Managerial Accounting: The Cornerstone of Business Decision-Making
Managerial Accounting: The Cornerstone of Business Decision-Making
7th Edition
ISBN: 9781337115773
Author: Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher: Cengage Learning
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Chapter 4, Problem 52E

Chapter 4, Problem 52E, (Appendix 4B) Sequential Method of Support Department Cost Allocation Refer to Exercise 4-51 for

(Appendix 4B) Sequential Method of Support Department Cost Allocation

Refer to Exercise 4-51 for data. Now assume that Stevenson uses the sequential method to allocate support department costs to the operating divisions. General Factory is allocated first in the sequential method for the company.

Required:

  1. 1. Calculate the allocation ratios for Power and General Factory. (Note: Carry these calculations out to four decimal places.)
  2. 2. Allocate the support service costs to the operating divisions. (Note: Round all amounts to the nearest dollar.)
  3. 3. Assume divisional overhead rates are based on direct labor hours. Calculate the overhead rate for the Battery Division and for the Small Motors Division. (Note: Round overhead rates to the nearest cent.)

1.

Expert Solution
Check Mark
To determine

Computeallocation ratios for power and general factory under the 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 calculate allocation ratios for general factory on the basis of number of square footage:

Power:

Power=Numberofsquare footageinpowerTotalsquare footage

Substitute 1,000 for number of square footage in power and 21,000 for total square footage in the above formula.

Power=1,000square footage21,000square footage=0.0476

Therefore, the cost assignment ratio for S2 is 0.0476.

Battery:

Battery=Numberofsquare footageinbatteryTotalsquare footage

Substitute 5,000 for number ofsquare footage in battery and 21,000 for total square footage in the above formula.

Battery=5,000square footage21,000square footage=0.2381

Therefore, the cost assignment ratio for battery is 0.2381.

Small motors:

Small motors=Numberofsquare footageinsmall motorsTotalsquare footage

Substitute 15,000 for number ofsquare footage in small motors and 21,000 for total square footage in the above formula.

Small motors=15,000square footage21,000square footage=0.7143

Therefore, the cost assignment ratio for painting department is 0.7143.

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

Battery:

Battery=Numberofmachine hoursofbatteryTotalmachine hoursofoperatingdepartments

Substitute 7,000 for number of machine hoursofbattery and 8,000 for total machine hours ofoperating department in the above formula.

Battery=7,000hours8,000hours=0.8750

Therefore, the assignment ratio for assembly department is 0.8750.

Small motors:

Small motors=Numberofmachine hoursofsmall motorsTotalmachine hoursofoperatingdepartments

Substitute 1,000 for number of machine hours of painting and 8,000 for total machine hours of operating department in the above formula.

Painting=1,000hours8,000hours=0.1250

Therefore, the assignment ratio for painting department is 0.1250.

2.

Expert Solution
Check Mark
To determine

Apportion the support service costs to the operating divisions 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 departmentsOperating departments
 Power($)General factory($)Battery($)Small motors($)
Direct costs160,000430,000163,00084,600
Allocate:    
Power20,468(430,000)102,383307,149
General factory(180,468) 157,91022,559
Total00423,293414,308

Table (1)

Working Note:

#. Allocation of support service costs to power:

Allocationcost=Generalfactorycost×Powerratioofgeneralfactory=$430,000×0.0476=$20,468

1. Allocation of support servicecost to battery:

For power cost:

Allocationcost=Powercost×Batteryratioofpower=$430,000×0.2381=$102,283

For general factory cost:

Allocationcost=General factorycost×Batteryratioofgeneral factory=$180,468×0.8750=$157,910

2. Allocation of support service cost to small motors:

For power cost:

Allocationcost=Powercost×Small motorsratioofpower=$430,000×0.7143=$307,149

For general factory cost:

Allocationcost=General factorycost×General factoryratioofgeneral factory=$180,468×0.1250=$22,559

3.

Expert Solution
Check Mark
To determine

Compute overhead rate of battery and small motors divisions.

Answer to Problem 52E

The overhead rate of battery and small motors divisions is $23.52 and $6.91 respectively.

Explanation of Solution

Overhead Rate:

The amount which is calculate at the beginning of the accounting year for a related activity by dividing the total estimated annual overhead by estimated annual activity level is known as the overhead rate.

Use the following formula to calculate overhead rate for battery division:

Overheadrate=EstimatedannualoverheadEstimatedannualactivitylevel

Substitute $423,293 for estimated annual overhead and 18,000 DLH for estimated annual activity level in the above formula.

Overheadrate=$423,29318,000DLH=$23.52

Therefore, overhead rate is $23.52.

Use the following formula to calculate overhead rate for small motors division:

Overheadrate=EstimatedannualoverheadEstimatedannualactivitylevel

Substitute $414,308 for estimated annual overhead and 60,000 DLH for estimated annual activity level in the above formula.

Overheadrate=$414,30860,000DLH=$6.91

Therefore, overhead rate is $6.91.

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Sequential Method of Support Department CostAllocationRefer to Exercise 4-51 for data. Now assume that Stevenson uses the sequential method to allocate support department costs to the operating divisions. General Factory is allocated first inthe sequential method for the company.Required:1. Calculate the allocation ratios for Power and General Factory. (Note: Carry thesecalculations out to four decimal places.)2. Allocate the support service costs to the operating divisions. (Note: Round all amounts tothe nearest dollar.)3. Assume divisional overhead rates are based on direct labor hours. Calculate the overheadrate for the Battery Division and for the Small Motors Division. (Note: Round overheadrates to the nearest cent.)
please answer within the format by providing formula the detailed workingPlease provide answer in text (Without image)Please provide answer in text (Without image)Please provide answer in text (Without image)
(Appendix 4B) Sequential Method of Support Department Cost Allocation Stevenson Company is divided into two operating divisions: Battery and Small Motors. The company allocates power and general factory costs to each operating division using the sequential method. General Factory is allocated first in the sequential method for the company. Support department cost allocations using the sequential method are based on the following data: Support Departments Operating Divisions Overhead costs Machine hours Square footage Direct labor hours Required: Power Allocation ratios for General Factory Battery Power Small Motors $160,000 Allocation ratios for Power 2,000 1,000 General Factory $430,000 1. Calculate the allocation ratios for Power and General Factory. (Note: Carry these calculations out to four decimal places.) 2,000 1,500 Battery $163,000 7,000 7,500 18,000 Small Motors $84,600 1,500 20,000 60,000

Chapter 4 Solutions

Managerial Accounting: The Cornerstone of Business Decision-Making

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