Chapter 2, Problem 61P

Cost Allocation with Cost Flow Diagram

Wayne Casting, Inc., produces a product made from a metal alloy. Wayne buys the alloy from two different suppliers, Chillicothe Metals and Ames Supply, in approximately equal amounts because of supply constraints at both vendors. The material from Chillicothe is less expensive to buy, but more difficult to use, resulting in greater waste. The metal alloy is highly toxic and any waste requires costly handling to avoid environmental accidents. Last year the cost of handling the waste totaled $300,000. Additional data from last year’s operations are shown below.

Required

1. a.      Allocate the cost of the waste handling to the two suppliers based on:
   1. 1. Amount of material purchased.
   2. 2. Amount of waste.
   3. 3. Cost of material purchased.
2. b.      Draw a cost flow diagram to illustrate your answer to requirement (a), part (1).

To determine

 Allocate the cost of the waste handling to the two suppliers based on:

1. Amount of material purchased.

2. Amount of waste.

3. Cost of material purchased.

Explanation of Solution

Calculate the allocation of the cost of handling the waste on the basis of given variables:

	Chillicothe Ames		Ames Supply		Total Cost
Particulars	%	Amount	%	Amount
1. Based on amount of material purchased:
Cost of handling the waste	52% (1)	$156,000 (3)	48%  (2)	$144,000 (4)	$300,000
2.  Based on amount waste:
Cost of handling the waste	85.33%  (5)	$256,000 (7)	14.67% (6)	$44,000 (8)	$300,000
3. Based on the cost of material purchased
Cost of handling the waste	41.6%  (9)	$124,000 (11)	58.4% (10)	$175,200 (12)	$300,000

Table: (1)

Calculate the allocation of cost of handling the waste on the basis of the amount of material purchased:

Working note 1:

Allocation for Chillicothe Ames:

$\begin{array}{c}\text{\% of Cost for chillicotha Ames = }\frac{\text{Material purchased for chillicotha Ames }}{\text{Total material purchased}}\\ \text{= }\frac{130}{250}\\ \text{= 52\%}\end{array}$

Working note 2:

Allocation for Ames Supply:

$\begin{array}{c}\text{\% of Cost for Ames Supply = }\frac{\text{Material purchased for Ames Supply }}{\text{Total material purchased}}\\ \text{= }\frac{120}{250}\\ \text{= 48\%}\end{array}$

Working note 3:

Calculate the cost of Chillicothe Ames:

$\begin{array}{c}\text{Cost for chillicotha Ames = handling waste cost }\times \text{ (\% of cost chillicotha Ames)}\\ \text{= \$300,000 }\times \text{ 52\%}\\ \text{= \$156,000}\end{array}$

Working note 4:

Calculate the cost of Ames Supply:

$\begin{array}{c}\text{Cost for Ames Supply = handling waste cost }\times \text{ (\% of cost Ames Supply)}\\ \text{= \$300,000 }\times \text{ 48\%}\\ \text{= \$144,000}\end{array}$

Calculate the allocation of cost of handling the waste on the basis of the amount of waste:

Working note 5:

Allocation for Chillicothe Ames:

$\begin{array}{c}\text{\% of Cost for chillicotha Ames = }\frac{\text{Waste for chillicotha Ames }}{\text{Total waste}}\\ \text{= }\frac{12.8}{15}\\ \text{= 85}\text{.33\%}\end{array}$

Working note 6:

Allocation for Ames Supply:

$\begin{array}{c}\text{\% of Cost for Ames Supply = }\frac{\text{Waste for Ames Supply}}{\text{Total waste}}\\ \text{= }\frac{2.2}{15}\\ \text{= 14}\text{.67\%}\end{array}$

Working note 7:

Calculate the cost of Chillicothe Ames:

$\begin{array}{c}\text{Cost for chillicotha Ames = handling waste cost }\times \text{ (\% of cost of chillicotha Ames)}\\ \text{= \$300,000 }\times \text{ 85}\text{.33\%}\\ \text{= \$256,000}\end{array}$

Working note 8:

Calculate the cost of Ames Supply:

$\begin{array}{c}\text{Cost for Ames Supply = handling waste cost }\times \text{ (\% of cost of Ames Supply})\\ \text{= \$300,000 }\times \text{ 14}\text{.67\%}\\ \text{= \$44,000}\end{array}$

Calculate the allocation of cost of handling the waste on the basis of cost purchases:

Working note 9:

Allocation for Chillicothe Ames:

$\begin{array}{c}\text{\% of Cost for chillicotha Ames = }\frac{\text{cost for purchase chillicotha Ames }}{\text{Total cost for purchase}}\\ \text{= }\frac{624,000}{1,500,000}\\ \text{= 41}\text{.6\%}\end{array}$

Working note 10:

Allocation for Ames Supply:

$\begin{array}{c}\text{\% of Cost for Ames supply = }\frac{\text{cost for purchase Ames supply }}{\text{Total cost for purchase}}\\ \text{= }\frac{876,000}{1,500,000}\\ \text{= 58}\text{.4\%}\end{array}$

Working note 11:

Calculate the cost of Chillicothe Ames:

$\begin{array}{c}\text{Cost for chillicotha Ames = handling waste cost }\times \text{ (\% of cost of chillicotha Ames)}\\ \text{= \$300,000 }\times \text{ 41}\text{.6\%}\\ \text{= \$124,000}\end{array}$

Working note 12:

Calculate the cost of Ames Supply:

$\begin{array}{c}\text{Cost for Ames Supply = handling waste cost }\times \text{ (\% of cost of Ames Supply})\\ \text{= \$300,000 }\times \text{ 58}\text{.4\%}\\ \text{= \$175,200}\end{array}$

To determine

Draw a cost flow diagram to illustrate your answer to requirement (a), part (1).

Explanation of Solution

The cost flow diagram to illustrate your answer to requirement (a), part (1):

Figure (1)