Question

Frogs, Inc. Part #3

Goal:

To allocate service department costs in a service company and use them to calculate full cost per unit.

Information: Frogs, Inc.’s owners were impressed by your analysis and has decided that a more detailed cost allocation system would indeed be better for the company. As part of your managerial duties, they have asked you to improve their cost accounting system.

In the past, the owners have used only DM, DL, and Manufacturing OH to calculate the cost of their jobs. However, you know that there are other costs in the company that contribute to the jobs. You tell the owners that you will present a cost analysis that includes all of these costs. The owners plan to meet with you on Friday to evaluate your proposal. After talking with the service department managers and asking them for the figures you need, they present you with the following chart of information:

	Design Dept.	Engineer Dept	Concrete Casting Dept.	Owners	Admin Support	Marketing
Budgeted Overhead	$30,000	$186,000	$15,500	$14,000	$50,000	$40,000
Assigned Driver	Number of Projects	Direct Labor HRS	Number of Frogs Made	Number of Projects	SQ FT of Office Space	Number Of Projects
Budgeted Drivers	200	16,640	1,000	200	4,500	200
Office Space Used	600	2,000	400	750	0	750
Number Of Projects	50	50	50	50	0	0

Required:

1. Identify and summarize the problem or issue: What is the fundamental or underlying issue or issues in this problem? Explain.

2. Calculate the average cost to be assigned to each project (assume the projects are all the same for simplicity) using only DM, DL, and the MOH in Part 2 question 4 to compare the average cost of Frogs, Inc.’s projects to the cost of the proposed parking lot job. included below.

	Concrete Casting	Design department	Engineering	Owner
Direct Material	71,000.00	10,000.00	900,000.00	1,000.00	982,000.00
Direct labour	208,000.00	499,200.00	447,200.00	208,000.00	1,362,400.00
Inspection Cost	1,000.00	500.00	5,000.00	2,000.00	8,500.00
Overhead Cost	15,500.00	30,000.00	200,000.00	14,000.00	259,500.00
Direct Labor Hours	10400.00	12480.00	16640.00	4160.00	43680.00
Totals for year	280,000.00	509,700.00	1,382,200.00	211,000.00	2,382,900.00
Overhead Rate (POHR)					5.62
	Design Dept	Engineering Dept	Concrete Cast	Owners	Totals
Overhead Costs
Setup Cost	10000.00	50000.00	5000.00	1000.00	66000.00
Utilities	10000.00	15000.00	5000.00	1000.00	31000.00
Equipment Fees	0.00	100000.00	5000.00	5000.00	110000.00
Permits	5000.00	1000.00	0.00	2000.00	8000.00
Travel to jobsite	5000.00	20000.00	500.00	5000.00	30500.00
Total	30000.00	186000.00	15500.00	14000.00	245500.00

3. Now, calculate the cost of the proposed job using your answers from Part 2, question 4 to include the Service Department costs. The company has decided to use the sequential method for allocating service overhead and apply Admin Support cost to marketing as well as the production departments.

4. Which result will the customer prefer? Explain.

5. Based on your answers to the previous questions, should Frogs, Inc. accept the parking lot job?

Answer 1

Ans 1. Frogs Inc. is not including the Administrative Overheads and Selling and Distribution Overheads to its costs to be assigned to each job. In other words, the Service Department's Costs were not being included in Total Costs to be assigned to a Job. So,  

• the departmental costs after manufacturing were not being added and thus not recovered against the revenues from each job, and
• also it was not possible to determine correct profitability for each job as these costs would have been differently allocated for different jobs as per traditional costing system than as per the systems intended to be implemented.

Thus, it is advisable to use the new system than a single volume measure system as was used in Traditional Costing Systems.