Chapter 4, Problem 35BEB

Use the following information for Brief Exercises 4-34 and 4-35:

Sanjay Company manufactures a product in a factory that has two producing departments, Assembly and Painting, and two support departments, S1 and S2. The activity driver for S1 is square footage, and the activity driver for S2 is number of machine hours. The following data pertain to Sanjay:

Brief Exercises 4-35 (Appendix 4B) Sequential Method

Refer to the information for Sanjay Company on the previous page. Now assume that Sanjay uses the sequential method to allocate support department costs. S1 is allocated first, then S2.

Required:

1. 1. Calculate the cost assignment ratios to be used under the sequential method for S2, Assembly, and Painting. Carry out your answers to four decimal places.
2. 2. Allocate the overhead costs to the producing departments by using the sequential method.

To determine

Computecost assignment ratios for S2 under sequential method.

Explanation of Solution

Sequential Method:

Sequential method recognizes that there is possible interaction between the support departments. However, it does notaccount for such interaction in full which makes it more accurate as compared to the direct method.

Use the following formula to calculatecost assignment ratios for S1 on the basis of number of square footage:

S2:

$\mathrm{S}2=\frac{\mathrm{Number}of\mathrm{square}footage\text{}in\mathrm{S}2}{\mathrm{Total}\mathrm{square}footage}$

Substitute 500 for number of square footage in S2 and 3,000 for total square footage in the above formula.

$\begin{array}{c}\mathrm{S}2=\frac{500\mathrm{square}footage}{3,000\mathrm{square}footage}\\ =0.1667\end{array}$

Therefore, the cost assignment ratio for S2 is 0.1667.

Assembly department:

$\mathrm{Assembly}=\frac{\mathrm{Number}of\mathrm{square}footage\text{}incutting}{\mathrm{Total}\mathrm{square}footage}$

Substitute 1,875 for number ofsquare footage in assembly and 3,000 for total square footage in the above formula.

$\begin{array}{c}\mathrm{Assembly}=\frac{1,875\mathrm{square}footage}{3,000\mathrm{square}footage}\\ =0.6250\end{array}$

Therefore, the cost assignment ratio for assembly department is 0.6250.

Painting department:

$\mathrm{Painting}=\frac{\mathrm{Number}of\mathrm{square}footage\text{}in\mathrm{sewing}}{\mathrm{Total}\mathrm{square}footage\text{}}$

Substitute 625 for number ofsquare footage in assembly and 3,000 for total square footage in the above formula.

$\begin{array}{c}\mathrm{Painting}=\frac{625\mathrm{square}footage}{3,000\text{}\mathrm{square}footage}\\ =0.2083\end{array}$

Therefore, the cost assignment ratio for painting department is 0.2083.

Use the following formula to calculate cost assignment ratios for Department S2 on the basis of number of machine hours:

Assembly department:

$\mathrm{Assembly}=\frac{\mathrm{Number}of\mathrm{machine}hours\mathrm{of}\mathrm{assembly}}{\mathrm{Total}\mathrm{machine}hours\mathrm{of}producingdepartments}$

Substitute 3,200 for number of machine hoursofassembly and 16,000 for total machine hours of producing department in the above formula.

$\begin{array}{c}\mathrm{Assembly}=\frac{3,200hours}{16,000hours}\\ =0.20\end{array}$

Therefore, the assignment ratio for assembly department is 0.20.

Painting department:

$\mathrm{Painting}=\frac{\mathrm{Number}of\mathrm{machine}hours\mathrm{of}\mathrm{sewing}}{\mathrm{Total}\mathrm{machine}hours\mathrm{of}producingdepartments}$

Substitute 12,800 for number of machine hours of painting and 16,000 for total machine hours of producing department in the above formula.

$\begin{array}{c}\mathrm{Painting}=\frac{12,800hours}{16,000hours}\\ =0.80\end{array}$

Therefore, the assignment ratio for painting department is 0.80.

Working Note:

1.

Calculation of total number of square footage in producing departments:

$\begin{array}{c}\mathrm{Total}\mathrm{square}footage\text{}inproducingdepartments=\left(\begin{array}{l}\mathrm{Number}of\mathrm{square}footage\text{}in\mathrm{S}1\\ +\mathrm{Number}of\mathrm{square}footage\text{}in\mathrm{assembly}\\ +\mathrm{Number}of\mathrm{square}footagein\mathrm{painting}\end{array}\right)\\ =500+1,875+625\\ =3,000\mathrm{square}footage\text{}\end{array}$

2.

Calculation of total number of machine hoursof producing departments:

$\begin{array}{c}\mathrm{Total}\mathrm{machine}hours\mathrm{of}producingdepartments=\left(\begin{array}{l}\mathrm{Number}of\mathrm{machine}hours\mathrm{of}\mathrm{assembly}\\ +\mathrm{Number}of\mathrm{machine}hours\mathrm{of}\mathrm{painting}\end{array}\right)\\ =3,200+12,800\\ =16,000\text{}hours\end{array}$

To determine

Allocate the support department costs to the producing departments by using the sequential method:

Explanation of Solution

Allocation:

Allocation can be defined as the process of assigning the indirect costs to the cost object with the help of a convenient and reasonable method. It is essential to allocate indirect costs to the cost objects.

	Support departments		Producing departments
Allocate	S1($)	S2($)	Assembly($)	Painting($)
Direct costs	200,000	140,000	115,000	96,000
S1	(200,000)	33,340	125,000	41,660
S2		(173,340)	34,668	138,672
Total	0	0	274,668	276,332

Table (1)

Working Note:

1.

Allocation of support departments cost to S2:

For S1 cost:

$\begin{array}{c}\mathrm{Allocation}\cos t=\mathrm{S}1\cos t\times \mathrm{S}2ratioofS1\\ =\$200,000\times 0.1667\\ =\$33,340\end{array}$

2.

Allocation of support departments cost to assembly department:

For S1 cost:

$\begin{array}{c}\mathrm{Allocation}\cos t=\mathrm{S}1\cos t\times \mathrm{Assembly}ratioofS1\\ =\$200,000\times 0.6250\\ =\$125,000\end{array}$

For S2 cost:

$\begin{array}{c}\mathrm{Allocation}\cos t=\mathrm{S}2\cos t\times \mathrm{Assembly}ratioofS2\\ =\$173,340\times 0.20\\ =\$34,668\end{array}$

3.

Allocation of support departments to painting department:

For S1 cost:

$\begin{array}{c}\mathrm{Allocation}\cos t=\mathrm{S}1\cos t\times \mathrm{Painting}ratioofS1\\ =\$200,000\times 0.2083\\ =\$41,660\end{array}$

For S2 cost:

$\begin{array}{c}\mathrm{Allocation}\cos t=\mathrm{S}2\cos t\times \mathrm{Painting}ratioofS2\\ =\$173,340\times 0.80\\ =\$138,672\end{array}$