Analyze Horsepower Hookup, Inc.

Horsepower Hookup, Inc., is a large automobile company that specializes in the production of high-powered trucks. The company is determining cost allocations for purposes of performance evaluation. A portion of company bonuses depends on divisions achieving cost management goals. This necessitates highly accurate support department cost allocation. Management has also stated that it has the means to implement as complex a method as necessary.

The general manager over the Mid-Size D wants to get a good idea of what factors are driving the costs of the support departments in order to make accurate cost allocations, so finding accurate support department cost drivers is important. Support department costs include Janitorial ($163,100) and Security ($285,400). The Janitorial costs vary depending on the number of vehicles produced, increasing with larger production volumes. Security costs are fixed based on the size of the lot, and do not change with respect to how many vehicles are in the lot or warehouse. Joint costs involved in producing the trucks before the split-off point where the various makes, models, and colors are produced are $946,000 for the period. All makes, models, and colors sell at relatively similar margins, but the sports models and metallic colors are normally more difficult to produce during the joint production process.

a. Identify the Support department cost allocation method that matches the given situation. a. Direct method b. Reciprocal services method c. Sales value method d. None of the above

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b. Identify the cost driver that should be used to allocate Janitorial costs. a. Square feet b. Number of vehicles produced c. Number of employees d. None of the above

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c. Identify the cost driver that should be used to allocate Security costs. a. Number of vehicles produced b. Number of employees c. Size of the lot d. None of the above

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d. If Janitorial costs were to be allocated based on square footage, and Security costs based on asset value, what percentage of each support departments costs would be allocated to each production department using the sequential method (allocating Security costs first) given the following:

	Square Footage	Asset Value
Janitorial Department	3,000	$ 10,000
Security Department	2,000	2,300
Production Department 1	54,000	450,000
Production Department 2	36,000	540,000

Line Item Description	Percentage
Janitorial Department:	fill in the blank 4%
Production Department 1:	fill in the blank 5%
Production Department 2:	fill in the blank 6%

Line Item Description	Percentage
Production Department 1:	fill in the blank 7%
Production Department 2:	fill in the blank 8%

e. Why the company should not consider security costs to evaluate the performance of the general manger? a. It is related to the square feet used in the plants and not related to the performance of the general manager b. It is a fixed cost and cannot be related to the performance of the general manager c. It is an unavoidable cost and not related to the performance of the company or general manager d. All the above

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Why the company should consider janitorial costs to evaluate the performance of the general manger? a. It increases with the number of vehicles produced and it is controllable costs b. It is a fixed cost that is not related to number of vehicles produced c. It is related to the square footage of the plant and unavoidable cost d. None of the above

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f. Identify the joint cost allocation method that should be used for performance evaluation purposes. a. Sales value method b. Net realizable value method c. Physical units method d. Weighted average method

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