Solutions Chapter 8 Support Dept Costs

Selected solutions from Eldenburg/Cost Management, Canadian Edition/ 9780470157039
Chapter 8
Measuring and Assigning Support Department Costs
QUESTIONS
8.2
Support department costs are direct costs of the department, but indirect costs when
allocated to other departments. Manufacturing overhead is a direct cost of the production
process but it becomes an indirect cost when it is allocated to units.
8.4
Costs that include support department allocations using a single cost pool and single
allocation base for both fixed and variable costs would overstate the incremental costs
used in short-term decisions. This limits the use of these costs for decision-making.
However, when a dual rate system is developed, the variable costs are more likely to be
relevant information for short-term decision-making.
8.6
Department 1 is an operating department because it works directly on the firm's final

product.
8.8
The dual rate separates fixed and variable support costs. When this is done, the variable
rate can be used as information for making decisions that require incremental costs, such
as transfer prices and insource and outsource decisions. A single rate includes both fixed
and variable costs and cannot be used for any type of decision making. Another
advantage of the dual rate method is that the allocations more accurately represent the
flow of resources because fixed and variable costs are separated and usually allocated
using different allocation bases or actual usage of some sort.
8.10
Better short-term decisions would be made using the dual rate method because the
variable costs of the support departments would be easy to use in decision-making. It
would depend on the type of long term decision being made whether either method would
provide useful information.
8.12
Accounting department costs could be allocated using number of employees,

departmental direct costs, or time spent on activities for individual departments. An
advantage of number of employees is that it would be simple to use in calculations. A
disadvantage is that it probably does not reflect the use of the department by other
departments. An advantage of departmental direct costs is that accounting activities
probably increase as direct costs increase, and direct costs are fairly easy to measure. A
disadvantage is that there are some accounting activities that do not vary with direct
costs. And advantage of time spent on accounting activities for every department is that
it is probably most accurately reflects the use of accounting by other departments, but it
Posted with permission from John Wiley & Sons Canada, Ltd
would be hard to track, and there is likely measurement error when time is not recorded
as used, but estimated or recorded after the fact.
MULTIPLE CHOICE QUESTIONS

8.14
A business uses the step-down method to allocate service department costs to the
manufacturing departments. Assume that there are two service departments and two
manufacturing departments, as shown here:
Costs
Labour hours
Space occupied (m2)
Service Departments
Plant Administration Custodial Services
$360,000
$90,000
25,000
6,000
10,000
1,000
Manufacturing Departments
Cutting
Polishing
$261,000
$689,000
18,000
30,000
5,000
45,000
Plant administration costs are allocated based on labour hours, and custodial services costs are
allocated based on space occupied. The total costs of the cutting and polishing departments
(rounded to the closest 1,000), after allocating all the service department costs, starting with
the largest service provider, are:
a) Cutting, $396,000, and polishing, $914,000
b) Cutting, $405,000, and polishing, $995,000
c) Cutting, $381,000, and polishing, $889,000
d) Cutting, $394,000, and polishing, $1,006,000
e) Cutting, $380,000, and polishing, $892,000
Ans: D
8.15
The managers of ACME Manufacturing are discussing ways to allocate the cost of
service departments, such as quality control and maintenance, to the production
departments. To aid them in this discussion, the controller has provided the following
information:
Budgeted overhead costs before Allocation

Budgeted machine hours
Budgeted direct labour hours
Budgeted hours of service:
Quality control
Maintenance
Quality Control Maintenance Machining Assembly

Total
$350,000
$200,000 $400,000 $300,000 $1,250,000
50,000
50,000
25,000
25,000
10,000
7,000
21,000
18,000
7,000
12,000
35,000
40,000
Using the direct allocation method, the total amount of overhead allocated to each machine hour
would be:
a) $9.35
b) $5.25
c) $2.40
d) $8.00
e) $15.65
Ans: E
8.16
Which of the following methods of allocating service department costs results in the most
accurate product cost?
a) Direct method
b) Step-down method
c) Reciprocal method
d) Activity-based costing method
Ans: C
8.17
Which service department should be allocated first, using the step-down method of
allocation?
a) Department A
b) Department B
c) Department C
d) Department X or Y
Ans: A
8.18 Assume that the service departments costs were allocated in alphabetical order. What is the
approximate overhead rate for Department C?
a) $1,860
b) $2,308
c) $2,429
d) $2,516
Ans: D
EXERCISES
8.20 Allocating Support Costs to Units
Monthly occupancy = 120 beds*0.8*30 days = 2,880 patient days
Monthly costs = $240,000 + $90*2,880 = $499,200
Average daily charge = $499,200/2,880 = $173.33
8.22 Direct and Step-Down Methods with Dual Rates - Petro-X
A. Direct method allocation
Support Departments
Physical
Equipment
Plant
Maintenance
Fixed Cost Allocation:
Allocation bases:
Square metres
Machine hours
Fixed costs:
$39,000
Physical plant
(39,000)
Equipment maintenance
Allocated fixed cost
0
(75,000)
0
Maintenance hours
Variable costs:
18,000
Physical plant
(18,000)
Equipment maintenance
Allocated variable cost
0
(60,000)
0
Total allocated cost

(fixed + variable)
Dept. X
Dept. Y
5,000
8,000
13,000
61.538%
100.00%
10,000
15,000
25,000
40.00%
60.00%
100.00%
$15,000
30,000
45,000
$ 24,000
45,000
69,000
$114,000
0
0
114,000
40
50
90
44.444%
55.556%
100.00%
200
400
600
33.333%
66.667%
100.00%
8,000
20,000
28,000
10,000
40,000
50,000
78,000
0
0
78,000
$73,000
$119,000
$192,000
60,000
Total
38.462%
$75,000
Variable Cost Allocation:

Allocation bases:
# of employees
Operating Departments
B. Step-down method allocation, with physical plant costs allocated first

Support Departments
Physical
Equipment
Plant
Maintenance
Allocation bases:
Square metres
$39,000
(39,000)
0

(fixed + variable)
Total
5,000
8,000
16,900
29.586%
47.337%
100.00%
10,000
15,000
25,000
40%
60%
100.00%
$11,538
33,600
45,138
$ 18,462
50,400
68,862
$114,000
0
0
114,000
$75,000
9,000
(84,000)
0
12
40
50
102
11.76%
39.22%
49.02%
100.00%
Maintenance hours
18,000
(18,000)
Dept. Y
3,900

Allocation bases:
# of employees
Variable costs:
Step 1: Physical plant
Step 2: Equip. maint.
Dept. X
23.077%
Machine hours
Fixed costs:
60,000
2,118
(62,118)
0
200
400
600
33.333%
66.667%
100.00%
7,059
20,706
27,765
8,823
41,412
50,235
78,000
0
0
78,000
$72,903
$119,097
$192,000
C. Step-down method allocation, with equipment maintenance costs allocated first

Support Departments
Physical
Equipment
Plant
Maintenance
Allocation bases:
Machine hours
Dept. X
Dept. Y
10,000
15,000
25,000
0.00%
40%
60%
100.00%
Square metres
Fixed costs:
$39,000
0
(39,000)
0

Allocation bases:
Maintenance hours
$75,000
(75,000)
0
Total
5,000
8,000
13,000
38.462%
61.538%
100.00%
$30,000
15,000
45,000
$ 45,000
24,000
69,000
$114,000
0
0
114,000
10
200
400
610
1.639%
32.787%
65.574%
100.00%
# of employees
Variable costs:
18,000
984
(18,984)
0
60,000
(60,000)
0
0

(fixed + variable)
40
50
90
44.44%
55.56%
100.00%
19,672
8,437
28,109
39,344
10,547
49,891
78,000
0
0
78,000
$73,109
$118,891
$192,000
D. Ideally, departments should be allocated in the order their services are used, with
departments providing more services to other departments according to their rank of
services provided. Because services can be difficult to measure, direct costs are often
used as a measure of services provided.
8.24 Reciprocal Method - Pauls Valley Protection Service

A sample spreadsheet using Solver for this problem is available on the Instructors web site for
the textbook (available at www.wiley.com/canada/eldenburg). Below are manual calculations.
Manual Calculations using Simultaneous Equations:
Let S1, S2 and S3 represent the full cost of providing each department's service. The
simultaneous equations for support department costs are:
S1 = $30,000 + 0.1xS2 + 0.2xS3
S2 = $20,000 + 0.4xS1 + 0.2xS3
S3 = $40,000 + 0.1xS1 + 0.2xS2
Substitute S1 into the equation for S2 and solve for S2:
S2 = $20,000 + 0.4($30,000 + 0.1xS2 + 0.2xS3) + 0.2xS3
S2 = $20,000 + $12,000 + 0.04xS2 + 0.08xS3 + 0.2xS3
0.96xS2 = $32,000 + 0.28xS3
S2 = $33,333.33 + 0.291667xS3
Substitute S1 into the equation for S3:
S3 = $40,000 + 0.1($30,000 + 0.1xS2 + 0.2xS3) + 0.2xS2
S3 = $40,000 + $3,000 + 0.01xS2 + 0.02xS3 + 0.2xS2
0.98xS3 = $43,000 + .21xS2
Substitute S2 into the equation for S3 and solve for S3:
0.98xS3 = $43,000 + 0.21($33,333.33 + 0.291667xS3)
0.91875xS3 = $43,000 + $7,000
S3 = $54,422
Substitute S3 back into the equation for S2 and solve for S3:
S2 = $33,333.33 + 0.291667($54,422) = $49,206
Substitute S2 and S3 back into the equation for S1 and solve for S1:
S1 = $30,000 + 0.1($49,206) + 0.2($54,422) = $45,805
Finally, support costs are allocated to all of the departments:

Support Departments
S2
S3
40%
10%
10%
20%
20%
20%
S1
S1
S2
S3
Department Costs
Cost Allocations:
S1
S2
S3
Total Allocated Cost
$30,000
$20,000
$40,000
(45,805)
4,921
10,884
$
0
18,322
(49,206)
10,884
$
0
4,581
9,841
(54,422)
$
0
P1
P2
P3
20%
20%
10%
20%
50%
10%
40%
10%
Total
100%
100%
100%
$90,000
$ 9,161
9,841
5,442
$24,444
$ 9,161
0
21,769
$30,930
$ 4,580
24,603
5,443
$34,626
0
0
0
$90,000
8.26 Direct, Step-Down, and Reciprocal Methods, Assigning Costs to Departments

Pelham Town Library
A sample spreadsheet for this problem is available on the Instructors web site for the textbook
(available at www.wiley.com/canada/eldenburg).
A. The only cost not already assigned is the building lease cost of $24,000. Either number
of employees or square metres can be used as an allocation base. Square metres is a more
logical base, reflecting the amount of space each department occupies. For example, the
Janitorial department occupies 50/250 square metres, so it is allocated 20% of the lease
cost. Total costs assigned to each department are computed by adding direct costs to
allocated lease costs. Below is an excerpt from the sample spreadsheet for this problem:
B. This problem is very similar to direct method problems illustrated in the chapter.
However, students need to identify the departments that provide support services
(administration and janitorial) and the operating departments (books and other media).
The solution shown below assumes that janitorial services are allocated using square
metres and administration is allocated using number of employees. Here is an excerpt
from the sample spreadsheet for this problem:
C. Under the step-down method, it is necessary to identify the support department that
provides the most services. Because Administration is the largest department when
comparing support department costs, it will be allocated first. Below is an excerpt from
the sample spreadsheet for this problem.
D. Under the reciprocal method, the simultaneous equations for the support department
allocations are developed first.
Simultaneous equations:
Admin = $49,800 + (50/200 square metres) x Janitorial
Janitorial = $29,800 + (1/4 employees) x Admin
Here are calculations for solving the simultaneous equations manually. First substitute
the Janitorial equation into the Admin equation and solve for Admin:
Admin = $49,800 + (50/200) x [$29,800 + (1/4 employees) x Admin]
Admin = $49,800 + $7,450 + 0.0625 Admin
Admin = $57,250/0.9375 = $61,067
Now substitute Admin into the Janitorial equation and solve for Janitorial:
Janitorial = $29,800 + (1/4) x $61,067 = $45,067
Below is an excerpt from the sample spreadsheet for this problem. It shows the results
using Excel Solver to solve the simultaneous equations and allocate the support
department costs.
8.28 Step-Down and Reciprocal Methods, Uncertainties, Pricing - Kovacik

A sample spreadsheet for this problem is available on the Instructors web site for the textbook
(available at www.wiley.com/canada/eldenburg).
A. Under the step-down method, the direct costs of Information Systems are allocated first
because they are larger than the direct costs for the other support department
(Engineering and Design). In the first step, Information Systems costs are allocated to all
other departments using the percent of services used as given in the problem. In the
second step, the percentages for Engineering and Design must be adjusted to remove the
percent of services used by Information Systems. Thus, the percent allocated to the Plain
Bank department is 40%/(100%-10%), or 44.444%. The percent allocated to the Javelina
Bank department is 50%/(100%-10%), or 55.5556%. The total cost allocated in step 2 of
$4,300 is equal to the Engineering and Design direct costs of $2,700 plus $1,600 in costs
allocated from Information Systems.

Support Departments
Engineering
Information
and Design
Systems
Plain Bank Javelina Bank
Allocation Bases:
Information systems
Engineering and design
20%
Direct Costs
$2,700
Allocations:
Step 1: Information systems
1,600
Step 2: Engineering and design (4,300)
Total Allocated Costs
$
0
Total
30%
50%
44.4444%
55.5556%
100%
100%
$8,000
$10,000
$20,000
$40,700
(8,000)
0
$
0
2,400
1,911
$14,311
4,000
2,389
$26,389
0
0
$40,700
B. Calculation of estimated total allocated cost per unit using costs calculated under the
step-down method:
Allocated Cost/Production Volume
Plain bank
$14,311/8,000 units
Javelina bank
$26,389/4,000 units
Allocated Cost Per Unit

$1.789
$6.597
C. Actual total allocated costs will be different than budgeted total allocated costs because
budgets never exactly predict costs or production levels. Production levels change
because of unanticipated changes in product demand, unexpected production stoppages,
delays in receipt of materials, and so on. There are many reasons for actual costs
differing from budgeted costs, such as:
*
*
*
*
*
There can be unexpected inflation or deflation in the costs of materials, labour,

supplies, etc.
Employment levels fluctuate because employees leave unexpectedly, it takes
longer than expected to hire new employees, or management decides to change
the number or types of employees.
Unanticipated new types of materials, designs, or technologies can be adopted,
altering production costs.
Capacity constraints occur if demand is higher than usual. As organizations near
their capacity levels, costs of congestion increase and money may be spent to
relax the constraint.
Changes in product design or the manufacturing process affect the amount and
cost of materials and labour.
D. Under the reciprocal method, the simultaneous equations for the two support departments
are:
Engineer = $2,700 + 20% Info
Info = $8,000 + 10% Engineer
Substituting Engineer into the Info equation and solving for Info:
Info = $8,000 + 10% ($2,700 + 20% Info)
0.98 Info = $8,000 + $270
Info = $8,439
Substituting Info back into the equation for Engineer:
Engineer = $2,700 + 20% ($8,439) = $4,388
The cost allocations are performed as follows:
Support Departments
Engineering
Information
and Design
Systems
Plain Bank Javelina Bank
Services used:
Information systems
Direct Costs
Allocations:
Information systems
Total Allocated Costs
Total
10%
40%
30%
50%
50%
100%
100%
$2,700
$8,000
$10,000
$20,000
$40,700
(4,388)
1,688
$
0
439
(8,439)
$
0
1,755
2,532
$14,287
2,194
4,219
$26,413
0
0
$40,700
20%
E. Calculation of estimated total allocated cost per unit using costs calculated under the
reciprocal method:
Allocated Cost/Production Volume
Plain bank
$14,287/8,000 units
Javelina bank
$26,413/4,000 units
Allocated Cost Per Unit

$1.786
$6.603

Solutions Chapter 8 Support Dept Costs

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Selected solutions from Eldenburg/Cost Management, Canadian Edition/ 9780470157039

Department 1 is an operating department because it works directly on the firm's final

Accounting department costs could be allocated using number of employees,

Selected solutions from Eldenburg/Cost Management, Canadian Edition/ 9780470157039

MULTIPLE CHOICE QUESTIONS

Budgeted overhead costs before Allocation

Quality Control Maintenance Machining Assembly

Selected solutions from Eldenburg/Cost Management, Canadian Edition/ 9780470157039

Selected solutions from Eldenburg/Cost Management, Canadian Edition/ 9780470157039

Total allocated cost

Variable Cost Allocation:

Selected solutions from Eldenburg/Cost Management, Canadian Edition/ 9780470157039

B. Step-down method allocation, with physical plant costs allocated first

Total allocated cost

Variable Cost Allocation:

Selected solutions from Eldenburg/Cost Management, Canadian Edition/ 9780470157039

C. Step-down method allocation, with equipment maintenance costs allocated first

Variable Cost Allocation:

Total allocated cost

Selected solutions from Eldenburg/Cost Management, Canadian Edition/ 9780470157039

8.24 Reciprocal Method - Pauls Valley Protection Service

Selected solutions from Eldenburg/Cost Management, Canadian Edition/ 9780470157039

Finally, support costs are allocated to all of the departments:

8.26 Direct, Step-Down, and Reciprocal Methods, Assigning Costs to Departments

Selected solutions from Eldenburg/Cost Management, Canadian Edition/ 9780470157039

Selected solutions from Eldenburg/Cost Management, Canadian Edition/ 9780470157039

8.28 Step-Down and Reciprocal Methods, Uncertainties, Pricing - Kovacik

Selected solutions from Eldenburg/Cost Management, Canadian Edition/ 9780470157039

Allocated Cost Per Unit

There can be unexpected inflation or deflation in the costs of materials, labour,

Selected solutions from Eldenburg/Cost Management, Canadian Edition/ 9780470157039

Allocated Cost Per Unit

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