ABC Corporation has three support departments with the following costs and cost drivers: Support Department Cost Cost DriverGraphics
Question:
Graphics Production $200,000 number of copies made
Accounting 500,000 number of invoices processed
Personnel 400,000 number of employees
ABC has three operating divisions, Micro, Macro, and Super. Their revenue, cost, and activity information are as follows:
Micro Macro Super
Revenues $700,000 $850,000 $650,000
Direct operating expenses 50,000 70,000 100,000
Number of copies made 20,000 30,000 50,000
Number of invoices processed 700 800 500
Number of employees 130 145 125
The support department cost that will be allocated to the Super Division is:-
a. $125,000
b. $550,000
c. $100,000
d. $350,000
The operating income of the Micro Division after all support department allocations will be:
a. $650,000
b. $345,000
c. $610,000
d. $305,000
The support department allocation rate for Graphics Production is:
a. $2.00
b. $10.00
c. $6.66
d. $0.50
The support department allocation rate for the Personnel Department is:
a. $2,758
b. $1,000
c. $3,200
d. $3,077
Answers
The allocation rate for the accounting department is $250.
Further Explanation:
Cost allocation:
Cost allocation refers to the process of allocating the cost of the business to the various departments. The management of the company has to calculate the cost incurred by each department. There are some expenses which are incurred collectively, so the management has to allocate the common cost to the various departments. The allocation of the cost should be done in a manner of the utilization of the expenses or cost by that specific department.
Calculate the support department allocation rate for the accounting department:
The allocation of the accounting department cost will be made on the basis of number of invoices processed. The services of accounting department are used for the preparation of the invoices. So, the cost of accounting will be allocated on the basis of the number of invoices.
Calculate the allocation rate for the accounting department:
[tex]\text{Allocation rate for accounting department}=\dfrac{\text{Accounting department cost}}{\text{Total number of invoices processed}}\\=\dfrac{\$500,000}{\$2,000}\\=\$250[/tex]
Thus, the allocation rate for the accounting department is $250 per invoice.
Working Note:
Calculate the total number of invoices processed:
[tex]\text{Total invoices processed} = \left [ \text{Invoices processed (Micro)}+\text{Invoices processed (Macro)} + \text{Invoices processed(Super)} \right] \\= 700+800+500\\= 2,000[/tex]
The total number of invoices is 2,000.
Learn more:
1. Learn more about the percentage of sales method
2. Learn more about the manufacturing cost
3. Learn more about the average cost per unit
Answer details:
Grade: Senior School
Subject: Cost Accounting
Chapter: Activity-Based Costing
Keywords: Activity-Based Costing, Costing, Cost accounting, Allocation of cost, Cost allocation, Fixed costing, Variable costing, Departmental costing, Accounting, Direct expenses, Indirect expenses, Cost, ABC costing.
The support department allocation rate for the Accounting Department = $250 per invoice.
Explanation:
Total cost of accounting department = $500,000
The cost driver for accounting department is number of invoices processed.
Total number of invoices processed for support department = sum of number of invoices processed by Micro, Macro and Super division.
Micro = 700 invoices
Macro = 800 invoices
Super = 500 invoices
Total = 2,000 invoices
The support department allocation rate for the Accounting Department = (Total cost of accounting department)/(number of invoices processed)
= $500,000/2,000 = $250 per invoice.
The support department allocation rate for the Accounting Department = $250 per invoice.