# SEU Provide Numerical Examples of A Direct Material Budget Cost Accounting Ques: Accounting Answers 2021

SEU Provide Numerical Examples of A Direct Material Budget Cost Accounting Ques: Accounting Answers 2021

## SEU Provide Numerical Examples of A Direct Material Budget Cost Accounting Ques: Accounting Answers 2021

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SEU Provide Numerical Examples of A Direct Material Budget Cost Accounting Ques

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1. Provide numerical examples of a Direct Material Budget for the second quarter (April to June)
by considering a manufacturing company operating in Saudi Arabia as a sample study.
2. XYZ Industries Co. decided to allocate Human Resource department costs based on the number
of employees in each department and Information Technology costs based on the number of
machine hours in each department.
Required:
a)
Give a numerical example for the four departments, given the table below, (the
numerical information should be appropriate as per the table given as a reference.
Support Departments
Human
Operating Departments
Information Hot
Resource Technology
Rolled cold Rolled Hollow
Hollow Steel
TOTAL
Steel
Total department cost
Number of employees
Number of machine hours
b- Then based on your given information, use The Direct method to allocate support department
costs.
Allocate cost:
Human Resource
Information Technology
TOTAL
3. For what types of items is the physical output method appropriate? Give suitable and real
example that should support your answer. ch9
Page 1 of 1
Cost Management
Measuring, Monitoring, and Motivating Performance
Chapter 8
Measuring and Assigning Support
Department Costs
© John Wiley & Sons, 2011
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 1
Chapter 8: Measuring and Assigning Support
Department Costs
Learning objectives

Q1: What are support departments, and why are their costs
allocated to other departments?
Q2: What process is used to allocate support department costs?
Q3: How is the direct method used to allocate support costs to
operating departments?
Q4: How is the step-down method used to allocate support costs
to operating departments?
Q5: How is the reciprocal method used to allocate support costs to
operating departments?
Q6: What is the difference between single- and dual-rate
allocations?
Q7: How do support cost allocations affect decisions and
managerial incentives?
© John Wiley & Sons, 2011
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 2
Q1: Support versus Operating Departments
• The operating departments of an organization
produce items or services that generate
revenue.
• The support departments of an organization
produce items or provide services to the
operating and other support departments.
• The support department costs are common
costs that are shared between two or more
other departments.
© John Wiley & Sons, 2011
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 3
Q1: Reasons for Allocating Support
Department Costs
• External reporting
• Motivation
• appropriate consumption of support
department resources
• efficiency of support department
• monitor consumption of support
department services
• Decision making
• item pricing
• make or buy decisions
© John Wiley & Sons, 2011
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 4
Q1: Support Department Allocation Process
© John Wiley & Sons, 2011
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 5
Q2: Process for Allocating Support
Department Costs
1. Clarify allocation purpose
2. Identify cost pools
3. Assign costs to cost pools
4. Choose allocation bases for each cost pool
5. Choose allocation method; allocate support
department costs
6. Allocate updated operating department costs to
units of goods or services, if relevant
© John Wiley & Sons, 2011
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 6
Q2: Process for Allocating Support
Department Costs
1. Clarify allocation purpose

if the purpose is to motivate the use of the services
of a newly formed department, perhaps no costs
should be allocated

if the purpose is to discourage operating department
managers from over-use of the services of support
departments, then a rate per unit of service might be
large and not based on actual costs

if the purpose is to determine the full cost of items
or services for long-term pricing decisions, then all
support costs should be allocated
© John Wiley & Sons, 2011
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 7
Q2: Process for Allocating Support
Department Costs
2. Identify cost pools
• the purpose will determine whether both fixed
and variable support department costs
should be allocated
• the purpose will determine which costs
should be allocated
© John Wiley & Sons, 2011
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 8
Q2: Process for Allocating Support
Department Costs
3. Assign costs to cost pools
• some costs will be direct to the cost pool
(e.g. toner cartridge costs would be direct to
the “variable copying costs” cost pool)
• some costs will be indirect to the cost pool
(e.g. rent costs for an entire facility would be
indirect to the “information technology costs”
cost pool)
© John Wiley & Sons, 2011
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 9
Q2: Process for Allocating Support
Department Costs
4. Choose allocation bases for each cost pool
• an allocation base with a good cause-andeffect relationship with the cost pool provides
a reasonable allocation rate
• users of support department services will
carefully monitor their consumption of the
allocation base
© John Wiley & Sons, 2011
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 10
Q2: Process for Allocating Support
Department Costs
5. Choose allocation method and allocate support
department costs
• in this chapter we cover three allocation
methods
• each of these three methods could be
implemented using
• a single- or dual-rate approach (covered later)
• actual or budgeted costs and allocation bases
(covered later)
© John Wiley & Sons, 2011
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 11
Q2: Process for Allocating Support
Department Costs
6. Allocate updated operating department costs to
units of goods or services, if relevant
• for some decisions, this may not be relevant
• for long-term pricing decisions, this is likely to
be relevant
© John Wiley & Sons, 2011
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 12
Q3: The Direct Method of Allocating
Support Department Costs
• The direct method ignores the fact that
support departments use each others’
services.
• Each support department’s costs are
allocated only to operating departments.
• This method is the easiest
computationally and the easiest to
explain.
© John Wiley & Sons, 2011
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 13
Q3: The Direct Method Example
Philco Toys makes metal and plastic toys in separate departments. It has
two support departments, Accounting and Information Systems. Philco has
decided to allocate Accounting department costs based on the number of
employees in each department and Information Systems costs based on
the number of computers in each department. Given the information below,
use the direct method to allocate support department costs.
Support Dep’ts
Total department costs
Number of employees
Number of computers
Operating Departments
AccInfo
Plastic
Metal
ounting Systems Items
Items
Total
\$48,000 \$72,000 \$386,000 \$182,000 \$688,000
3
4
22
16
45
4
6
3
3
16
Allocate costs:
Accounting
(48,000)
Information Systems
Totals
© John Wiley & Sons, 2011
(72,000)
\$0
\$0
27,789
20,211
\$0
36,000
36,000
\$0
\$449,789
\$238,211
\$688,000
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 14
Q3: The Direct Method Example
Plastic Items is allocated
Plastic and Metal Item share
22/(22+16) of Accounting
Info Systems costs equally
department costs, and Metal
because they have the same
Items is allocated
number of computers in each
16/(22+16). Notice that the
department. Notice that the
number of employees in the
number of computers in the
support departments is ignored
departments
is ignored
Support Dep’ts support
Operating
Departments
under the direct method.
under the direct method.
Total department costs
Number of employees
Number of computers
AccInfo
Plastic
Metal
ounting Systems Items
Items
Total
\$48,000 \$72,000 \$386,000 \$182,000 \$688,000
3
4
22
16
45
4
6
3
3
16
Allocate costs:
Accounting
(48,000)
Information Systems
Totals
© John Wiley & Sons, 2011
(72,000)
\$0
\$0
27,789
20,211
\$0
36,000
36,000
\$0
\$449,789
\$238,211
\$688,000
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 15
Q4: The Step-Down Method of Allocating
Support Department Costs
• The step-down method allocates some (but not all)
support department costs to other support
departments.
• The first support department’s costs are allocated
to all operating and support departments that use
its services.
• Each subsequent support department’s costs are
allocated to all operating and support departments
that use its services, except any support
department whose costs were already allocated.
• Allocation order must be determined.
© John Wiley & Sons, 2011
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 16
Q4: The Step-Down Method Example
Given the information for Philco, use the step-down method to allocate
support department costs. Allocate the costs of the support department that
provides the largest percentage of its services to the other support
department first.
First determine
allocation order:
Accounting provided 4/(4+22+16) = 4/42
= 9.5% of its services to Info Systems.
Information Systems provided 4/(4+3+3) = 4/10 = 40% of its
services to Accounting, so Information Systems goes first.
Support Dep’ts
Total department costs
Number of employees
Number of computers
© John Wiley & Sons, 2011
Operating Departments
AccInfo
Plastic
Metal
ounting Systems Items
Items
Total
\$48,000 \$72,000 \$386,000 \$182,000 \$688,000
3
4
22
16
45
4
6
3
3
16
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 17
Q4: The Step-Down Method Example
Given the information for Philco, use the step-down method to allocate
support department costs.
Now perform the allocation:
Support Dep’ts
Total department costs
Number of employees
Number of computers
Operating Departments
Metal
Plastic
Info
AccTotal
Items
ounting Systems Items
\$48,000 \$72,000 \$386,000 \$182,000 \$688,000
45
16
22
4
3
16
3
3
6
4
Allocate costs:
Accounting
Information Systems
Totals
© John Wiley & Sons, 2011
(76,800)
(48,000)
28,800
\$0
(72,000)
\$0
44,463
27,789
32,337
20,211
\$0
\$0
21,600
21,600
21,600
\$0
\$0
\$435,389
\$452,063
\$223,811
\$235,937
\$659,200
\$688,000
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 18
Q4: The Step-Down Method Example
Info Systems costs are allocated
to Accounting, Plastic, & Metal
based on each department’s
number of computers compared
to total non-Info Systems
Support Dep’ts
computers: 4+3+3=10.
Total department costs
Number of employees
Number of computers
Accounting costs are allocated
only to Plastic & Metal based on
each department’s number of
employees compared to total
non-Accounting and non-Info
Operatingemployees:
Departments
Systems
22+16=38
AccInfo
Plastic
Metal
ounting Systems Items
Items
Total
\$48,000 \$72,000 \$386,000 \$182,000 \$688,000
3
4
22
16
45
4
6
3
3
16
Allocate costs:
Accounting
Information Systems
Totals
(76,800)
28,800
\$0
(72,000)
\$0
44,463
32,337
\$0
21,600
21,600
\$0
\$452,063
\$235,937
\$688,000
Total costs allocated out of Accounting are now higher because of
the Info Systems costs allocated to Accounting.
© John Wiley & Sons, 2011
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 19
Q4: The Step-Down Method Example
(22/38) x \$76,800
(4/10) x \$72,000
(16/38) x \$76,800
(3/10) x \$72,000
Support Dep’ts
Total department costs
Number of employees
Number of computers
(3/10) x \$72,000
Operating Departments
AccInfo
Plastic
Metal
ounting Systems Items
Items
Total
\$48,000 \$72,000 \$386,000 \$182,000 \$688,000
3
4
22
16
45
4
6
3
3
16
Allocate costs:
Accounting
Information Systems
Totals
© John Wiley & Sons, 2011
(76,800)
28,800
\$0
(72,000)
\$0
44,463
32,337
\$0
21,600
21,600
\$0
\$452,063
\$235,937
\$688,000
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 20
Q5: The Reciprocal Method of Allocating
Support Department Costs
• The reciprocal method allocates all support
department costs to other support
departments.
• The first step is to compute the total costs of
each support department when its usage of
other support department services is taken
into consideration.
• Support department costs are then allocated
to all other operating and support
departments that consume its services.
© John Wiley & Sons, 2011
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 21
Q5: The Reciprocal Method Example
Given the information for Philco, use the reciprocal method to allocate
support department costs.
First determine total costs for each support department by writing an equation for its
costs (use A and IS as abbreviations).
A = \$48,000 + [4/(4+3+3)] x IS; IS = \$72,000 + [4/(4+22+16)] x A
Then solve: A = \$48,000 + (4/10) x [\$72,000 + (4/42) x A]
A = \$48,000 + \$28,800 + (16/420) x A]
(404/420) x A = \$76,800
A = \$76,800 x (420/404) = \$79,842
IS = \$72,000 + (4/42) x \$79,842 = \$79,604
Support Dep’ts
Total department costs
Number of employees
Number of computers
© John Wiley & Sons, 2011
Operating Departments
AccInfo
Plastic
Metal
ounting Systems Items
Items
Total
\$48,000 \$72,000 \$386,000 \$182,000 \$688,000
3
4
22
16
45
4
6
3
3
16
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 22
Q5: The Reciprocal Method Example
Given the information for Philco, use the reciprocal method to allocate
support department costs.
Now perform the allocation:
Support Dep’ts
Total department costs
Number of employees
Number of computers
Operating Departments
AccInfo
Plastic
Metal
ounting Systems Items
Items
Total
\$48,000 \$72,000 \$386,000 \$182,000 \$688,000
3
4
22
16
45
4
6
3
3
16
Allocate costs:
Accounting
Information Systems
Totals
© John Wiley & Sons, 2011
(79,842)
7,604
41,822
(79,842)
7,604
41,822
31,842 (79,604)
(79,604)
23,881
31,842
23,881
\$0
\$0 \$451,703
\$451,703
\$0
\$0
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
30,416
30,416
23,881
23,881
\$0
\$0
\$236,297
\$236,297
\$688,000
Slide # 23
Q5: The Reciprocal Method Example
These numbers are the
solutions to the
simultaneous equations.
(4/42) x \$79,842
(22/42) x \$79,842
(16/42) x \$79,842
Support Dep’ts
Total department costs
Number of employees
Number of computers
Operating Departments
AccInfo
Plastic
Metal
ounting Systems Items
Items
Total
\$48,000 \$72,000 \$386,000 \$182,000 \$688,000
3
4
22
16
45
4
6
3
3
16
Allocate costs:
Accounting
Information Systems
Totals
© John Wiley & Sons, 2011
(79,842)
7,604
41,822
(79,842)
7,604
41,822
31,842 (79,604)
(79,604)
23,881
31,842
23,881
\$0
\$0 \$451,703
\$451,703
\$0
\$0
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
30,416
30,416
23,881
23,881
\$0
\$0
\$236,297
\$236,297
\$688,000
Slide # 24
Q5: The Reciprocal Method Example
(4/10) x \$79,604
(3/10) x \$79,604
(3/10) x \$79,604
Support Dep’ts
Total department costs
Number of employees
Number of computers
Operating Departments
AccInfo
Plastic
Metal
ounting Systems Items
Items
Total
\$48,000 \$72,000 \$386,000 \$182,000 \$688,000
3
4
22
16
45
4
6
3
3
16
Allocate costs:
Accounting
Information Systems
Totals
© John Wiley & Sons, 2011
(79,842)
7,604
41,822
(79,842)
7,604
41,822
31,842 (79,604)
(79,604)
23,881
31,842
23,881
\$0
\$0 \$451,703
\$451,703
\$0
\$0
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
30,416
30,416
23,881
23,881
\$0
\$0
\$236,297
\$236,297
\$688,000
Slide # 25
Q6: Single- versus Dual-Rate Allocation
• In single-rate allocation, each cost pool
includes fixed and variable costs.
• In dual-rate allocation, fixed and variable
costs are in separate cost pools.
• Both methods can be employed with the
direct, step-down, or reciprocal methods.
• The prior three examples used the singlerate allocation method.
© John Wiley & Sons, 2011
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 26
Q6: Single- versus Dual-Rate Example
Philco has decided to use the direct method and allocate variable
Accounting costs based on the number of transactions and fixed
Accounting costs based on the number of employees. The Info Systems
variable costs will be allocated based on the number of service requests
and fixed costs will be allocated based on the number of computers. The
required information is presented below.
Support Dep’ts
Total department variable costs
Total department fixed costs
Number of transactions
Number of employees
Number of service requests
Number of computers
Operating Departments
AccInfo
Plastic
Metal
ounting Systems Items
Items
\$20,000 \$22,000 \$186,000 \$100,000
\$28,000 \$50,000 \$200,000
\$82,000
20
32
140
86
3
4
22
16
18
5
12
8
4
6
3
3
Now perform the allocation…
© John Wiley & Sons, 2011
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 27
Q6: Single- versus Dual-Rate Example
Total department variable costs
Total department fixed costs
Number of transactions
Number of employees
Number of service requests
Number of computers
Support
Accounting
\$20,000
\$28,000
20
3
18
4
Dep’ts
Operating Departments
Info
Plastic
Metal
Systems Items
Items
\$22,000 \$186,000 \$100,000
\$50,000 \$200,000
\$82,000
32
140
86
4
22
16
5
12
8
6
3
3
(20,000)
12,389
7,611
13,200
8,800
\$211,589
\$116,411
16,211
25,000
\$241,211
11,789
25,000
\$118,789
\$452,800
\$235,200
Allocate variable costs:
Accounting
Information Systems
Total variable costs
Allocate fixed costs:
Accounting
Information Systems
Total fixed costs
Total fixed and variable costs
© John Wiley & Sons, 2011
(22,000)
\$0
\$0
(28,000)
\$0
\$0
(50,000)
\$0
\$0
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 28
Q7: Decision Making with Support Costs
• Support costs need to be considered when
evaluating decisions such as make/buy, keep/drop,
special order, and constrained resource
• Necessary to isolate relevant support costs
– This may not be the same as the allocated support costs
– For example, outsourcing an operating department may
not result in a reduction in support department costs
© John Wiley & Sons, 2011
Chapter 8: Measuring and Assigning Support Department Costs
Eldenburg & Wolcott’s Cost Management, 2e
Slide # 29
Q7: Establishing Transfer Prices for
Support Departments
• Transfer prices…

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