1. Support department cost allocation—sequential method
Becker Tabletops has two support departments (Janitorial and Cafeteria) and two production departments (Cutting and Assembly). Relevant details for these departments are as follows:
Support Department | Cost Driver | |
Janitorial Department | Square footage to be serviced | |
Cafeteria Department | Number of employees |
Janitorial Department |
Cafeteria Department |
Cutting Department |
Assembly Department |
|
Department costs | $310,000 | $169,000 | $1,504,000 | $680,000 |
Square feet | 50 | 5,000 | 1,000 | 4,000 |
Number of employees | 10 | 3 | 30 | 10 |
Allocate the support department costs to the production departments using the sequential method.
Allocate the support department with the highest department cost first.
Cutting Department |
Assembly Department |
||
Janitorial Department | $ | $ | |
Cafeteria Department | $ | $ |
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2.
Joint Cost Allocation—Net Realizable Value Method
Lily’s Lemonade Stand makes three types of lemonade: pure, raspberry, and strawberry. The lemonade is produced through a joint mixing process that costs a total of $30 per batch. One batch produces 32 cups of pure lemonade, 21 cups of strawberry lemonade, and 21 cups of raspberry lemonade. After the split-off point, all three lemonades can be sold for $0.80 per cup, but strawberry and raspberry lemonade can be processed further by adding artificial coloring and flavoring and sold for $0.95 and $1.00 per cup, respectively. It is estimated that these additional processing costs are $0.75 and $1.80 per batch for strawberry and raspberry lemonade, respectively.
Allocate the joint costs of production to each product using the net realizable value method.
Joint Product | Allocation |
Pure lemonade | $ |
Strawberry lemonade | |
Raspberry lemonade | |
Totals | $ |
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3.
Support department cost allocation—reciprocal services method
Becker Tabletops has two support departments ( Janitorial and Cafeteria) and two production departments (Cutting and Assembly). Relevant details for these departments are as follows:
Support Department | Cost Driver | |
Janitorial Department | Square footage to be serviced | |
Cafeteria Department | Number of employees |
Janitorial Department |
Cafeteria Department |
Cutting Department |
Assembly Department |
|
Department costs | $310,000 | $169,000 | $1,504,000 | $680,000 |
Square feet | 50 | 5,000 | 1,000 | 4,000 |
Number of employees | 10 | 3 | 30 | 10 |
Allocate the support department costs to the production departments using the reciprocal services method.
Cutting Department |
Assembly Department |
|||
Janitorial Department cost allocation | $ | $ | ||
Cafeteria Department cost allocation | $ | $ |
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Becker Tabletops | |||||
Sequential Method | Janitorial | Cafeteria | Cutting | Assembly | Total |
Square Feet | 5,000.00 | 1,000.00 | 4,000.00 | 10,000.00 | |
Square Feet % | 50.00% | 10.00% | 40.00% | 100.0000% | |
Number of Employees | 30.00 | 10.00 | 40.00 | ||
Number of Employees % | 75.00% | 25.00% | 100.0000% | ||
Total costs | 310,000.00 | 169,000.00 | 1,504,000.00 | 680,000.00 | 2,663,000.00 |
Janitorial cost to be allocated- Square Feet % | (310,000.00) | 155,000.00 | 31,000.00 | 124,000.00 | - |
Total | - | 324,000.00 | 1,535,000.00 | 804,000.00 | 2,663,000.00 |
Cafeteria cost to be allocated- Number of Employees % | (324,000.00) | 243,000.00 | 81,000.00 | ||
Total cost after allocation | - | - | 1,778,000.00 | 885,000.00 | 2,663,000.00 |
Lily’s Lemonade | |||
Workings for NRV | A | B | C=A*B |
Calculation of final sales value | Cups | Sell Price | Market Value |
Pure lemonade | 32.00 | 0.80 | 25.60 |
Strawberry lemonade | 21.00 | 0.95 | 19.95 |
Raspberry lemonade | 21.00 | 1.00 | 21.00 |
Total | 74.00 | 66.55 | |
Calculation of NRV | Pure lemonade | Strawberry lemonade | Raspberry lemonade | Total |
Market Value | 25.60 | 19.95 | 21.00 | |
Further processing costs | - | 0.75 | 1.80 | |
NRV | 25.60 | 19.20 | 19.20 | 64.00 |
Weight of NRV | 40.00% | 30.00% | 30.00% | F |
G | See F | H=F*G | |
Allocation of Joint costs | Joint Cost | Weight of base | Allocated cost |
Pure lemonade | 30.00 | 40.00% | 12.00 |
Strawberry lemonade | 30.00 | 30.00% | 9.00 |
Raspberry lemonade | 30.00 | 30.00% | 9.00 |
Total | 30.00 |
Becker Tabletops | |||||
Reciprocal Method | Janitorial | Cafeteria | Cutting | Assembly | Total |
Square Feet | - | 5,000.00 | 1,000.00 | 4,000.00 | 10,000.00 |
Number of Employees | 10.00 | - | 30.00 | 10.00 | 50.00 |
Square Feet % | 0.00% | 50.00% | 10.00% | 40.00% | 100.00% |
Number of Employees % | 20.00% | 0.00% | 60.00% | 20.00% | 100.00% |
Total costs | 310,000.00 | 169,000.00 | 1,504,000.00 | 680,000.00 | 2,663,000.00 |
Let cost of Janitorial is $ X and Cafeteria is $ Y |
So, X= 310000+ 0.20Y |
Y= 169000+ 0.50X |
Substituting the value of X in equation 2: |
Y = 169000 + 0.50(310000 + 0.20Y) |
Y = 169000 + 115000+.010Y |
Y – 0.010Y = 115000+169000 |
0.90Y = 384,000 |
Y = 384000/0.90 |
Y = $ 426,667 |
Substituting the value of Y in equation 1: |
So, X= 310000+ .020Y |
So, X= 310000+ 0.20*426667 |
So, X= 310000+ 85333 |
X= $ 395,333 |
Allocation Summary | Janitorial | Cafeteria | Cutting | Assembly | Total |
Square Feet % | - | 50.00% | 10.00% | 40.00% | 100.00% |
Number of Employees % | 20.00% | - | 60.00% | 20.00% | 100.00% |
Department cost | 310,000.00 | 169,000.00 | 1,504,000.00 | 680,000.00 | 2,663,000.00 |
Total costs | |||||
Janitorial | (395,333.00) | 197,666.50 | 39,533.30 | 158,133.20 | - |
Cafeteria | 85,333.00 | (426,667.00) | 256,000.20 | 85,333.80 | - |
Cost after allocation | - | (60,000.50) |
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