment%

Ta2es

'e($eciationGachining &@3)!>>>C@,>!>>>' or ):.3L X@2 @#2 ):.3L X3,> @21>

Assembly &@2)!>>>C@,>!>>>' or #1.L X@2 3> #1.L X3,> 1)>

@2 @3,>

bAllocated on the basis of oor space%

Ta2es Heat 'e($eciationGachining !>>> s6. ft.C1>!>>> s6. ft.'

or #>L X@1#)................... @ ): #>L X@#:> @1;2 #>L X3;> @ 1),

Assembly &,!>>> s6. ft.C1>!>>> s6. ft.'

or ,>L X@1#) .................. : ,>LX@#:> 2:: ,>L X3;> 23#

@ 1#) @#:> @ 3;>cAllocated on the basis of direct and indirect labor cost%

Gachining @ :!,>> 3:. X@;>, @3)1

Assembly...... 13!,>> ,1.3 X@;>, )))

@ 22!2>> 1>>L @ ;>,

dAllocated on the basis of horsepower rating%

Gachining &12>C3>>' or #>L X@3>> @ 12>

Assembly &1:>C3>>' or ,>L X@3>> 1:>

@ 3>>

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13.2; &Allocating unassigned costs to retail store departments.'

a. ROYAL SPECIALTY SHOPO(e$atin& E2(enses fo$ the Yea$

Clothin& Accesso$ies Total @1#!,>>Supplies 0sed........................ 3!:>> 3!2>> !>>>> #!:>> ,!#>>Advertising............................ 3!2, :!):, 12!312Giscellaneous xpenses........ 1!>>> :>> 1!:>>

$otal >> @ 2#!>>> @ #:!>>>Supplies 0sed........................ :#> ),> 1!#>>Advertising............................ 2!333 1!))) 3!:::/uilding 7ent......................... !,>> 11!#>> 1;!>>>ayroll $axes.......................... ,!#33 )!:, 12!3>>TorkmenUs 8ompensation

4nsurance........................... 1!>:: ;;2 2!>:>Dire 4nsurance........................ #>3 ); 1!>>>:> 2> 1!:>>Giscellaneous xpenses........ 2#> 3,> ,>>

$otal 4ndirect xpenses...... @ ##!>1 @ #,!>)1 @ ;>!>,:$otal perating xpenses...... .. @ 132!3:3 @ 132!; @ 2,)!1:>

Clothin& Accesso$ies Total

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8alculation of Allocationercentages%

Sales..................................... @,>>!>>> @#>>!>>> @1!>>>!>>>8ost of Koods Sold................ ##>!>>> 2#>!>>> ,:>!>>>

Kross Gargin......................... @ 1,>!>>> @ 1,>!>>> @ 32>!>>>

ercent of Kross Gargin........... )>L )>L 1>>LSales........................................ ,>L #>L 1>>LDloor Space.............................. #>L ,>L 1>>L

Clothin& Accesso$ies

Salaries% @ ,;!3,> @1#!,>>Allocated=ther............... 2#!>>> 2#!>>> #:!>>>

$otal Salaries................. @ 1>2!2#> @ ;3!3,> @ 1;)!,>>

ercent of $otal Salaries........ )2.3L #.L 1>>L

8ost of 6uipment and4nventory%

6uipment......................... @ 1>!>:> @ 2#!;,> @ 3)!>#>4nventory &Average'........... 1>>!:>> 13;!2>> 2#>!>>>

$otal............................... @ 11>!::> @ 1,#!1,> @ 2)!>#>

ercent of 6uipment and4nventory........................... #>.3L );.L 1>>L

Number of mployees........... #>L ,>L 1>>L

b. ROYAL SPECIALTY SHOPIncome Statement fo$ the Yea$

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Clothin& Accesso$ies TotalSales..................................... @,>>!>>> @#>>!>>> @1!>>>!>>>8ost of Koods Sold................ ##>!>>> 2#>!>>> ,:>!>>>

Kross Gargin on Sales........... @1,>!>>> @1,>!>>> @ 32>!>>>ther perating xpenses... . 132!3:3 132!; 2,)!1:>

Net 4ncome........................ @ 2!,1 @ 2!2>3 @ )#!:2>

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. ...............................13.3> &Allocating service department costs using the step method.'

*e/e$s Com(an/

Allocation of Se$0ice 'e(a$tment Costs to P$ouction 'e(a$tmentsSte(*etho

'e(a$tment 'e(a$tment 'e(a$tment 'e(a$tmentTotal S1 S, P1 P,

$otal before Allocation @22>!>>> @3>!>>> @#>!>>> @;>!>>>@,>!>>>

Solutions 13-2>

Allocation of L 1>L 1>L

Allocation of >'@22>!>>>

@22>!>>>

&3>!>>>' 3!>>@,3!>>

2#!>>>@,#!>>>

3!>>>@;3!>>>

#>!>>@1>3!>>

2#!>>>@11!>>>

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13-21 Solutions

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13.31 &Allocating service department costs using the step method.'

Allocation of Se$0ice 'e(a$tment Costs to P$ouction 'e(a$tmentsSte(*etho

Allocation of S1 to S2! 1 and 2%.,> x @,>!>>> @3,!>>> to S2( .2> x @,>!>>> @12!>>> to 1( .2> x @,>!>>> @12!>>> to2.Now S2 has @11,!>>> in costs to allocate.

Allocation of S2 to 1 and 2%.#> x @11,!>>> @#,!#>> to 1( .,> x @11,!>>> @,;!,>>to 2.

$otal costs in % @1:>!>>> B @12!>>> B @#,!#>> @23:!#>>.

$otal costs in 2% @12>!>>> B @12!>>> B @,;!,>> @2>1!,>>.

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13.32 &Allocating service department costs.'

4ualit/ *ain+

Tu"in& Pac5in& Cont$ol tenance$otal !>>> @21>!>>>Allocation of Gaintenance.... @11)!)>> @ ;!:>> 1#!>> &21>!>>>'$otal 9uality 8ontrol to

Allocate......................... @11#!>> ->-Allocation of 9uality

8ontrol........................... ,:!:2> #)!::> &11#!>>'$otal 8osts Allocated............ @ 1:#!32> @ 12)!,:> ->-

Allocation ercent for Gaintenance%

4ualit/ *ain+Tu"in& Pac5in& Cont$ol tenance

Fours 0sed.......................... 2!)> 1!;>> 3)> )!>>>ercent of $otal.................... ))L 3:L L

Allocation ercent for 9uality 8ontrol%Total fo$

AllocationTu"in& Pac5in& Pu$(oses

Fours of Service................... 1!># ,;: 1!#)ercent of $otal.................... ,>L #>L

13.33 &Allocating service department costs V8A adaptedW.'

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a. @111!,>. $he direct method is being used here! and total costs of the maintenance department would beallocated to the production departments in proportion to the s6uare footage they occupied.

8osts of Gaintenance >>verhead......................................................................... ),!1>>

$otal............................................................................. @ 2>3!2>>

S6uare Dootage ccupied by roduction >>Assembly......................................................................... 2!>>>

$otal............................................................................. 1,>!>>>

Allocation% ::!>>>C1,>!>>> X@2>3!2>> @111!,>.

b. @>!>>>. 0sing the direct method! total costs of the administration department would be allocated to theproduction departments in proportion to the direct labor hours they used.

8osts of Administration >>verhead......................................................................... >!>>>

$otal............................................................................. @ 1,>!>>>

$otal............................................................................. 1>>!>>>

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Allocation% #3!)>C1>>!>>> X@1,>!>>> @>!>>>.

c. @3!:#> &:C&12 B : B 2:> B 2>> computers' X@2#>!>>>. $he step method is being used here! and computersupport department costs &@;1!>>> B @:!>>> B @,2!>>> @2#>!>>>' would be allocated rst. $he computer

support department costs would be allocated to the production departments and the other two servicedepartments in proportion to the number of computers they have.

d. @>. Then using the step method! once a service departmentUs costs have been allocated! no subse6uent servicedepartment costs are allocated back to it. Since computer support department costs would be allocated rst &foran explanation see art c.'! none of the maintenance departmentUs costs would be allocated to the computersupport department.

13.3# &Allocating service department costs V8A adaptedW'

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a. @12#!3>>. $he direct method is being used here! and total costs of the maintenance department would beallocated to the production departments in proportion to the s6uare footage they occupied.

8osts of Gaintenance >>!>>>verhead......................................................................... ),!>>>

$otal............................................................................. @ 22,!>>>

S6uare Dootage ccupied by roduction >>utput............................................................................. 2!>>>

$otal............................................................................. 1,>!>>>

Allocation% ::!>>>C1,>!>>> X@22,!>>> @12#!3>>.

b. @:!)>. 0sing the direct method! total costs of the administration department would be allocated to theproduction departments in proportion to the direct labor hours they used.

8osts of Administration !>>>verhead......................................................................... :>!>>>

$otal............................................................................. @ 1:>!>>>

utput............................................................................. :!)>>

$otal............................................................................. 2>>!>>>

Allocation% :!)>>C2>>!>>> X@1:>!>>> @:!)>.

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c. @3!:#> &1,C&2# B 1, B ),> B #>> computers' X&@;1!>>> B @:!>>> B @,2!>>>'. $he step method is beingused here! and technology support department costs would be allocated rst. $he technology supportdepartment costs would be allocated to the production departments and the other two service departments in

proportion to the number of computers they have.

d. @>. Then using the step method! once a service departmentUs costs have been allocated! no subse6uent servicedepartment costs are allocated back to it. Since technology support department costs would be allocated rst&see part c'! none of the maintenance departmentUs costs would be allocated to the technology supportdepartment.

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13.3) &*oint cost allocation and product protability.'

a. Allocation on the Basis of 6nits of Out(ut!uried Tafers

#)!>>>C )!>>> B 1)!>>>' X@:)!,>> ......................... @ ,#!2>>

8hips1)!>>>C&1)!>>> B #)!>>>> X@:)!,>>.......................... 21!#>>

$otal................................................................................. @ :)!,>>

b. Allocation on the Basis of *a$5et 7alue!uried Tafers

@2>!>>>C&@2>!>>> B @1#>!>>>'X@:)!,>> ................... @ 1>!>>

8hips@1#>!>>>C&@2>!>>> B @1#>!>>>' X@:)!,>>................. #!;>>

$otal................................................................................. @ :)!,>>

c. 4t is not possible to determine which product is more protable because costs are "oint. ne product cannot beproduced without the other=hence only the protability of the totaloutput is relevant. 4n total the company hascombined revenue of @1,>!>>> and costs of @:)!,>>! making this a protable "oint product.

13.3, &*oint cost allocation and product protability.'

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*oint cost @3>> & @2>> cost of timber B @1>> "oint process costs'.

a. Allocation on the Basis of 6nits of Out(ut!

Krade A &per 1!>>> board feet'.2) X@3>> ................................................................... @ )

Krade / &per 1!>>> board feet'.) X@3>>.................................................................... 22)

$otal................................................................................. @ 3>>

b. Allocation on the Basis of *a$5et 7alue!Krade A &per 1!>>> board feet'

@2#>C@#>> X@3>> ....................................................... @ 1:>

Krade / &per 1!>>> board feet'@1,>C@#>> X@3>>........................................................ 12>

$otal................................................................................. @ 3>>

4t is not possible to determine how much prot is made on either product or which product is more protable.ne product cannot be produced without the other=hence only the protability of the totaloutput is relevant. 4ntotal! the company sells lumber for a combined @#>> per board feet and incurs a cost of @3>> per 1!>>> boardfeet! making the "oint products protable.

13.3 &7elating allocation methods to organi+ational characteristics for a retailer V8GA adaptedW.'

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a. 1. 4n terms of ease of use! the predetermined rate is the simplest method of allocation. $he budgeteddepartment costs are known and distributed to the stores each month. Hess paper work is involved than ifactual costs were tabulated and allocated each month.

2. 4n terms of controlling costs! the actual method of allocation would be most e?ective here. $his way! savingsand overruns are charged to the stores which can pressure the department to keep the costs down and candecide what level of service they &the stores' want from the department.

A centrali+ed organi+ation is more conducive to a predetermined rate allocation method. Since top managementis deciding on the usage of service departments! the problem of cost control is up to them! not the individualstores. Tith decentrali+ed organi+ations! the stores are going to want to see actual costs. 4n this way the storespressure the departments about using costs! leaving top management free to do other things.

b. 1. Total sales olla$s. $he following conditions would be re6uired for the base to be suitable%

X the proportion of credit sales to cash sales must be the same at each store(

X the customer credit risk level must be the same for each store(

X the average si+e sale per customer should be the same.

$o the extent that the above conditions are not present or could be a?ected by store managers! charges tostores will be ine6uitable. $his may cause some managers to take actions which! while increasing theirsales! increases company collection costs &more credit sales! higher risk credit sales! smaller receivables' bya greater percentage causing other stores to bear an inappropriate portion of the costs.

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13.3 b. continued.

2. A0e$a&e num"e$ of (ast ue accounts. $he following conditions would be re6uired for this base to besuitable%

X collection costs based on the number of accounts or average account si+e are identical(

X all stores use the same criteria to submit accounts to the collection department for collection e?ort(

X the collection department makes collection e?orts in proportion to the past due accounts from each store.

4f these conditions are not present or could be a?ected by the store managers! charges to stores may beine6uitable. 4f collection costs vary by account si+e! the manager could encourage more large credit salesand discourage small credit sales to increase sales and decrease hisCher share of the collection charges. 4fpast due criteria are not consistent! a manager could report fewer accounts! thus reducing costs. $he focus

on past due accounts may cause a manager to tighten credit standards and reduce credit risks. Fowever!this method of assignment is the best of the four presented because it relates to accounts which are likely tore6uire collection and is the least likely to result in ine6uitable cost assignments due to managermanipulation.

3. Num"e$ of uncollecti"le accounts 8$itten o9. $he following conditions would be re6uired for the baseto be suitable%

X the proportion of uncollectible accounts to accounts re6uiring collection e?ort should be the same for eachstore(

X the same conditions listed for the average number of accounts past duebase apply.

$o the extent that such conditions are not present or can be a?ected by the store manager! the charges tostores might be ine6uitable. As with the past due account method! a manager might seek higher average

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credit sales and change the criteria used for submitting accounts for collection. $he focus on uncollectibleaccounts may cause managers to tighten credit standards and reduce credit risks.

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13.3 b. continued.

#. One t8ent/+si2th of the cost of each of the sto$es. $his basis of allocation would be inappropriatebecause it is not tied directly to the activity for which costs are being allocated. Store managers would have

very little incentive to monitor customer credit! because they would know that the number of bad customersor the amounts of uncollectible accounts or write-o?s would have no e?ect on the allocation. $he managersmight even accept customers with very marginal credit ratings "ust to increase the dollar volume of sales.Additionally! stores with a small volume would be penali+ed because their e6ual share of the allocated creditand collection department cost would be applied to a smaller margin.

13-33 Solutions

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13.3: &Allocation for economic decisions and motivation V8GA adaptedW.'

a. $he ten cost items can be categori+ed into four basic groups for purposes of discussion.

Allocation

Item Allocation *etho .usti#cation4. All items in this category

should be distributed.1. Salaries and benets Qes

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Item Allocation *etho .usti#cation. 6uipment! furniture! Qes

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charging rate is re6uired.;. /uilding occupancy and Qes S6uare $here is no cost

security &only feet control benet fromfor full allocation of thesecost costs. $he only rea-charging son to allocate is forrate' a full cost charging

rate.

1>. 8orporate administra- Qes Number of tive charges &only employees

for full or somecost othercharging generalrate' basis

b. $he number of hours selected for determining the charging rate depends upon the purpose of establishing therate. 4f the ob"ective is to charge user departments for all of the costs of 8omputer perations! the actual hours

which can be identied with the user departments will be included in the base hours. $his amounts to 3!)>>hours as shown below%

4n order to promote cost control! /onn 8ompany might consider a dual charging rate whereby the marginal costswould be charged over actual user time &3!)>> hours' and xed costs over available time !2#2 hours'.

Actual 6se$ Time A0aila"le Time$esting and debugging..... 2)> $esting and debugging.... .. . 2)>Set-up.............................. )>> Set-up................................. )>>rocessing........................ 2!)> rocessing.......................... 2!)>$otal............................... 3!)>> 4dle time............................. #2

$otal................................. #!2#2