Question 5 (2 points) Valdosta State University has two colleges, College of Bus

Question

Question 5 (2 points)

Valdosta State University has two colleges, College of Business Administration (COBA) & College of Education (COE). The two support departments are Physical Plant & the Library. The costs incurred in each of these departments is as follows:

COBA

$ 90,000

COE

$ 70,000

Physical Plant

$120,000

Library

$ 80,000

The actual level of support is as follows:

Supplied by

Used by

Physical Plant

Library

COBA

COE

Physical Plant

40%

35%

25%

Library

20%

50%

30%

Determine the:

Cost allocated to COBA using the direct method

Cost allocated to COBA using the step-down method (allocating Library first)

Cost allocated to COBA using the reciprocal method

Question 6 (2 points)

Trident Company produces two varieties of pine wood, A & B, from a common processing of lumber. The amount of each product produced in March 2001 is 24,000 square feet and 28,000 square feet respectively. A is a superior grade pine and sells for $6 per square foot. B sells for $5 per square foot. The additional processing costs for A & B are $48,000 and $15,000 respectively. The joint processing cost is $125,000.

Determine the following:

Joint cost allocated to each product A & B using the physical volume method, relative sales value method, and net realizable value method.

The unit cost of each product using the net realizable value method

COBA

$ 90,000

COE

$ 70,000

Physical Plant

$120,000

Library

$ 80,000

Explanation / Answer

A) Under direct method:

Calculation of the ratios based on which the service department costs will be allocated to producing departments:

Physiscal Plant cost will be allocated based on the following ratio

COBA: COE = 35: 25= 7:5

Physiscal Plant overhead cost allocated to:

COBA department = (7/12) x $120000 = $70000

Library cost will be allocated based on the following ratio

COBA: COE = 50: 30=5:3

Library overhead cost allocated to:

COBA department = (5/8) x $80000 = $50000

Total cost allocated to COBA = $90000 + $70000 + $50000 = $210000

B) Sequential Method:

First , Library overhead cost will be allocated to the other three departments in the following ratio

Plant : COBA : COE= 20:50:30 = 2:5:3

Plant = (2/10) x $80000 = $16000

COBA = (5/10) * $80000 = $40000

Assembly = (3/10) * $80000 = $24000

After allocation, Physical Plant cost to be allocated to the COBA and COE becomes $120000+$16000= $136000

Thereafter, the Physical Plant cost will be allocated to the production departments in the following ratio :

COBA Department : COE Department = 35:25= 7:5

Therfore Cost allocated to COBA = $90000 + $40000 + (7/12) * $136000 = $209333

C) Reciprocal Method:

Let, P and L are the variables that represent the total costs to allocate from each of these service departments.

The equations that could be formed are:

P = 120000 + 0.20L ---------------(1)

L = 80000 + 0.40P ----------------(2)

solving (1) and (2) we get

P = 120000 + 0.20 x (80000 + 0.40P)

0.92P = 136000

P = 136000 / 0.92 = $147826

From (2) we get, L = 80000 + 0.4*$147826 = $139130

Physical plant Library COBA COE Total Overhead costs prior to allocation $        1,20,000 $      80,000 $     90,000 $       70,000 Physical plant cost apportioned $      -1,20,000 $     70,000 $       50,000 maintenace department cost apportioned $     -80,000 $     50,000 $       30,000 Total overhead cost after reallocation $ 2,10,000 $   1,50,000 $   3,60,000

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