Chapter 5, Problem 1MAD

Analyze Milkrageous, Inc.

Milkragcous, Inc., a large, private dairy products company, is determining cost allocations for performance evaluation purposes. Company bonuses are based on cost containment, so accurate costing numbers are imperative.

The general managers (GMs) over the cheese and yogurt divisions are being evaluated. Support department costs include Janitorial ($150,700) and Maintenance ($300,200). The Janitorial costs remain relatively fixed from quarter to quarter. Maintenance costs, however, vary with respect to the number of service calls made each quarter. The joint cost of processing milk before the split-off point for yogurt and cheese is $755,000 for the quarter. Yogurt sells at higher margins than cheese (at split-off as well as after further processing), but is equally difficult to produce as cheese.

1. a. Which support department allocation method (direct, sequential, or reciprocal services) should be used to allocate support department costs for the GMs’ performance evaluation?
2. b. What cost driver would be best for allocating Janitorial costs?
3. c. What cost driver would be best for allocating Maintenance costs?
4. d. Should Janitorial and Maintenance costs be considered when evaluating the general managers over cheese and yogurt?
5. e. What joint cost allocation method should be used for performance evaluation purposes?
6. f. Regardless of the correct answer to part (e), use the physical units method to allocate joint costs to yogurt and cheese assuming 198,000 pounds of yogurt and 102,000 pounds of cheese were produced during the quarter.