1. 15 - 1 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Step-Down Method Human Resources costs to be allocated become $2,160,000 + $36,000 = $2,196,000. Human Resources to Assembly: 48 ÷ 72 × $2,196,000 = $1,464,000 Human Resources to Finishing: 24 ÷ 72 × $2,196,000 = $732,000

2. 15 - 2 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Step-Down Method Costs beforeAllocatedAllocated allocationcostscosts Human Resources:$2,160,000$ 36,000($2,196,000) Assembly:$1,700,000$132,000$ 1,464,000 Finishing:$ 900,000$132,000$ 732,000

3. 15 - 3 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Step-Down Method Total cost after allocation: Assembly Department: $1,700,000 + $132,000 + $1,464,000 = $3,296,000 Finishing Department: $900,000 + $132,000 + $732,000 = $1,764,000

4. 15 - 4 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Reciprocal M HR A F Maintenance –12%44%44% Human Resources10% –60%30% Maintenance cost = $300,000 +.10P Human Resource cost = $2,160,000 +.12M

5. 15 - 5 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Reciprocal Maintenance cost (M) = $300,000 +.10($2,160,000 +.12M) M = $300,000 + $216,000 +.012M.988M = $516,000  M = $522,267 HR = $2,160,000 +.12($522,267) HR = $2,160,000 + $62,672 = $2,222,672

6. 15 - 6 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Reciprocal M HR A F Before allocation:$300,000 $2,160,000$1,700,000$ 900,000 Allocation: (522,267) 62,672 229,797 229,797 Allocation: 222,267($2,222,672) 1,333,603 666,802 Total$3,263,400$1,796,599 Total cost Assembly Department:$3,263,400 Total cost Finishing Department:$1,796,599

7. 15 - 7 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Overview of Methods Overhead rate for the Assembly Department is determined using direct labor cost as a denominator. Overhead rate for the Finishing Department is determined using machine-hours as the denominator.

8. 15 - 8 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Comparison of Methods AssemblyFinishing Direct labor cost:$698,880$349,440 Machine-hours: 24,000 23,500 What are the various overhead rates using the three methods?

9. 15 - 9 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Overhead Rates Direct Method Assembly: $3,290,000 ÷ $698,880 direct labor costs = 471% of direct labor costs Finishing: $1,770,000 ÷ 23,500 = $75.32 per machine-hour

10. 15 - 10 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Overhead Rates Step-Down Method Assembly: $3,296,000 ÷ $698,880 direct labor costs = 472% of direct labor cost Finishing: $1,764,000 ÷ 23,500 = $75.06 per machine-hour

11. 15 - 11 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Overhead Rates Reciprocal Assembly: $3,263,400 ÷ $698,880 direct labor costs = 467% of direct labor cost Finishing: $1,796,599 ÷ 23,500 = $76.45 per machine-hour

12. 15 - 12 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Comparison of Rates Assembly Finishing Direct method:471%$75.32 Step-down method:472%$75.06 Reciprocal method:467%$76.45

13. 15 - 13 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 4 Allocate common costs using either the stand-alone or incremental method.

14. 15 - 14 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Allocating Common Costs Two methods for allocating common cost are: 1. Stand-alone cost allocation method 2. Incremental cost allocation method

15. 15 - 15 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Stand-Alone Example A consultant in Tampa is planning to go to Chicago and meet with an international client. The round-trip Tampa/Chicago/Tampa airfare costs $540. The consultant is also planning to attend a business meeting with a North Carolina client in Durham.

16. 15 - 16 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Stand-Alone Example The round-trip Tampa/Durham/Tampa airfare costs $360. The consultant decides to combine the two trips into a Tampa/Durham/Chicago/Tampa itinerary that will cost $760.

17. 15 - 17 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Stand-Alone Example How much should the consultant charge to the North Carolina client? $360 ÷ ($360 + $540) =.40.40 × $760 = $304 How much to the international client? $760 – $304 = $456

18. 15 - 18 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Incremental Cost Example Assume that the business meeting in Chicago is viewed as the primary party. What would be the cost allocation? International client (primary)$540 Durham client (incremental) $760 – $540 =$220

19. 15 - 19 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 5 Explain the importance of explicit agreement between contracting parties when reimbursement is based on costs incurred.

20. 15 - 20 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Cost Allocation and Contracts Many commercial contracts include clauses that require the use of cost accounting information. Contract disputes arise with some regularity, often with respect to cost allocation. Cost assignment rules should be as explicit as possible (and in writing).

21. 15 - 21 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster End of Chapter 15