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Exercise 6-6 Cost Allocation Process Apex Company's Copy Department, which does all of the photocopying for the Sales Department and the Administration Department, budgets the following costs for the year, based on the expected activity indicated: Expected copies for the year 5,000,000 Budgeted annual costs: Salaries (fixed) $ 100,000 Employee benefits (fixed) 12,500 Depreciation of copy machines (fixed) 10,000 Utilities (fixed) 5,000 Paper (variable) 50,000 Toner (variable) 50,000 Budgeted paper cost per copy 0.01 Budgeted toner cost per copy 0.01 The costs are assigned to two pools, one for fixed and one for variable costs. The costs are then assigned to the Sales Department and the Administrative Department. Fixed costs are assigned on a lump- sum basis. as follows: Fixed costs to Sales 40% Fixed costs to Administration 60% The variable costs are assigned at the following: Variable costs per copy $ 0.02 The number of copies made during the year are: Total copies made 4,800,000 Copies made for Sales 2,500,000 Copies made for Administration 2,300,000 Required Calculate the Copy Department costs allocated to Sales and Administration. Total fixed costs to be allocated Sales Administration Fixed costs allocated Variable costs allocated Total costs allocated Exercise 6-8 Cost Allocation Process Marvin Company has three service departments (S1, S2, and S3) and two production departments (P1 and P2). The following data relate to Marvin's allocation of service department costs: Budgeted Number of Costs Employees S1 $4,500,000 90 S2 3,000,000 60 S3 2,700,000 40 P1 200 P2 300 Service department costs are allocated by the direct method. The number of employees is used as the allocation base for all service department costs. Required a. Allocate service department costs to production departments. Portion of employees in P1 Portion of employees in P2 Department Costs Cost Allocated to P1 P2 Service Department S1 S2 S3 b. Calculate the total service department cost allocated to each production department. Cost allocated to P1 Cost allocated to P2 What-if? Consider the following after you have completed the requirements of E6-8. The manager of department P2 thinks he is being charged more than his fair share' of service department costs from department S2. He argues that department S2 costs have been less than budget by $80,000 for each of the past few months. He requests that the allocation be based on actual instead of budgeted costs. 1. Determine the costs to be allocated to department P2 from department S2 it actual costs are allocated rather than budgeted costs. Allocated Costs Cost Allocated to P2 P1 Allocated of budgeted costs Allocation of actual costs 2. Which allocation basis appears to be more fair' to the departments receiving the allocations? Problem 6-9 Choice of Allocation Based, Problems with Cost Allocation Tilden Financial Services has two divisions, Financial Planning and Business Consulting. The firm's accountants are in the process of selecting an allocation base to allocate centrally provided personnel costs to the divisions. Two allocation bases have been proposed salary and headcount (number of employees). Expected costs and data relating to the allocation follow: Financial Planning Business Consulting Total $ 1,500,000 Expected personnel costs Salaries Headcount $ 15,000,000 $5,000,000 200 50 Required a. Prepare a schedule showing the allocations to the two divisions using each allocation base. Amount To Be Allocated Financial Planning Proportion Financial Planning Allocation Business Consulting Proportion Business Consulting Allocation Allocation Base Salaries Headcount b. Referring to your answer to a, explain why allocations are sometimes considered arbitrary