P14.2 (LO 1, 2), AP Excel Sunshine Juice Company produces and distributes concentrated orange juice for thirsty customers needing a fresh start to their day. It has been operating in two key customer segments for years selling to institutional customers and retail customers. The production departments are supported by the following three services: Administrative, Information Systems, and Maintenance. To date, the accounting team has simply allocated the support costs evenly between the two operating segments in order to determine total costs. Realizing that there are more accurate ways of assigning these costs, the new controller has asked you to prepare support department cost allocations using three other (and arguably more accurate) methods. Financial information is as follows. Support Departments Administrative Information Systems Maintenance Original Costs $75,000 $110,000 $60,000 Proportion of Administrative hours used 0.10 0.10 Proportion of Information Systems hours used 0.20 0.10 Proportion of Maintenance hours used 0.10 0.10 Required a. Determine the total costs that each operating segment would be accountable for if support costs are allo- cated using the direct method. b. Determine the total costs that each operating segment would be accountable for if the step method is used to allocate support costs; assume support departments are ranked according to their original cost. c. Use Excel to determine the total costs that each operating segment would be accountable for if support costs are allocated using the reciprocal method. d. Evaluate the accuracy of each method while considering the time involved to perform the allocation. Spec- ify which method you think the controller should use going forward and explain why.
P14.2 (LO 1, 2), AP Excel Sunshine Juice Company produces and distributes concentrated orange juice for thirsty customers needing a fresh start to their day. It has been operating in two key customer segments for years selling to institutional customers and retail customers. The production departments are supported by the following three services: Administrative, Information Systems, and Maintenance. To date, the accounting team has simply allocated the support costs evenly between the two operating segments in order to determine total costs. Realizing that there are more accurate ways of assigning these costs, the new controller has asked you to prepare support department cost allocations using three other (and arguably more accurate) methods. Financial information is as follows. Support Departments Administrative Information Systems Maintenance Original Costs $75,000 $110,000 $60,000 Proportion of Administrative hours used 0.10 0.10 Proportion of Information Systems hours used 0.20 0.10 Proportion of Maintenance hours used 0.10 0.10 Required a. Determine the total costs that each operating segment would be accountable for if support costs are allo- cated using the direct method. b. Determine the total costs that each operating segment would be accountable for if the step method is used to allocate support costs; assume support departments are ranked according to their original cost. c. Use Excel to determine the total costs that each operating segment would be accountable for if support costs are allocated using the reciprocal method. d. Evaluate the accuracy of each method while considering the time involved to perform the allocation. Spec- ify which method you think the controller should use going forward and explain why.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Transcribed Image Text:P14.2 (LO 1, 2), AP Excel Sunshine Juice Company produces and distributes concentrated orange juice for
thirsty customers needing a fresh start to their day. It has been operating in two key customer segments for years,
selling to institutional customers and retail customers. The production departments are supported by the following
three services: Administrative, Information Systems, and Maintenance. To date, the accounting team has simply
allocated the support costs evenly between the two operating segments in order to determine total costs. Realizing
that there are more accurate ways of assigning these costs, the new controller has asked you to prepare support
department cost allocations using three other (and arguably more accurate) methods. Financial information is as
follows.
Support Departments
Administrative Information Systems Maintenance
$75,000
Original Costs
$110,000
$60,000
Proportion of Administrative hours used
0.10
0.10
Proportion of Information Systems hours used
0.20
0.10
Proportion of Maintenance hours used
0.10
0.10
Required
a. Determine the total costs that each operating segment would be accountable for if support costs are allo-
cated using the direct method.
b. Determine the total costs that each operating segment would be accountable for if the step method is used
to allocate support costs; assume support departments are ranked according to their original cost.
c. Use Excel to determine the total costs that each operating segment would be accountable for if support
costs are allocated using the reciprocal method.
d. Evaluate the accuracy of each method while considering the time involved to perform the allocation. Spec-
ify which method you think the controller should use going forward and explain why.
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