Please only do Worksheet E6-8 "What If" Problem under Exercise 6-8 Cost Allocation Process from the workbook

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 Budgeted annual costs: Salaries (fixed) Employee benefits (fixed) Depreciation of copy machines (fixed) Utilities (fixed) Paper (variable) Toner (variable) Budgeted paper cost per copy Budgeted toner cost per copy 5,000,000 $ $ $ 100,000 12,500 10,000 5,000 50,000 50,000 0.01 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 Fixed costs to Administration 40% 60% The variable costs are assigned at the following: Variable costs per copy $ The number of copies made during the year are: Total copies made Copies made for Sales Copies made for Administration 0.02 4,800,000 2,500,000 2,300,000 Required Calculate the Copy Department costs allocated to Sales and Administration. Total fixed costs to be allocated $ Sales Fixed costs allocated Variable costs allocated Total costs allocated $ 127,500 Administration 51,000 $ 50,000 $ 101,000 $ 76,500 40,000 116,500 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 Costs S1 S2 S3 P1 P2 $4,500,000 3,000,000 2,700,000 Number of Employees 90 60 40 200 300 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. 40% 60% Portion of employees in P1 Portion of employees in P2 Service Department S1 S2 S3 Service Cost Allocated to Department P2 Costs P1 $ 4,500,000 $ 1,800,000 $2,700,000 1,800,000 3,000,000 1,200,000 1,620,000 2,700,000 1,080,000 $10,200,000 $ 4,080,000 $6,120,000 b. Calculate the total service department cost allocated to each production department. Cost allocated to P1 Cost allocated to P2 $ 4,080,000 $6,120,000 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 Expected personnel costs Salaries Headcount Business Consulting Total $ 1,500,000 $ 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 Allocation Base Allocated Salaries Headcount $ 1,500,000 $ 1,500,000 Financial Planning Proportion 75% 80% Financial Planning Allocation $ 1,250,000 1,200,000 Business Consulting Proportion 25% 20% Business Consulting Allocation $ 375,000 300,000 b. Referring to your answer to a, explain why allocations are sometimes considered arbitrary. Both handcount and salary appear to be plausible allocation bases, but they result in very different allocations. They suggest that in many cases allocations are somewhat arbitrary