Partners BamBam Knoxville and Johnny-0 have invested millions into an adventure and Jetski manufacturing company called "Concussion Ave" and decided to split the company into two operating divisions: Exploding Energy Cells and Joltin' Jetski Engines. You notice BamBam and Johnny keep fighting about what to do next to lower costs and stay profitable. BamBam says he is worried about HR productivity as many of the employees are taking more sick-days. J-O disagrees with Bam and says the biggest problem is the machines keep breaking down.

You are their accounting consultant and you tell both of them to calm down for a moment and to objectively sit down and look over the accounting numbers with you.

Studying the books you see that "Concussion Ave" currently allocates electric and the People Resource Center (PRC) cost to each operating division using the direct method.

"Concussion Ave" has electrical costs allocated on number of machine hours and PRC costs are allocated on the number of employees.

Using the direct method, support department cost allocation is decided using these accounting numbers:

Operating Divisions: Energy Cell and Jetski

Exploding Energy Cells

Direct Labour Hours 25,000

Overhead costs $290,000

Machine Hours 7,500

Number of Employees 25

Joltin' Jetski Engines

Direct Labour Hours 115,000

Overhead costs $127,500

Machine Hours 4,500

Number of Employees 75

Departments :

Electric and People Resource Center (PRC) Support

Electric

Direct Labour Hours --

Overhead costs $150,000

Machine Hours 2,500

Number of Employees 35

PRC

Direct Labour Hours --

Overhead costs $365,000

Machine Hours 2,500

Number of Employees 45

SOLVE and ANALYZE:

1a. Calculate the allocation ratios for electric and PRC and allocate the support service costs to the producing departments. (Calculate using 3 decimal places)

1b. BamBam isn't so sure of the number and asks you instead to assume departmental overhead rates are based on direct labour hours. He wants you to calculated the overhead rate for the energy cell division and for the Jetski division. (overheads rate should be rounded to nearest cent).

/15 marks

2. Based on the numbers and the simmering conflict between partners BamBam and Johnny-O, what management accounting advice and allocation would you recommend for "Concussion Ave" company to going forward and avoid losing money? /10 marks