Problem 11-54 (Algo) Step Method with Three Service Departments (LO 11-3) Model, Inc., produces model automobiles made from metal. It operates two production departments, Molding and Painting, and has three service departments, Administration, Accounting, and Maintenance. The accumulated costs in the three service departments were $244,000, $396,000, and $200,000, respectively. Management is concerned that the costs of its service departments are getting too high. In particular, managers would like to keep the costs of service departments under $3.50 per unit on average. You have been asked to allocate service department costs to the two production departments and compute the unit costs. The company decided that Administration costs should be allocated on the basis of square footage used by each production and service department. Accounting costs are allocated on the basis of number of employees. Maintenance costs are allocated on the basis of the dollar value of the equipment in each department. The use of each base by all departments during the current period follows. Used by Allocation Base Administration Accounting Maintenance Molding Painting Building area 11,000 55,800 62,000 434,000 68,200 Employees 21 13 42 84 63 Equipment value (in thousands) $ 174.00 $ 232.00 $ 16.50 $ 116.00 $ 58.00 Direct costs of the Molding Department included $245,000 in direct materials, $347,500 in direct labor, and $105,000 in overhead. The Painting Department’s direct costs consisted of $205,000 in direct materials, $205,000 in direct labor, and $82,500 in overhead. Required: a. Using the step method, determine the allocated costs and the total costs in each of the two producing departments. Ignore self-usage (for example, ignore work done by Administration for itself). Rank order the allocation as follows: (1) Maintenance, (2) Accounting, and (3) Administration. b. Assume that 100,000 units were processed through these two departments. What is the unit cost for the sum of direct materials, direct labor, and overhead (1) for Molding, (2) for Painting, and (3) in total? c-1. Compute the cost per unit for the service department costs allocated to the production departments. c-2. Did the company meet management's standards of keeping service department costs below $3.50 per unit in the Molding Department? c-3. Did the company meet management's standards of keeping service department costs below $3.50 per unit in the Painting Department?
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Problem 11-54 (Algo) Step Method with Three Service Departments (LO 11-3)
Model, Inc., produces model automobiles made from metal. It operates two production departments, Molding and Painting, and has three service departments, Administration, Accounting, and Maintenance. The accumulated costs in the three service departments were $244,000, $396,000, and $200,000, respectively. Management is concerned that the costs of its service departments are getting too high. In particular, managers would like to keep the costs of service departments under $3.50 per unit on average. You have been asked to allocate service department costs to the two production departments and compute the unit costs.
The company decided that Administration costs should be allocated on the basis of square footage used by each production and service department. Accounting costs are allocated on the basis of number of employees. Maintenance costs are allocated on the basis of the dollar value of the equipment in each department. The use of each base by all departments during the current period follows.
| Used by | |||||||||||||||
| Allocation Base | Administration | Accounting | Maintenance | Molding | Painting | ||||||||||
| Building area | 11,000 | 55,800 | 62,000 | 434,000 | 68,200 | ||||||||||
| Employees | 21 | 13 | 42 | 84 | 63 | ||||||||||
| Equipment value (in thousands) | $ | 174.00 | $ | 232.00 | $ | 16.50 | $ | 116.00 | $ | 58.00 | |||||
Direct costs of the Molding Department included $245,000 in direct materials, $347,500 in direct labor, and $105,000 in
Required:
a. Using the step method, determine the allocated costs and the total costs in each of the two producing departments. Ignore self-usage (for example, ignore work done by Administration for itself). Rank order the allocation as follows: (1) Maintenance, (2) Accounting, and (3) Administration.
b. Assume that 100,000 units were processed through these two departments. What is the unit cost for the sum of direct materials, direct labor, and overhead (1) for Molding, (2) for Painting, and (3) in total?
c-1. Compute the cost per unit for the service department costs allocated to the production departments.
c-2. Did the company meet management's standards of keeping service department costs below $3.50 per unit in the Molding Department?
c-3. Did the company meet management's standards of keeping service department costs below $3.50 per unit in the Painting Department?
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