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 production
departments which produce goods and services.

13.3

A direct cost is one that firms can identify specifically with a particular
product, department, or process. An indirect cost, in contrast, results
from the joint use of a facility or a service by several products,
departments, or processes.

13.4

The 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.

13.5

Joint production processes are characterized by the transformation of

common (joint) inputs into multiple products such that use of the common
inputs cannot be traced directly to any of the types of products.

13.6

The objective of joint-cost allocation is to measure all costs of production

for each joint product. These production costs include further processing
costs and some reasonable share of joint processing costs.

13.7

Common Cost
Building Utilities
Payroll Accounting
Insurance

Allocation Base
Space Occupied
Number of Employees
Value of Equipment and
Inventories
Number of Service Calls
Number of Units Produced

Equipment Repair
Quality Control Inspection
13.8

The primary reason for accumulating costs at the service department is to

enable managers to control those costs.

13-1

Solutions

13.9

Direct and indirect are defined as such with respect to cost objects. In
this case, there are two cost objectsthe product and the department.
Consider the paint used to paint cars in the paint department of a car
assembly plant. The paint is direct to the cars and to the department.
The solvent used to clean the paint machines at the end of each work
shift is direct to the department but indirect to each car because it cannot
be traced to each car.

13.10

The different methods give the same results when service departments do
not provide services to other service departments.

13.11

Suppose production Departments A and B each have 50 employees, and

the Service Department has fixed costs of $1,000. Each production
department will be allocated $500.
Now suppose that production
Department A adds 50 employees. Now Department A is allocated
$666.67 (= (50 + 50)/150) total employees and Department B is allocated
$333.33. Although Department B did nothing, the costs allocated to it
decreased from $500 to $333.33.

13.12
This problem relates to the distinction between resources used
and resources supplied that we discussed in Chapter 3.
The
company should separate
use of service department resources from the capacity to supply the
resources. For example, suppose a repair department has 10 employees.
There
may be times when all 10 employees are providing repair services; at
other
times, some of the 10 employees are simply waiting to get repair calls.
Production department should be charged with the use of repair
personnel,
that part is clear. But what about the cost of repair personnel who are
waiting idly for production departments to call for repair help. This latter
case is an example of excess capacity (which the company might want
to be sure that repair people are available to help as soon as neededmuch like
a fire
station has firefighters waiting to be called for help). Excess capacity
either
should not be allocated to production departments or should be allocated
using
some base other than usage (e.g., evenly to all departments).

Solutions

13-2

13.13

Some of the costs include:

(1) additional bookkeeping;
(2) additional management costs in selecting allocation methods and
allocation bases; and
(3) costs of making the wrong decision because of the use of counterproductive information.
Some of the benefits are:
(1) instilling responsibility for all costs of the company in the division
managers;
(2) relating indirect costs to products under contract; and
(3) constructing performance measures ("net profit") for a division that
may be more meaningful to management than contribution margins,
particularly for measuring divisional performance rather than the
performance of individual managers.

13.14

Allocating zero costs is another allocation method. It too is an arbitrary

method. However, an advantage of no cost allocation is that it reduces
costs of cost allocation.

13.15

Several reasons including:

Pricing and Bidding.
Contract Cost Reimbursement.
Motivational Effects.
Asset Valuation and Income Determination.

13-3

Solutions

13.16
Costs

Benefits

Loss of current contribution to

profit

Improved overall efficiency if less

efficient divisions are dropped

Cost of decommissioning and disposing of physical assets (inventories, plant, property and equipment)

Use of talented employees in more

effective division

Possible environmental cleanup

costs

Improved reputation for efficiency

may attract better physical and
human capital

Retaining, relocating, or terminating employees

Closing may get other divisions

attention and cause them to become more efficient

Lost income to surrounding community, with numerous adverse

effects on commercial and public
sectors
Loss of community goodwill and
possible adverse effects on company reputation
13.17

Solutions

Sharing the cost equally is certainly the easiest approach. However, if

one student causes most of the cleaning needs, sharing costs equally is
not necessarily fair (unless all students agree on this approach). Another
alternative might be to use square footage of each bedroom as a
percentage of the square footage of all bedrooms. However, this does not
take into account the neatness (or lack thereof) of each student. Another
option is for the students to share the cleaning costs based on usage.
Perhaps the student that only uses the house four days a week would pay
less than the other two students who use the house the entire week.
The point is that it is often difficult to come up with a reasonable and
fair approach to allocating costs. By definition, indirect costs are allocated
arbitrarily, and any basis of allocation will likely have its share of
detractors.

13-4

13.18

(Allocating overhead to departments and jobs.)

a.

Filming
Department

Labor Hours Basis...............

b.
Material.........................
Labor.............................
Overhead.......................
Total...........................
13.19

$12 per hr.

Editing
Printing
Department Department

$16 per hr.

Filming
Dept.

Editing
Dept.

$ 1,200
3,000
3,000
$ 7,200

-$ 4,000
6,400
$10,400

Printing
Dept.

160
400
760
$ 1,320

$20 per hr.

Total

$ 1,360
7,400
10,160
$18,920

(Allocating overhead.)
Department
No. 1
No. 2

Maintenance

General
Plant

Charged Directly to
Department:
Indirect Labor................ $ 56,000 $ 28,000 $ 45,000 $ 40,000
Indirect Material............
18,000
14,000
1,800
16,000
Miscellaneous................
6,000
10,000
3,200
10,000
$ 80,000 $ 52,000 $ 50,000 $ 66,000
Allocations:
General Planta...............
33,000
19,800
13,200
(66,000)
Maintenanceb................
25,280
37,920 (63,200)
c
Total Overhead ................... $ 138,280 $ 109,720
0
0
aTotal costs for the General Plant ($66,000) are allocated 50% to
Department 1, 30% to Department 2, and 20% to Maintenance.
bTotal costs for Maintenance ($63,200) are allocated based on
maintenance hours.
c$138,280 + $109,720 = $80,000 + $52,000 + $50,000 + $66,000.

13-5

Solutions

13.20 (Allocating overhead to jobs.)

a.

HAMILTON, INC.
Job Order Production Record
Month
of

Job
Jobs in
Order Process
Direct
ProcessCompleted
No.
1/1
Dept. A
788
$2,400
$ 600
--789
1,700
1,200
$
6,050
790
--1,600
5,600
791
--2,000
7,200
792
--2,400
--Total $4,100
$7,800
$
18,850

Labor

Direct Material

Dept. B
$ 400

Dept. A
$ 500

Applied Overhead

Dept. B Dept. Aa Dept. Bb

$ 300
$ 300
$ 300

Jobs in
Total
Costs
1/31
$ 4,800 $ 4,800

600

900

600

600

450

6,050

---

800

1,100

700

800

600

5,600

---

1,200

1,200

900

1,000

900

7,200

---

1,600

1,800

800

1,200

1,200

9,000

9,000

$4,600

$5,500

$3,300

$3,900

$3,450

aAmount = 50% of direct labor.

bAmount = 75% of direct labor.
b. Overhead
Applied..............................
Actual ...............................
Over (Under) Applied........

Solutions

January

13-6

Dept. A
$3,900
4,600 a
$ (700)

Dept. B
$3,450
3,400 b
$ 50

Total
$7,350
8,000
$ (650)

$32,650 $13,800

Jobs

a$4,600 = $4,200 + (X $600).

b$3,400 = $3,200 + (X $600).

13-7

Solutions

13.21

(Allocating service department costs using the step method.)

General
Factory
Admin.

Maintenance

Cutting Assembly
Service Department
Costs................................. $ 2,400
$4,800
NA
NA
a
Maintenance Allocation ......
960 (1/5) (4,800) $ 960 (1/5) $ 2,880 (3/5)
General Factory Administration Allocation............ (3,360)
1,344 (2/5) 2,016 (3/5)
Total Costs Allocated............
$ 2,304
$ 4,896
aAllocated first according to the problem.
13.22

(Using multiple cost drivers to allocate costs.)

Step 1: Derive overhead application rates
Department A

Department B

Number of Parts

$4,000 40 parts
= $100 per part

$800 10 parts
= $80 per part

Machine Hours
hours

$208,000 16,000 hours

$60,000

= $13.00 per machine

hour

= $40 per machine

hour

Setup Hours
hours

$24,000 300 hours

= $80 per setup
hour

$8,000

Department A: ($100 X 10 parts) + ($13 X 1,000 machine hours)

($80 X 20 setup hours)

$15,600.

Department B: ($80 X 2 parts) + ($40 X 200 machine hours)

Total:

Solutions

($80 X 10 setup hours)

$8,960.

$24,560 (= $15,600 + $8,960).

13-8

= $80 per setup

hour

Step 2: Apply overhead to Job 300ZX

1,500

100

13.23

(Using multiple cost drivers to allocate costs.)

Step 1: Derive overhead application rates
Department A

Department B

Number of Parts

$8,000 40 parts
= $200 per part

$1,600 10 parts
= $160 per part

Machine Hours
hours

$208,000 32,000 hours

$60,000

$20

= $6.50 per machine

3,000
per

machine
hour
Setup Hours
hours

hour

$24,000 300 hours

= $80 per setup
hour

$8,000

100

= $80 per setup

hour

Step 2: Apply overhead to Job CLK430

Department A: ($200 X 10 parts) + ($6.50 X 1,000 machine hours)
+

($80 X 20 setup hours)

$10,100.

Department B: ($160 X 4 parts) + ($20 X 400 machine hours)

Total:

($80 X 10 setup hours)

$9,440.

$19,540 (= $10,100 + $9,440).

13-9

Solutions

Solutions

13-10

13.24

Solutions will vary.

13.25

(Joint-process costing and net realizable method.)

Total joint costs are $150,000 (based on the $50,000 materials plus $100,000 conversion). These costs are allocated
as follows:
To Output L:
$200,000/$250,000 X $150,000 = $120,000
To Output T:
($250,000 - $200,000)/$250,000 X $150,000 = $30,000

13-11

Solutions

13.26

(Using joint-process costing to measure product costs.)

a.

Total Units of X
Total Units Produced
Joint Product Costs

= 14,000 Units
= 28,000 Units
=$63,000

Amount Allocated from Joint Costs:

14,000/28,000 X $63,000 ................................................. $ 31,500
Additional Processing Costs..................................................
18,000
Total Costs of Product X........................................................ $ 49,500
b.

Solutions

Net Realizable Value of Y at Split-Off

Total Net Realizable Value at Split-Off

13-12

= $70,000
=$200,000

Joint Product Costs

= $63,000

Amount Allocated from Joint Costs:

$70,000/$200,000 X $63,000 ........................................... $ 22,050
Additional Processing Costs..................................................
14,000
Total Costs Allocated to Y..................................................... $ 36,050

13-13

Solutions

13.27

Solutions

The focus should be on differential revenues and costs (and, therefore, differential profits) as they apply to
alternative uses of the counter space. If the differential profits for selling peanuts are higher than any other
alternative, then Joe is taking the correct course of action. Note that opportunity costs are important. Does putting
the peanut stand on the counter mean foregoing other uses of the space (e.g., candy machine)? If so, then those
opportunity costs should be considered versus the benefits of the peanut stand. Also, consider long-run costs.

13-14

13.28

(Allocating overhead.)
Indirect Labor..............................
Supplies.......................................
Taxes:
Machinery and Equipmenta.....
Buildingb..................................
Compensation Insurancec...........
Powerd.........................................
Heat and Lightb...........................
Depreciation:
Buildingb..................................
Machinery and Equipmenta.....
Total ..................................

Machining
$ 6,600
1,500

Assembly
$ 3,600
900

Total
$ 10,200
2,400

42
58
351
120
192

30
87
555
180
288

72
145
906
300
480

156
210
$ 9,229

234
150
$ 6,024

390
360
$ 15,253

13-15

Solutions

aAllocated on the basis of the cost of machinery and equipment:

Taxes
Depreciation
Machining ($35,000/$60,000) or 58.3% X $72 =$42 58.3% X 360 =
$210
Assembly ($25,000/$60,000) or 41.7% X $72 = 30 41.7% X 360 =
150
$72
$360
bAllocated on the basis of floor space:
Taxes
Heat
Depreciation
Machining (4,000 sq. ft./10,000 sq. ft.)
or 40% X $145...................= $ 58
40% X $480 = $192 40% X 390 =
$ 156
Assembly (6,000 sq. ft./10,000 sq. ft.)
or 60% X $145 ..................=
87
60% X $480 = 288
60% X 390 =
234
$145
$480
$ 390
cAllocated on the basis of direct and indirect labor cost:

Machining
Assembly......

$ 8,600
13,600
$22,200

38.7 X $906 =

61.3 X $906 = 555

100%
$ 906

dAllocated on the basis of horsepower rating:

Machining (120/300) or 40% X $300 = $ 120
Assembly (180/300) or 60% X $300 =
180
$ 300

Solutions

13-16

$351

13.29

(Allocating unassigned costs to retail store departments.)

a.

ROYAL SPECIALTY SHOP

Operating Expenses for the Year
Clothing
Direct Departmental
Expenses:
SalariesClerks....................
Supplies Used........................
Depreciation of Equipment....
Advertising............................
Miscellaneous Expenses........
Total Direct Expenses........
Allocated Indirect Expenses:
SalariesOther.....................
Supplies Used........................
Advertising............................
Building Rent.........................
Payroll Taxes..........................
Workmen's Compensation
Insurance...........................
Fire Insurance........................
Delivery Expense..................
Miscellaneous Expenses........
Total Indirect Expenses......
Total Operating Expenses........

Accessories

Total

$ 78,240
3,800
1,600
3,726
1,000
$ 88,366

$ 69,360
3,200
4,800
8,586
800
$ 86,746

$ 147,600
7,000
6,400
12,312
1,800
$ 175,112

$ 24,000
840
2,333
7,600
6,433

$ 24,000
560
1,555
11,400
5,867

$ 48,000
1,400
3,888
19,000
12,300

1,088
403
1,080
240
$ 44,017
$ 132,383

992
597
720
360
$ 46,051
$ 132,797

2,080
1,000
1,800
600
$ 90,068
$ 265,180

Accessories

Total

Clothing

13-17

Solutions

Calculation of Allocation
Percentages:
Sales..................................... $ 600,000
Cost of Goods Sold................
440,000
Gross Margin......................... $ 160,000
Percent of Gross Margin...........
Sales........................................
Floor Space..............................

50%
60%
40%

Clothing
Salaries:
Direct.................................
AllocatedOther...............
Total Salaries.................
Percent of Total Salaries........
Cost of Equipment and
Inventory:
Equipment.........................
Inventory (Average)...........
Total...............................
Percent of Equipment and
Inventory...........................
Number of Employees...........
b.

Solutions

$ 78,240
24,000
$ 102,240
52.3%

$ 10,080
100,800
$ 110,880
40.3%
40%

$ 400,000
240,000
$ 160,000
50%
40%
60%

100%
100%
100%

Accessories
$ 69,360
24,000
$ 93,360
47.7%

$ 24,960
139,200
$ 164,160
59.7%
60%

ROYAL SPECIALTY SHOP

Income Statement for the Year

13-18

$1,000,000
680,000
$ 320,000

$ 147,600
48,000
$ 195,600
100%

$ 35,040
240,000
$ 275,040
100%
100%

Sales.....................................
Cost of Goods Sold................
Gross Margin on Sales...........
Other Operating Expenses....
Net Income........................

Clothing
$ 600,000
440,000
$ 160,000
132,383
$ 27,617

13-19

Accessories
Total
$ 400,000
$1,000,000
240,000
680,000
$ 160,000
$ 320,000
132,797
265,180
$ 27,203
$
54,820

Solutions

.
13.30

...............................

(Allocating service department costs using the step method.)

Meyers Company
Allocation of Service Department Costs to Production DepartmentsStep
Method

Total before Allocation

$60,000

Total
$220,000

Department Department Department Department

S1
S2
P1
P2
$30,000
$40,000
$90,000
80%

Allocation of Department S1
to S2, P1 and P2
(30,000
)
$220,000

Allocation of Department S2
to P1 and P2
Total Production Department Costs

(64,000
)
$220,000

Solutions

13-20

24,000
$64,000

10%

10%

3,000
$93,000

3,000
$63,000

37.5%

62.5%

24,000
$117,000

40,000
$103,000

13-21

Solutions

13.31

(Allocating service department costs using the step method.)

Allocation of Service Department Costs to Production DepartmentsStep

Method

Allocation of S1 to S2, P1 and P2:

.60 x $60,000 = $36,000 to S2; .20 x $60,000 = $12,000 to P1; .20 x $60,000 = $12,000 to
P2.
Now S2 has $116,000 in costs to allocate.
Allocation of S2 to P1 and P2:
.40 x $116,000 = $46,400 to P1; .60 x $116,000 = $69,600to P2.
Total costs in P: $180,000 + $12,000 + $46,400 = $238,400.
Total costs in P2: $120,000 + $12,000 + $69,600 = $201,600.

Solutions

13-22

13.32

(Allocating service department costs.)

Tubing

Packing

Quality
Control

Maintenance

Total Direct Costs to Service

Departments.................
$ 100,000 $ 210,000
Allocation of Maintenance.... $ 115,500 $ 79,800
14,700 (210,000)
Total Quality Control to
Allocate.........................
$ 114,700
-0Allocation of Quality
Control...........................
68,820
45,880 (114,700)
Total Costs Allocated............ $ 184,320 $ 125,680
-0Allocation Percent for Maintenance:
Tubing
Hours Used..........................
Percent of Total....................

55%

Packing
2,750
38%

Quality
Control
1,900
7%

Maintenance
350

Allocation Percent for Quality Control:

Hours of Service...................
Percent of Total....................

13.33

Tubing
1,047
60%

Packing
698
40%

Total for
Allocation
Purposes
1,745

(Allocating service department costs [CPA adapted].)

13-23

Solutions

5,000

a.

$111,760. The direct method is being used here, and total costs of the maintenance department would be
allocated to the production departments in proportion to the square footage they occupied.
Costs of Maintenance Department:
Direct Material.................................................................
Direct Labor.....................................................................
Overhead.........................................................................
Total.............................................................................

$ 65,000
82,100
56,100
$ 203,200

Square Footage Occupied by Production Departments:

Creative...........................................................................
Assembly.........................................................................
Total.............................................................................

88,000
72,000
160,000

Allocation:
b.

88,000/160,000 X $203,200 = $111,760.

$70,000. Using the direct method, total costs of the administration department would be allocated to the
production departments in proportion to the direct labor hours they used.
Costs of Administration Department:
Direct Material.................................................................
Direct Labor.....................................................................
Overhead.........................................................................
Total.............................................................................
Direct Labor Hours Used by Production Departments:
Creative...........................................................................
Assembly.........................................................................
Total.............................................................................

Solutions

13-24

-090,000
70,000
$ 160,000
56,250
43,750
100,000

Allocation: 43,750/100,000 X $160,000 = $70,000.

13.34

c.

$3,840 = (8/(12 + 8 + 280 + 200 computers) X $240,000. The step method is being used here, and computer
support department costs ($91,000 + $87,000 + $62,000 = $240,000) would be allocated first. The computer
support department costs would be allocated to the production departments and the other two service
departments in proportion to the number of computers they have.

d.

$0. When using the step method, once a service department's costs have been allocated, no subsequent service
department costs are allocated back to it. Since computer support department costs would be allocated first (for
an explanation see Part c.), none of the maintenance department's costs would be allocated to the computer
support department.

(Allocating service department costs [CPA adapted])

13-25

Solutions

a.

$124,300. The direct method is being used here, and total costs of the maintenance department would be
allocated to the production departments in proportion to the square footage they occupied.
Costs of Maintenance Department:
Direct Material.................................................................
Direct Labor.....................................................................
Overhead.........................................................................
Total.............................................................................

$ 80,000
90,000
56,000
$ 226,000

Square Footage Occupied by Production Departments:

Creative...........................................................................
Output.............................................................................
Total.............................................................................

88,000
72,000
160,000

Allocation:
b.

88,000/160,000 X $226,000 = $124,300.

$78,750. Using the direct method, total costs of the administration department would be allocated to the
production departments in proportion to the direct labor hours they used.
Costs of Administration Department:
Direct Material.................................................................
Direct Labor.....................................................................
Overhead.........................................................................
Total.............................................................................
Direct Labor Hours Used by Production Departments:
Creative...........................................................................
Output.............................................................................
Total.............................................................................
Allocation: 87,500/200,000 X $180,000 = $78,750.

Solutions

13-26

-0100,000
80,000
$ 180,000
112,500
87,500
200,000

c.

$3,840 = (16/(24 + 16 + 560 + 400 computers) X ($91,000 + $87,000 + $62,000). The step method is being
used here, and technology support department costs would be allocated first. The technology support
department costs would be allocated to the production departments and the other two service departments in
proportion to the number of computers they have.

d.

$0. When using the step method, once a service department's costs have been allocated, no subsequent service
department costs are allocated back to it. Since technology support department costs would be allocated first
(see part c), none of the maintenance department's costs would be allocated to the technology support
department.

13-27

Solutions

13.35

(Joint cost allocation and product profitability.)

a.

b.

c.

13.36

Solutions

Allocation on the Basis of Units of Output:

Purified Wafers
45,000/ (45,000 + 15,000) X $85,600 .........................

$ 64,200

Chips
15,000/(15,000 + 45,0000 X $85,600..........................

21,400

Total.................................................................................

$ 85,600

Allocation on the Basis of Market Value:

Purified Wafers
$20,000/($20,000 + $140,000)X $85,600 ...................

$ 10,700

Chips
$140,000/($20,000 + $140,000) X $85,600.................

74,900

Total.................................................................................

$ 85,600

It is not possible to determine which product is more profitable because costs are joint. One product cannot be
produced without the otherhence only the profitability of the total output is relevant. In total the company has
combined revenue of $160,000 and costs of $85,600, making this a profitable joint product.

(Joint cost allocation and product profitability.)

13-28

Joint cost = $300 (= $200 cost of timber + $100 joint process costs).
a.

Allocation on the Basis of Units of Output:

Grade A (per 1,000 board feet)
.25 X $300 ...................................................................

Grade B (per 1,000 board feet)

.75 X $300....................................................................

b.

75
225

Total.................................................................................

300

Allocation on the Basis of Market Value:

Grade A (per 1,000 board feet)
$240/$400 X $300 .......................................................

180

Grade B (per 1,000 board feet)

$160/$400 X $300........................................................
Total.................................................................................

120
$

300

It is not possible to determine how much profit is made on either product or which product is more profitable.
One product cannot be produced without the otherhence only the profitability of the total output is relevant. In
total, the company sells lumber for a combined $400 per board feet and incurs a cost of $300 per 1,000 board
feet, making the joint products profitable.

13.37

(Relating allocation methods to organizational characteristics for a retailer [CMA adapted].)

13-29

Solutions

a.

1. In terms of ease of use, the predetermined rate is the simplest method of allocation. The budgeted
department costs are known and distributed to the stores each month. Less paper work is involved than if
actual costs were tabulated and allocated each month.
2. In terms of controlling costs, the actual method of allocation would be most effective here. This way, savings
and overruns are charged to the stores which can pressure the department to keep the costs down and can
decide what level of service they (the stores) want from the department.
A centralized organization is more conducive to a predetermined rate allocation method. Since top management
is deciding on the usage of service departments, the problem of cost control is up to them, not the individual
stores. With decentralized organizations, the stores are going to want to see actual costs. In this way the stores
pressure the departments about using costs, leaving top management free to do other things.

b.

1. Total sales dollars. The following conditions would be required for the base to be suitable:

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

the customer credit risk level must be the same for each store;

the average size sale per customer should be the same.

To the extent that the above conditions are not present or could be affected by store managers, charges to
stores will be inequitable. This may cause some managers to take actions which, while increasing their
sales, increases company collection costs (more credit sales, higher risk credit sales, smaller receivables) by
a greater percentage causing other stores to bear an inappropriate portion of the costs.

Solutions

13-30

13.37 b. continued.
2. Average number of past due accounts. The following conditions would be required for this base to be
suitable:

collection costs based on the number of accounts or average account size are identical;

all stores use the same criteria to submit accounts to the collection department for collection effort;

the collection department makes collection efforts in proportion to the past due accounts from each store.

If these conditions are not present or could be affected by the store managers, charges to stores may be
inequitable. If collection costs vary by account size, the manager could encourage more large credit sales
and discourage small credit sales to increase sales and decrease his/her share of the collection charges. If
past due criteria are not consistent, a manager could report fewer accounts, thus reducing costs. The focus
on past due accounts may cause a manager to tighten credit standards and reduce credit risks. However,
this method of assignment is the best of the four presented because it relates to accounts which are likely to
require collection and is the least likely to result in inequitable cost assignments due to manager
manipulation.
3. Number of uncollectible accounts written of. The following conditions would be required for the base
to be suitable:

the proportion of uncollectible accounts to accounts requiring collection effort should be the same for each
store;

the same conditions listed for the average number of accounts past due base apply.

To the extent that such conditions are not present or can be affected by the store manager, the charges to
stores might be inequitable. As with the past due account method, a manager might seek higher average

13-31

Solutions

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

Solutions

13-32

13.37 b. continued.
4. One twenty-sixth of the cost of each of the stores. This basis of allocation would be inappropriate
because 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 customers
or the amounts of uncollectible accounts or write-offs would have no effect on the allocation. The managers
might even accept customers with very marginal credit ratings just to increase the dollar volume of sales.
Additionally, stores with a small volume would be penalized because their equal share of the allocated credit
and collection department cost would be applied to a smaller margin.

13-33

Solutions

13.38

(Allocation for economic decisions and motivation [CMA adapted].)

a.

The ten cost items can be categorized into four basic groups for purposes of discussion.
Item
I. All items in this category
should be distributed.
1. Salaries and benefits
2. Supplies

Allocation
Yes
Yes

Allocation
Method
Direct
Direct

Justification
The costs of these two
items are directly
incurred by the activity centers and
can be controlled by
the supervisor. A
part of the salaries
and benefits might
be excluded from a
marginal cost

charging rate.
II.

All items in this category

should be distributed because a direct causal basis
exists, but they should be excluded from a marginal cost
charging rate.
3.
4.

Solutions

Equipment maintenance
Insurance

Yes
Yes

13-34

Direct
Direct

The costs of these

items are directly incurred by the activity
centers but are controlled by corporate
policy. They would
be included in a full
cost charging rate
and excluded from
a marginal cost
charging rate.
Allocation

III.

7.

Item
Equipment, furniture,
and depreciation

Yes

5.

Heat and air conditioning

8.

Building improvements
and depreciation

All items should be distributed

because a reasonable measure
for estimating the causal relation exists.
6. Electricity

Allocation
Direct

Method
Justification
The costs of these
items are directly incurred by the activity
centers.

Yes

Direct
(one
center
only)

Yes

Direct
(one
center
only)

They are not controllable costs in the

usual sense. They
would be included in
a full cost rate and
excluded from a
marginal cost
charging rate.

Yes

Equipment
usage and
wattage
ratings

A reasonable estimate can be made of

the electrical charges
and they can be controlled by efficient
use of equipment.
The cost should be included in a full cost
and a marginal cost
charging rate.

IV.The following items should be

distributed only if a full cost

13-35

Solutions

charging rate is required.

9. Building occupancy and
security

10. Corporate administrative charges

b.

Yes
(only
for full
cost
charging
rate)

Square
feet

Yes
(only
for full
cost
charging
rate)

Number of
employees
or some
other
general
basis

There is no cost
control benefit from
allocation of these
costs. The only reason to allocate is for
a full cost charging
rate.

The number of hours selected for determining the charging rate depends upon the purpose of establishing the
rate. If the objective is to charge user departments for all of the costs of Computer Operations, the actual hours
which can be identified with the user departments will be included in the base hours. This amounts to 3,500
hours as shown below:
In order to promote cost control, Bonn Company might consider a dual charging rate whereby the marginal costs
would be charged over actual user time (3,500 hours) and fixed costs over available time (4,242 hours).
Actual User Time
Testing and debugging..... 250
Set-up.............................. 500
Processing........................ 2,750
Total............................... 3,500

Available Time
Testing and debugging....... 250
Set-up................................. 500
Processing.......................... 2,750
Idle time............................. 742
Total................................. 4,242

Downtime for maintenance is excluded because the computer is not available for use during that time.

Solutions

13-36