P14.2 (LO 1, 2), AP Excel Sunshine Juice Company produces and distributes concentrated orange juice. 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. Original costs Proportion of Administrative hours used Determine and evaluate support department cost allocations under th direct, step, and reciprocal methods. Operating Segments Institutional Administrative Support Departments Information Systems Maintenance Retail $75,000 - $110,000 0.10 $60,000 $650,000 $350,000 0.10 0.45 0.35 0.10 0.40 0.30 0.10 - 0.30 0.50 Proportion of Information Systems hours used Proportion of Maintenance hours used 0.20 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. 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. Original costs Proportion of Administrative hours used Determine and evaluate support department cost allocations under th direct, step, and reciprocal methods. Operating Segments Institutional Administrative Support Departments Information Systems Maintenance Retail $75,000 - $110,000 0.10 $60,000 $650,000 $350,000 0.10 0.45 0.35 0.10 0.40 0.30 0.10 - 0.30 0.50 Proportion of Information Systems hours used Proportion of Maintenance hours used 0.20 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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Transcribed Image Text:P14.2 (LO 1, 2), AP Excel Sunshine Juice Company produces and distributes concentrated orange juice. 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.
Original costs
Proportion of Administrative hours used
Determine and evaluate support
department cost allocations under th
direct, step, and reciprocal methods.
Operating Segments
Institutional
Administrative
Support Departments
Information Systems
Maintenance
Retail
$75,000
-
$110,000
0.10
$60,000
$650,000
$350,000
0.10
0.45
0.35
0.10
0.40
0.30
0.10
-
0.30
0.50
Proportion of Information Systems hours used
Proportion of Maintenance hours used
0.20
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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