
a. (1)
Identify the costs that are direct costs of Department M.
a. (1)

Explanation of Solution
Direct cost: The costs that can be directly attributed to the production. Examples of direct costs are direct materials and direct labor.
The direct costs are identified as follows:
Cost Assignment Categories | Department M |
Salary of supervisor Department M | $ 80,000 |
Direct materials cost Department M | $300,000 |
Direct labor cost Department M | $240,000 |
Direct utilities cost Department M | $120,000 |
Total costs | $740,000 |
Table (1)
Hence, the direct costs of Department M are $740,000.
a. (2)
Identify the costs that are direct costs of Department N.
a. (2)

Explanation of Solution
The direct costs are identified as follows:
Cost Assignment Categories | Department N |
Salary of supervisor Department N | $60,000 |
Direct materials cost Department N | $420,000 |
Direct labor cost Department N | $680,000 |
Direct utilities cost Department N | $24,000 |
Total costs | $1,184,000 |
Table (2)
Hence, the direct costs of Department N are $1,184,000.
a. (3)
Identify the costs that are indirect costs.
a. (3)

Explanation of Solution
Indirect cost: The costs that cannot be directly attributed to the production. Examples of direct costs are indirect materials and indirect labor.
The indirect costs are identified as follows:
Cost Assignment Categories | Indirect costs |
Salary of Vice President of production division | $200,000 |
General factory wide utilities | $36,000 |
Production supplies | $36,000 |
$138,000 | |
$720,000 | |
Total costs | $1,130,000 |
Table (3)
b.
Identify the appropriate cost drivers for the indirect costs and allocate these costs to Departments M and N.
b.

Explanation of Solution
Cost driver: Cost driver is one of the measurements that help the company in tracing directly the number of units produced. It is considered as one of the casual factors, at the time of incurrence of the
Indirect Costs |
Allocation Rate |
Weight of Base |
Allocated To Department M |
Allocated To Department N | ||
Salary of Vice President | $100,000 | 1 department | $100,000 | |||
Salary of Vice President | $100,000 | 1 department | $100,000 | |||
General utilities | $0.25 | $120,000 | $30,000 | |||
General utilities | $0.25 | $24,000 | $6,000 | |||
Production supplies | $0.05 | $300,000 | $15,000 | |||
Production supplies | $0.05 | $420,000 | $21,000 | |||
Fringe benefits | $0.15 | $240,000 | $36,000 | |||
Fringe benefits | $0.15 | $680,000 | $102,000 | |||
Depreciation | $120 | 5,000 hours | $600,000 | |||
Depreciation | $120 | 1,000 hours | $120,000 | |||
Total allocated cost | $781,000 | $349,000 |
Table (4)
Working note 1: Determine the weight of base for the costs.
Cost | Base | Amount | Cost driver |
Allocation Rate |
(1) | (2) | |||
Salary of Vice President | Number of department | $200,000 | 2 department | $100,000 per department |
General utilities | Direct utility cost | $36,000 | $144,000 | $0.25 per utility cost |
Production supplies | Direct material cost | $36,000 | $720,000 | $0.05 per material cost |
Fringe benefits | Direct labor cost | $138,000 | $920,000 | $0.15 per labor cost |
Depreciation | Machine hours | $720,000 | 6,000 hours | $120 per machine hour |
Table (5)
c.
Determine the total estimated cost of the products made in Departments M and N and calculate the price per unit must it charge for Product M and for Product N if Company M prices its products at cost plus 40 percent of cost.
c.

Explanation of Solution
Cost: The amount paid to purchase the asset, install it, and put it into operations, is referred to as cost.
Determine the total estimated cost of the products made in Departments M and N:
Particulars | Department M | Department N |
Total direct cost | $740,000 | $1,184,000 |
Total indirect cost | $781,000 | $349,000 |
Total production costs (a) | $1,521,000 | $1,533,000 |
Number of units (b) | 2,000 | 4,000 |
Cost per unit (c) | $760.50 | $383.25 |
Table (6)
Thus, the cost per unit for Product M and for Product N is $760.50 and $383.25 respectively.
Calculate the price per unit must it charge for Product M and for Product N if Company M prices its products at cost plus 40 percent of cost:
Particulars | Department M | Department N |
Cost per unit (a) | $760.50 | $383.25 |
Add: Increased by 40% | $304.20 | $153.30 |
Price | $1,064.70 | $536.55 |
Table (7)
Thus, the price per unit for Product M and for Product N would be $1064.70 and $536.55 respectively, if Company M prices its products at cost plus 40 percent of cost.
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Chapter 12 Solutions
SURVEY OF ACCOUNTING-ACCESS
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