Cost Allocation Issues Chapter 5 Managerial Accounting Concepts and Empirical Evidence

Single Base vs. Multiple Base Approach to Allocating Indirect Costs u Y = b 0 +b 1 X 1 +b 2 X 2 +…+b n X n, … Eq. 5.3 u IC = f (X 1, X 2,…... X n ), … Eq. 5.1 u Y = B 0 +B 1 X 1 +B 2 X 2 +….+B n X n + , … Eq. 5.2

Vad Corporation Regression Analysis Estimated Model: Y = 1, X X X 3 ^

Data Summary of Job # 33 Direct material costs$ 2,000 Direct labor costs$ 1,700 Machine hours 1,000 Machine set-ups 4 Direct labor hours 150 Units produced 100 Vad Corporation Single vs. Multiple Base Cost Allocation

Single Base u Direct Material$ 2, u Direct labor $ 1, Costs u Indirect Cost$ 2, Allocated ($14.00 * 150) u Total Costs$ 5, u Unit Costs$ Vad Corporation Single vs. Multiple Base Cost Allocation Multiple base u Direct Material$ 2, u Direct labor $ 1, Costs u Indirect Cost$ 4, Allocated u Total Costs$ 8, u Unit Costs$ [ *(150) *(1,000) *(4)]

Cost Flow with Reciprocal Service Dept. P1 Direct Costs F/G P2 … …Work in Progress … … Indirect Costs S2 S1 :::: :::: ::::

Joint Costs & Joint Products Joint Product Joint Product Split-off Point Joint Costs Separable Costs

West Company Joint Cost Illustration Product: A: 400* $ 1.50 = $600 B: 600* $ 0.45 = $270

West Company Joint Cost Illustration Product: A: 400* $ 0.10 = $40 B: 600* $ 0.05 = $30

West Company Joint Cost Illustration By-Product Revenue: $0.10 * 50 lbs. = $ 5

West Company Joint Cost Illustration Product A: 560 / 800 = 70% 70 % * 410 = $287 Product B: 240 / 800 = 30% 30 % * 410 = $123

West Company Joint Cost Illustration

# of Product A: 400 / 1000 = 40% 40 % * 410 = $164 # of Product B: 600 / 1000 = 60% 60 % * 410 = $246

West Company Joint Cost Illustration