Model, Inc., produces model automobiles made from metal. It operates two product

Question

Model, Inc., produces model automobiles made from metal. It operates two production departments, Molding and Painting, and has three service departments, Administration, Accounting, and Maintenance. The accumulated costs in the three service departments were $261,000, S413,000, and $204,000, respectively. Management is concerned that the costs of its service departments are getting too high. In particular, managers would like to keep the costs of service departments under $3.50 per unit on average. You have been asked to allocate service department costs to the two production departments and compute the unit costs The company decided that Administration costs should be allocated on the basis of square footage used by each production and service department. Accounting costs are allocated on the basis of number of employees. Maintenance costs are allocated on the basis of the dollar value of the equipment in each department. The use of each base by all departments during the current period follows Used Allocation Base Building area Employees Equipment value (in thousands) Administration Accounting Maintenance Molding Painting 39,600 50 S 17.50 240.00 $114.00 8,000 369,600 84 44,000 26,400 S66.00 $180.00 Direct costs of the Molding Department included $232,500 in direct materials, $342,500 in direct labor, and $120,000 in overhead. The Painting Department's direct costs consisted of $202,000 in direct materials, $178,000 in direct labor, and $72,500 in overhead.

Explanation / Answer

a) First of all Maintenance Cost of $ 204000 is to be allocated between Administration, Accounting, Molding & Painting Department on the basis of Dollar value of Equipment

Total Maintenance cost = $ 204000

Total $ value of equipment(in thousands) = Administration- 66, Accounting - 180, Molding - 240, Painting - 114

= $ 600

So, Maintenance cost per $ value of Equipment = 204000/600 = 340

So, allocation is as follows

Allocated Cost

340 per $ value of Equipment

=66*340

=$ 22440

=180*340

=61200

=240*340

81600

=114*340

=38760

  

Now Accounting Cost will be allocated between administration, Molding & painting department on the basis of No. of Employees

So, Total Accounting Cost = $ 413000+ $ 61200(Allocated) = $ 474200

No of employees = Administration - 22, Molding - 84 , Painting - 50 = 156

So Accounting Cost per employees = $ 474200 / 156 = 3039.74

Allocation is as follows

Allocated Cost

3039.74 per Employees

=22*3039.74

66874

=84*3039.74

=255339

=50*3039.74

=151987

Now Administration Cost will be allocated between Molding & Painting on the basis of Building Area

Total Administration Cost = $ 261000 + $ 22440(Maintenance cost Allocation)+$ 66874(Accounting Cost Allocation)

= $ 350314

Total Building Area = Molding - 369600, Painting- 39600 = 409200

So Administration Cost per Building Area = 350314/409200 = 0.856

Allocation is as follows

Allocated Cost

0.856 per building Area

=369600*0.856

=316413

=39600*0.856

=33901

Total Direct costs for Molding = 232500+342500+120000= 695000

Total Direct costs for Painting = 202000+178000+72500= 452500

b)

c) 1)

2) The Company did not meet management's standards of keeping service department cost below $ 3.50 in the molding department as cost is 6.53

3)The Company did meet management's standards of keeping service department cost below $ 3.50 in the painting department as cost is 2.25

Basis Administration Accounting Molding Painting $ value of equipment 66 180 240 114

Allocated Cost

340 per $ value of Equipment

=66*340

=$ 22440

=180*340

=61200

=240*340

81600

=114*340

=38760

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