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CHAPTER 7
1. c 5. b 9. a
2. b 6. c 10. c
3. b 7. a 11 a
4. b 8. d 12. C
1. (c)
2. (a)
3. (b)
4. (a)
5. (d)
S1 = P27,000 + .20 S2
= P27,000 + .20 (P18,000 + .10 S1)
= P27,000 + P3,600 + .02 S1
.98S1 = P30,600
S1 = P31,224
Total service cost allocated to P2: (40% x P31,224) + (50% x P21,122) = P23,051
6. (d)
7. (b)
Under the step method, the maintenance department would allocate its P18,700 of
cost first, because it has the greatest total cost. Note that both the maintenance and
utilities department provides service to the other service department. Thus, the
criterion for first allocation is greatest cost, not greatest number of service
department.
2
8. (c)
9. (b)
Under the reciprocal method, simultaneous equations are developed to determine the
gross costs of each service department, taking into account the interactive effect of
other service departments providing inter service department service. For Utilities,
the cost is P9,000 plus 20% of the Maintenance cost, 30% of its will be applied to
Department A and 60% to B. The 10% that have already been assigned to the
Maintenance Department is reflected in the set of simultaneous equations.
10. (d)
11. (a)
12. (a)
M = P12,000 + .20E
E = P54,000 + .25M
M = P12,000 + .20 (P54,000 + .25M)
M = P12,000 + P10,800 = .05M
.95M = P22,800
M = P24,000
Or:
E = P60,00
M = P12,000 + .20E
M = P12,000 + P12,000
M = P24,000
3
13. (a)
14. (d)
Under the direct method, no service department costs are allocated to another service
department. Thus, there would be no maintenance cost allocated to the Engineering
Department.
15. (c)
16. (b)
17. (c)
18. (c)
19. (d)
Under the step method, once departments cost have been allocated to subsequent
departments, no reallocation back to Maintenance Department is to be made. Thus,
no Engineering costs is reallocated to the Maintenance Department.
20. (b)
21. (d)
22. (d)
23. (a)
24. (b)
25. (b)
26. (b)
Advertising Circulaton
Administration:
P781,500 x .29 P226,635
P781,500 x .71 P554,865
Human Resources:
P492,700 x .32 157,664
P492,700 x .68 335,036
Total P384,299 P889,901
Administration (P781,500):
Base % Allocation
Human Resources P 291,700 10 P781,500
Advertising 762,400 26 203,190
Circulation 1,870,300 64 500,160
P2,924,400 P781,500
5
28, (a)
Administration H. Resources
Base % Base %
Administration (A) n/a n/a 10 21
Human Resources (H) P 291,700 10 n/a n/a
Advertising 762,400 26 12 26
Circulation 1,870,300 64 25 53
P2,924,400 47
Equation:
A = P781,500 + .21 H
H = P492,700 + .10 A
Administration allocations:
Human resources: P903,950 x .10 = P 90,305
Advertising: P903,950 x .26 = P235,027
Circulation: P903,950 x .64 = P578,528
29. (b)
Administration Editorial
Department Base % Base %
Administration (A) n/a n/a 10 10
Editorial (E) P 144,000 6 n/a n/a
College Texts 1,200,000 50 55 55
Prof. Pubs. 1,056,000 44 35 35
Total P2,400,000 100 100 100
Equation:
A = P450,000 + 0.10E
E = P350,000 + 0.06A
Administration Costs:
Editorial: P487,928 x 0.06 = P 29,276
College texts: P487,928 x 0.50 = 243,964
Prof. pubs.: P487,928 x 0.44 = 214,688
Editorial Costs:
Administration: P379,276 x 0.10 = P 37,928
College texts: P379,276 x 0.55 = P208,602
Prof. Pubs.: P379,276 x 0.35 = P132,746
College
Department Administration Editorial Texts Prof. Pubs.
Direct costs P450,000 P350,000 P2,250,000 P 950,000
Administration (487,928) 29,276 243,964 214,688
Editorial 37,928 (379,276) 208,602 132,746
Total P 0 P 0 P2,702,566 P1,297,434
Solutions to Problems
Problem 7-1
Allocation:
Machinery Assembly
Factory Administration:
P129,000 x 55.56% P7 1,672
P129,000 x 44.44% P 57,328
Building and grounds:
P105,000 x 37.25% 39,113
P105,000 x 62.75% 65,888
Total P110,785 P123,216
Base % Allocation
Building and Grounds 1,100 23.41 P 30,199
Machinery 2,000 42.55 54,890
Assembly 1,600 34.04 43,911
Total 4,700 100.00 P129,000
Base % Allocation
Machinery 1,900 37.25 P 50,362
Assembly 3,200 62.75 84,837
Total 5,100 100.00 P135,199
Equation:
F = P129,000 + .19B
B = P105,000 + .23F
B = P105,000 + .23(P155,757)
B = P105,000 + P35,824
B = P140,824
Cost Allocations:
Factory Administration allocations:
Building and grounds: P155,757 x .23 = P35,824
Machinery: P155,757 x .43 = P66,976
Assembly: P155,757 x .34 = P52,957
Problem 7-2
(c)
Maintenance Storeroom
Base % Base %
Maintenance (M) n/a 400 0.03
Storeroom (S) .14 n/a n/a
Machinery .32 3,500 0.25
Assembly .26 6,000 0.43
Packaging .28 4,100 0.29
14,000
Equation:
M = P250,000 + .03S
S = P180,000 + .14M
S = P180,000 + .14M
S = P180,000 + .14 (P256,477)
S = P180,000 + P35,907
S = P215,907
10
Storeroom allocations:
Maintenance: P215,907 x .03 = P 6,477
Machinery: P215,907 x .25 = P 53,977
Assembly: P215,907 x .43 = P 92,840
Packaging: P215,907 x .29 = P 62,613
Problem 7-3
1. Producing Departments
A B
Budgeted manufacturing overhead P820,000 P608,000
Service Department X to:
A (180/600 x P200,000) 60,000
B (420/600 x P200,000) 140,000
Service Department Y to:
A (128/160 x P100,000) 80,000
B ( 32/160 x P100,000) 20,000
Total P960,000 P768,000
Problem 7-4
Assembly Finishing
Factory overhead budget P1,040,000 P 800,000
Allocation of Service Departments cost:
Maintenance: P400,000, 42:18 280,000 120,000
Administration: P300,000, 30:20 180,000 120,000
Total budgeted factory overhead P1,500,000 P1,040,000
Divided by machine hours 50,000 40,000
Factory overhead rates P 30/hour P 26/hour
Problem 7-5
1. S1 (P20,000):
Base % Allocation
S2 20 .025 P 500
P1 360 .45 9,000
P2 420 .525 10,500
800 P20,000
S2 (P69,500 + P500 = P70,000):
Base % Allocation
P1 8,000 .57 P40,000*
P2 6,000 .43 30,000*
14,000 P70,000
*rounded
P1 P2
Budgeted factory overhead P400,000 P600,000
S1 cost 9,000 10,500
S2 cost 40,000 30,000
Total cost P449,000 P640,500
Divided by 8,000 20,000
Predetermined overhead rates P 56.125 P 32.025
3. Individual jobs may have relatively different amounts of time in each department.
For example, if P1 is machine intensive and P2 is labor intensive, the departmental
overhead rates would provide a fairer allocation of costs to jobs.
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Problem 7-6
Substitution:
C = P40,000 + .20 (P40,000 + .20C)
C = P40,000 + P8,000 + .04C
.96C = P48,000
C = P50,000
2. Service C allocation:
Service D: P50,000 x .20 = P10,000
Service E: P50,000 x .30 = P15,000
Producing B: P50,000 x .50 = P25,000
Service D allocation:
Service C: P50,000 x .20 = P10,000
Service E: P50,000 x .10 = P 5,000
Producing A: P50,000 x .30 = P15,000
Producing B: P50,000 x .40 = P20,000
Service E allocation:
Producing A: P40,000 x .40 = P16,000
Producing B: P40,000 x .30 = P12,000
Marketing: P40,000 x .20 = P 8,000
General office: P40,000 x .10 = P 4,000
Problem 7-7
1. Producing Department
P1 P2
Factory overhead P 40,000 P47,600
Allocation of Service Department:
S1: P14,400; ( 40% : 50%) 6,400 8,000
S2: P18,000 ; ( 20% : 40%) 6,000 12,000
Total P120,000 P52,400
2. S2 allocation (P18,000):
P1: P18,000 x 20% = P 3,600
P2: P18,000 x 40% = 7,200
S1: P18,000 x 40% = 7,200
P18,000
3. S1 = P14,400 + .40 S2
S2 = P18,000 + .10 S1
Substitution:
S1 = P14,400 + .40 (P18,000 + .10 S1)
S1 = P14,400 + P7,200 + .04 S1
.96S1 = P21,600
S1 = P22,500
S1 allocations:
S2: P22,500 x .10 = P2,250
P1: P22,500 x .40 = P9,000
P2: P22,500 x .50 = P11,250
S2 allocations:
S1: P20,250 x .40 = P8,100
P1: P20,250 x .20 = P4,050
P2: P20,250 x .40 = P8,100
Problem 7-8
Summary of allocation:
Commercial: P107,877 + P147,922 + P154,343 = P 410,142
Residential: P518,835 + P214,487 + P325,834 = P1,0549,156
Prop. Mgmt: P 66,781 + P 51,772 + P 17,149 = P 135.702
Problem 7-9
The P40 transfer price is inadequate because the EDP Department is left with a loss
(for internal evaluation purposes) of (P90,640 P82,400) or P8,240.
Lit FP LC Total
Administration (P450,000), 10:5:3 P250,000 P125,000 P 75,000 P 450,000
EDP-Fixed (P300,000), 80:345:240:25 69,565 208,696 21,739 300,000
Total allocated P319,565 P333,696 P 96,739 P 750,000
Transfer costs 48,800 26,000 7,600 82,400
Direct costs 200,000 255,000 340,000 795,000
Problem 7-10
PD1 PD2
SD1: P1,065,000 x 0.57 P 607,050
P1,065,000 x 0.43 P 457,950
SD2: P840,000 x 0.44 369,600
P840,000 x 9.56 470,400
SD3: P1,185,000 x 0.40 474,000
P1,185,000 x 0.60 711,000
Total P1,450,650 P1,639,350
Equations:
SD1 = P1,065,000 + .167 SD2 + 0.73 SD3
SD2 = P 840,000 + .05 SD1 + 0.98 SD3
SD3 = P1,185,000 + .075 SD1 + 0.83 SD2
Substituting SD3
SD1 = P1,215,000 + .09 (P1,264,839 + .08SD1)
SD1 = P1,215,000 + P113,835 + .007SD1
.993SD1 = P1,328,835
SD1 = P1,228,202
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Substituting SD1
SD3 = P1,264,839 + .08 (P1,338,202)
SD3 = P1,264,839 + P107,056
SD3 = P1,371,896
Allocations:
SD1 allocations:
SD2: P1,338,202 x 0.050 = P66,910
SD3: P1,338,202 x 0.075 + P100,365
PD1: P1,338,202 x 0.500 = P669,101
PD2: P1,338,202 x 0.375 = P501,826
SD2 allocations:
SD1: P1,041,356 x 0.167 = P173,906
SD3: P1,041,356 x 0.083 = P86,433
PD1: P1,041,356 x 0.333 = P346,772
PD2: P1,041,356 x 0.417 = P434,245
SD3 allocations:
SD1: P1,371,896 x 0.073 = P100,149
SD2: P1,371,896 x 0.098 = P134,446
PD1: P1,371,896 x 0.332 = P455,469
PD2: P1,371,896 x 0.497 = P681,832
Note: SD1, SD2, and SD3 columns are off due to rounding.
Given that the rates are the same using the step and direct methods and the rates are only
slightly different using the reciprocal (algebraic) method, there seems in this case to be little
benefit to using the complex step and algebraic methods.
18
Problem 7-11