1. Cost Allocation and Responsibility Accounting
Chapter 24
Cost Allocation and Responsibility Accounting
Demonstration Problems
© 2016 Pearson Education, Inc.

2. © 2016 Pearson Education, Inc.
Aragon makes handheld calculators in two models: basic and professional. Aragon estimated $851,500 of manufacturing overhead and 655,000 machine hours for the year. The basic model actually consumed 180,000 machine hours, and the professional model consumed 475,000 machine hours.
Compute the predetermined overhead allocation rate using machine hours (MHr) as the allocation base. How much overhead is allocated to the basic model? To the professional model?
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3. © 2016 Pearson Education, Inc.
Requirement 1: Compute the predetermined overhead allocation rate using machine hours as the allocation base.
Predetermined
Overhead
Allocation Rate =
© 2016 Pearson Education, Inc.

4. E24-14
Requirement 1: Compute the predetermined overhead allocation rate using machine hours as the allocation base.
Predetermined
Overhead
Allocation Rate =
Total estimated overhead costs
Total estimated quantity of the overhead allocation base
© 2016 Pearson Education, Inc.

5. E24-14
Requirement 1: Compute the predetermined overhead allocation rate using machine hours as the allocation base.
Predetermined
Overhead
Allocation Rate =
Total estimated overhead costs
Total estimated quantity of the overhead allocation base
$851,500 total estimated overhead costs
655,000 total estimated machine hours
© 2016 Pearson Education, Inc.

6. E24-14
Requirement 1: Compute the predetermined overhead allocation rate using machine hours as the allocation base.
Predetermined
Overhead
Allocation Rate =
Total estimated overhead costs
Total estimated quantity of the overhead allocation base
$851,500 total estimated overhead costs
655,000 total estimated machine hours
$1.30 per machine hour
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7. © 2016 Pearson Education, Inc.
Requirement 2: How much overhead is allocated to the basic model? To the professional model?
Predetermined
Overhead
Allocation Rate ×
Actual Quantity
of the
Allocation Base
Used =
Allocated
Manufacturing
Overhead Cost
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8. © 2016 Pearson Education, Inc.
Requirement 2: How much overhead is allocated to the basic model? To the professional model?
Predetermined
Overhead
Allocation Rate ×
Actual Quantity
of the
Allocation Base
Used =
Allocated
Manufacturing
Overhead Cost
Basic
model
$1.30 per MHr
180,000 MHrs
$ 234,000
© 2016 Pearson Education, Inc.

9. © 2016 Pearson Education, Inc.
Requirement 2: How much overhead is allocated to the basic model? To the professional model?
Predetermined
Overhead
Allocation Rate ×
Actual Quantity
of the
Allocation Base
Used =
Allocated
Manufacturing
Overhead Cost
Basic
model
$1.30 per MHr
180,000 MHrs
$ 234,000
Professional
475,000 MHrs
$ 617,500
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10. © 2016 Pearson Education, Inc.
One subunit of Xtreme Sports Company had the following financial results last month:
Xtreme – Subunit X
Actual
Flexible
Budget
Budget Variance
% Variance
Direct materials
$ 28,200
$ 26,100
Direct labor
13,500
14,200
Indirect labor
26,500
23,500
Utilities
12,700
11,600
Depreciation
26,000
Repairs and maintenance
4,000
5,000
Total
$ 110,900
$ 106,400
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11. © 2016 Pearson Education, Inc.
Requirements
Complete the performance evaluation report for this subunit. Enter the variance percent as a percentage rounded to two decimal places.
Based on the data presented, what type of responsibility center is this subunit?
Which items should be investigated if part of management’s decision criteria is to investigate all variances exceeding $2,500 or 10%?
Should only unfavorable variances be investigated? Explain.
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12. © 2016 Pearson Education, Inc.
Requirement 1: Complete the performance evaluation report for this subunit. Enter the variance percent as a percentage rounded to two decimal places.
Xtreme – Subunit X
Actual
Flexible
Budget
Budget Variance
% Variance
Direct materials
$ 28,200
$ 26,100
Direct labor
13,500
14,200
Indirect labor
26,500
23,500
Utilities
12,700
11,600
Depreciation
26,000
Repairs and maintenance
4,000
5,000
Total
$ 110,900
$ 106,400
© 2016 Pearson Education, Inc.

13. © 2016 Pearson Education, Inc.
Requirement 1: Complete the performance evaluation report for this subunit. Enter the variance percent as a percentage rounded to two decimal places.
Xtreme – Subunit X
Actual
Flexible
Budget
Budget Variance
% Variance
Direct materials
$ 28,200
$ 26,100
$ 2,100 U
8.05% U
Direct labor
13,500
14,200
Indirect labor
26,500
23,500
Utilities
12,700
11,600
Depreciation
26,000
Repairs and maintenance
4,000
5,000
Total
$ 110,900
$ 106,400
© 2016 Pearson Education, Inc.

14. © 2016 Pearson Education, Inc.
Requirement 1: Complete the performance evaluation report for this subunit. Enter the variance percent as a percentage rounded to two decimal places.
Xtreme – Subunit X
Actual
Flexible
Budget
Budget Variance
% Variance
Direct materials
$ 28,200
$ 26,100
$ 2,100 U
8.05% U
Direct labor
13,500
14,200
700 F
4.93% F
Indirect labor
26,500
23,500
Utilities
12,700
11,600
Depreciation
26,000
Repairs and maintenance
4,000
5,000
Total
$ 110,900
$ 106,400
© 2016 Pearson Education, Inc.

15. © 2016 Pearson Education, Inc.
Requirement 1: Complete the performance evaluation report for this subunit. Enter the variance percent as a percentage rounded to two decimal places.
Xtreme – Subunit X
Actual
Flexible
Budget
Budget Variance
% Variance
Direct materials
$ 28,200
$ 26,100
$ 2,100 U
8.05% U
Direct labor
13,500
14,200
700 F
4.93% F
Indirect labor
26,500
23,500
3,000 U
12.77% U
Utilities
12,700
11,600
Depreciation
26,000
Repairs and maintenance
4,000
5,000
Total
$ 110,900
$ 106,400
© 2016 Pearson Education, Inc.

16. © 2016 Pearson Education, Inc.
Requirement 1: Complete the performance evaluation report for this subunit. Enter the variance percent as a percentage rounded to two decimal places.
Xtreme – Subunit X
Actual
Flexible
Budget
Budget Variance
% Variance
Direct materials
$ 28,200
$ 26,100
$ 2,100 U
8.05% U
Direct labor
13,500
14,200
700 F
4.93% F
Indirect labor
26,500
23,500
3,000 U
12.77% U
Utilities
12,700
11,600
1,100 U
9.48% U
Depreciation
26,000
Repairs and maintenance
4,000
5,000
Total
$ 110,900
$ 106,400
© 2016 Pearson Education, Inc.

17. © 2016 Pearson Education, Inc.
Requirement 1: Complete the performance evaluation report for this subunit. Enter the variance percent as a percentage rounded to two decimal places.
Xtreme – Subunit X
Actual
Flexible
Budget
Budget Variance
% Variance
Direct materials
$ 28,200
$ 26,100
$ 2,100 U
8.05% U
Direct labor
13,500
14,200
700 F
4.93% F
Indirect labor
26,500
23,500
3,000 U
12.77% U
Utilities
12,700
11,600
1,100 U
9.48% U
Depreciation
26,000
0.00%
Repairs and maintenance
4,000
5,000
Total
$ 110,900
$ 106,400
© 2016 Pearson Education, Inc.

18. © 2016 Pearson Education, Inc.
Requirement 1: Complete the performance evaluation report for this subunit. Enter the variance percent as a percentage rounded to two decimal places.
Xtreme – Subunit X
Actual
Flexible
Budget
Budget Variance
% Variance
Direct materials
$ 28,200
$ 26,100
$ 2,100 U
8.05% U
Direct labor
13,500
14,200
700 F
4.93% F
Indirect labor
26,500
23,500
3,000 U
12.77% U
Utilities
12,700
11,600
1,100 U
9.48% U
Depreciation
26,000
0.00%
Repairs and maintenance
4,000
5,000
1,000 F
20.000% F
Total
$ 110,900
$ 106,400
© 2016 Pearson Education, Inc.

19. © 2016 Pearson Education, Inc.
Requirement 1: Complete the performance evaluation report for this subunit. Enter the variance percent as a percentage rounded to two decimal places.
Xtreme – Subunit X
Actual
Flexible
Budget
Budget Variance
% Variance
Direct materials
$ 28,200
$ 26,100
$ 2,100 U
8.05% U
Direct labor
13,500
14,200
700 F
4.93% F
Indirect labor
26,500
23,500
3,000 U
12.77% U
Utilities
12,700
11,600
1,100 U
9.48% U
Depreciation
26,000
0.00%
Repairs and maintenance
4,000
5,000
1,000 F
20.000% F
Total
$ 110,900
$ 106,400
$ 4,500 U
4.23% U
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20. © 2016 Pearson Education, Inc.
Requirement 2: Based on the data presented, what type of responsibility center is this subunit?
© 2016 Pearson Education, Inc.

21. © 2016 Pearson Education, Inc.
Requirement 2: Based on the data presented, what type of responsibility center is this subunit?
Based on the data presented, the responsibility center is a cost center.
© 2016 Pearson Education, Inc.

22. © 2016 Pearson Education, Inc.
Requirement 2: Based on the data presented, what type of responsibility center is this subunit?
Based on the data presented, the responsibility center is a cost center.
Requirement 3: Which items should be investigated if part of management’s decision criteria is to investigate all variances exceeding $2,500 or 10%?
© 2016 Pearson Education, Inc.

23. © 2016 Pearson Education, Inc.
Requirement 2: Based on the data presented, what type of responsibility center is this subunit?
Based on the data presented, the responsibility center is a cost center.
Requirement 3: Which items should be investigated if part of management’s decision criteria is to investigate all variances exceeding $2,500 or 10%?
The indirect labor and repairs and maintenance should be investigated.
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24. © 2016 Pearson Education, Inc.
Requirement 4: Should only unfavorable variances be investigated? Explain.
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25. © 2016 Pearson Education, Inc.
Requirement 4: Should only unfavorable variances be investigated? Explain.
Both unfavorable and favorable variances should be investigated. A favorable cost variance could indicate costs are being cut that might impact future operations.
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26. © 2016 Pearson Education, Inc.
End of Chapter 24
© 2016 Pearson Education, Inc.