W9: A Costing Framework and Cost allocation
A Costing Framework and Cost allocation
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W9: A Costing Framework and Cost allocation
Solutions to calculation questions
Dark Tower Security has two operations departments (Events Security, and Mobile Patrol), and two
support departments (Human Resources (HR), Information Technology (IT)). Prior to allocation of
any support department costs, the total cost of HR Department is $600,000, and the total cost of
Information Technology department is $450,000. Dark Tower Security uses the number of
employees to allocate HR Department’s costs, and the number of computer devices to allocate IT
Department’s cost. The following additional information is available:
Support departments Operating departments
HR IT Event security Mobile Patrols
Number of employees 5 8 12 20
Number of computer
devices
6 20 15 24
Using the Direct Method of support cost allocation, what is the amount of HR cost allocated to Event
Security?
Answer: 600000*12/32=225,000
Dark Tower Security has two operations departments (Events Security, and Mobile Patrol), and two
support departments (Human Resources (HR), Information Technology (IT)). Prior to allocation of
any support department costs, the total cost of HR Department is $600,000, and the total cost of
Information Technology department is $450,000. Dark Tower Security uses the number of
employees to allocate HR Department’s costs, and the number of computer devices to allocate IT
Department’s cost. The following additional information is available:
Support departments Operating departments
HR IT Event security Mobile Patrols
Number of employees 5 8 12 20
Number of computer
devices
6 20 15 24
Using the Step-Down Method of support cost allocation, what is the amount of IT cost allocated to
Mobile Patrol?
Answer: First, allocate cost from HR to IT: $600000*8/40=120000. Next,
$(120000+450000)*24/39=$350,769.
Dark Tower Security has two operations departments (Events Security, and Mobile Patrol), and two
support departments (Human Resources (HR), Information Technology (IT)). Prior to allocation of
any support department costs, the total cost of HR Department is $600,000, and the total cost of
Information Technology department is $450,000. Dark Tower Security uses the number of
employees to allocate HR Department’s costs, and the number of computer devices to allocate IT
Department’s cost. The following additional information is available:
Support departments Operating departments
HR IT Event security Mobile Patrols
Number of employees 5 8 12 20
Number of computer
devices
6 20 15 24
Using the Reciprocal Method of support cost allocation, what is the amount of IT cost after HR cost
has been allocated to IT? (Use 2 decimal points for each of your cost equations)
Answer: IT=450k+(8/(8+12=20)*HR, or IT=450k+0.20*HR. HR=600k+(6/(6+15+24)*IT, or
HR=600k+0.13*IT. Solve the equations to get IT=$585,216
Dean’s Design provides interior design services. The company allocates its overhead costs to its two
divisions, Residential and Commercial, based on each division’s revenue. The budgeted overhead
cost in May is $600,000, while the actual overhead cost turns out to be $620,000. Based on the
following information about Dean’s Design in May, what is the company’s pre-determined overhead
cost rate in May?
Residential Commercial
Budgeted sales in May 100,000 200,000
Actual sales in May 115,000 210,000
Answer: 600k/(100k+200k)=$2 per sales dollar
Allgood Hospital uses a budgeted overhead rate for allocating overhead to patient stays. In April, the
operating room had a budgeted allocation base of 2,000 operating hours. The budgeted operating
room overhead costs were $90,000. Patient Cuthbert Henry was in the operating room for a 5-hour
surgery. The additional costs involved in the operation include a team of medical staff who operates
on Cuthbert ($7,000) and medical supplies required for the operation ($1,500). Based on this
information, what is the budgeted cost of Cuthbert’s operation?
Answer: $(90000/2000)*5+$7000+$1500=$8725
Susan Sai Ltd provides the following information about departmental consumption of allocation
bases for its 3 support and 2 operating departments.
Resource provided to:
Support departments
Resource provided to:
Operating departments
Resources
provided by:
Personnel Cafeteria Maintenance Machining Assembly
Personnel 10% 20% 30% 40%
Cafeteria 10% 20% 40% 30%
Maintenance 10% 20% 50% 20%
For the step-down method, what proportion of the cafeteria’s costs will be allocated to the
maintenance department if the allocation order is personnel, cafeteria and maintenance?
Answer: 20/(20+40+30)=0.222 or 22.2%
Billy Bumble Pet Food sells organic packaged dog treat, in a box of 12 packets (sold as “Bumbler’s
Dozen”). Each box requires a total of 0.5 hour of cooking time and 0.2 hour of packaging time. Each
individual package requires $5 direct materials and $2 direct labour cost. The pre-determined
indirect cost rate of cooking is $100 per hour, and the predetermined indirect cost rate for packaging
is $20 per hour. What is the cost of one box of Bumbler’s Dozen?
Answer = $100*0.5+$20*0.2+12*($5+$2)=$138