1 Kilogram of chemicals purchased for $2000 and with an additional $1000 is processed into 400 grams of Crystals and 80 litres of a Cleaning agent. At split-off, a gram of Crystal can be sold for $1 and the Cleaning agent can be sold for $4 per litre. At an additional cost of $400, Carina can process the 400 grams of Crystal into 500 grams of Detergent that can be sold for $2 per gram. The 80 litres of Cleaning agent is packaged at an additional cost of $300 and made into 200 packs of Softener that can be sold for $2 per pack. Required:
Carica Company is a manufacturer with two production departments (Machining and
Assembly) as well as two support departments (Materials Requisitions and Utility Services).
For the last quarter of 2020, Carica’s cost records indicate the following:
SUPPORT PRODUCTION
Materials
Requisitions
(MR)
Utility
Services
(US)
Machining Assembly Total
Budgeted
before any interdepartment cost
allocations
$200,000 $1,000,000 $5,456,000 $7,458,000 $14,114,000
Support work
supplied by MR
(Number of
requisitions)
0 25% 40% 35% 100%
Support work
supplied by US
(Power costs)
10% 0 30% 60% 100%
Required:
1. Allocate the two support departments’ costs to the two operating departments using the
following methods:
a. Direct method
b. Step-down method (allocate MR first)
c. Step-down method (allocate US first)
d. The Algebraic method.
2. Compare and explain differences in the support-department costs allocated to each
production department.
3. What approaches might be used to decide the sequence in which to allocate support
departments when using the step-down method?
Problem 2
Carina Company produces sanitation products after processing specialized chemicals; The
following relates to its activities:
1 Kilogram of chemicals purchased for $2000 and with an additional $1000 is
processed into 400 grams of Crystals and 80 litres of a Cleaning agent. At split-off, a
gram of Crystal can be sold for $1 and the Cleaning agent can be sold for $4 per litre.
At an additional cost of $400, Carina can process the 400 grams of Crystal into 500
grams of Detergent that can be sold for $2 per gram. The 80 litres of Cleaning agent is
packaged at an additional cost of $300 and made into 200 packs of Softener that can
be sold for $2 per pack.
Required:
1. Allocate the joint cost to the Detergent and the Softener using the following:
a. Sales value at split-off method
b. NRV method
2. Should Carina have processed each of the products further? What effect does the allocation
method have on this decision?
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