Connect - Managerial Accounting Chapter 9

1.

Advertising department expenses of $24,000 and purchasing department expenses of $34,000 of Cozy Bookstore are allocated to operating departments on the basis of dollar sales and purchase orders, respectively. Information about the allocation bases for the three operating departments follows.

Department	Sales		Purchase Orders
Books	$	495,000		516
Magazines		198,000		360
Newspapers		207,000		324
Total	$	900,000		1,200

Complete the following table by allocating the expenses of the two service departments (advertising and purchasing) to the three operating departments. (Amounts to be deducted should be indicated with minus sign.)

Advertising Allocation Base Percent of Allocation Base Cost to be Allocated Allocated Cost Department Sales Numerator Denominator % of Total Books Dept $495,000 $495,000 $900,000 55 $24,000 $13,200 Magazines Dept 198,000 198,000 900,000 22 24,000 5,280 Newspapers Dept 207,000 207,000 900,000 23 24,000 5,520 Totals 900,000 100 $24,000 Purchasing Allocation Base Percent of Allocation Base Cost to be Allocated Allocated Cost Department Number of orders Numerator Denominator % of Total Books Dept 516 516 1,200 43 $34,000 $14,620 Magazines Dept 360 360 1,200 30 34,000 10,200 Newspapers Dept 324 324 1,200 27 34,000 9,180 Totals 1,200 100 $34,000

COZY BOOKSTORE Allocation of Expenses to Departments Allocation Base Expense Account Balance Advertising Dept. Purchasing Dept. Books Dept. Magazines Dept. Newspapers Dept. Total department expenses $698,000 $24,000 $34,000 $425,000 $90,000 $125,000 Advertising Dept. Sales (24,000) 13,200 5,280 5,520 Purchasing Dept. Purch. orders (34,000) 14,620 10,200 9,180 Total expenses allocated to operating depts. $698,000 $0 $0 $452,820 $105,480 $139,700

-----------------------------------------------------------------------------------------------------------------------------------

2.

Jessica Porter works in both the jewelry department and the hosiery department of a retail store. Porter assists customers in both departments and arranges and stocks merchandise in both departments. The store allocates Porter’s $30,000 annual wages between the two departments based on a sample of the time worked in the two departments. The sample is obtained from a diary of hours worked that Porter kept in a randomly chosen two-week period. The diary showed the following hours and activities spent in the two departments.

Selling in jewelry department	51.0 hours
Arranging and stocking merchandise in jewelry department	6.0 hours
Selling in hosiery department	12.0 hours
Arranging and stocking merchandise in hosiery department	7.0 hours
Idle time spent waiting for a customer to enter one of the selling departments	4.0 hours

Allocate Porter’s annual wages between the two departments.

	Department Hours worked Percent of Hours worked Wages Allocation Numerator Denominator % of Hours Jewelry 57.0 57.0 76.0 75.00% $30,000 $22,500 Hosiery 19.0 19.0 76.0 25.00% $30,000 7,500 Totals 76.0 100.00% $30,000

-----------------------------------------------------------------------------------------------------------------------------------

3.

Woh Che Co. has four departments: materials, personnel, manufacturing, and packaging. In a recent month, the four departments incurred three shared indirect expenses. The amounts of these indirect expenses and the bases used to allocate them follow.

Indirect Expense		Cost	Allocation Base
Supervision	$	82,500	Number of employees
Utilities		50,000	Square feet occupied
Insurance		22,500	Value of assets in use
Total	$	155,000

Departmental data for the company’s recent reporting period follow.

Department	Employees			Square Feet			Asset Values
Materials		27			25,000		$	6,000
Personnel		9			5,000			1,200
Manufacturing		63			55,000			37,800
Packaging		51			15,000			15,000
Total		150			100,000		$	60,000

1.	Use this information to allocate each of the three indirect expenses across the four departments.

Supervision expenses Allocation Base Percent of Allocation Base x Indirect Cost Allocated Cost Department Number of employees Numerator Denominator % of Total Materials 27 27 150 18.00% $82,500 $14,850 Personnel 9 9 150 6.00% 82,500 4,950 Manufacturing 63 63 150 42.00% 82,500 34,650 Packaging 51 51 150 34.00% 82,500 28,050 Totals 150 100.00% $82,500 Utilities Allocation Base Percent of Allocation Base x Indirect Cost Allocated Cost Department Square feet occupied Numerator Denominator % of Total Materials 25,000 25,000 100,000 25.00% $50,000 $12,500 Personnel 5,000 5,000 100,000 5.00% 50,000 2,500 Manufacturing 55,000 55,000 100,000 55.00% 50,000 27,500 Packaging 15,000 15,000 100,000 15.00% 50,000 7,500 Totals 100,000 100.00% $50,000 Insurance Allocation Base Percent of Allocation Base x Indirect Cost Allocated Cost Department Value of assets in use Numerator Denominator % of Total Materials $6,000 $6,000 $60,000 10.00% $22,500 $2,250 Personnel 1,200 1,200 60,000 2.00% 22,500 450 Manufacturing 37,800 37,800 60,000 63.00% 22,500 14,175 Packaging 15,000 15,000 60,000 25.00% 22,500 5,625 Totals $60,000 100.00% $22,500

2.	Prepare a summary table that reports the indirect expenses assigned to each of the four departments.

	Supervision Utilities Insurance Total Materials $14,850 $12,500 $2,250 $29,600 Personnel 4,950 2,500 450 7,900 Manufacturing 34,650 27,500 14,175 76,325 Packaging 28,050 7,500 5,625 41,175 Totals $82,500 $50,000 $22,500 $155,000

-----------------------------------------------------------------------------------------------------------------------------------

4.

Below are departmental income statements for a guitar manufacturer. The manufacturer is considering dropping its electric guitar department since it has a net loss. The company classifies advertising, rent, and utilities expenses as indirect.

WHOLESALE GUITARS Departmental Income Statements For Year Ended December 31, 2015
	Acoustic			Electric
Sales	$	112,500		$	105,500
Cost of goods sold		55,675			66,750
Gross profit		56,825			38,750
Operating expenses
Advertising expense		8,075			6,250
Depreciation expense—equipment		10,150			9,000
Salaries expense		17,300			13,500
Supplies expense		2,030			1,700
Rent expense		6,105			5,950
Utilities expense		3,045			2,550
Total operating expenses		46,705			38,950
Net income (loss)	$	10,120		$	(200	)

1.	Prepare a departmental contribution report that shows each department’s contribution to overhead.

WHOLESALE GUITARS Income Statement Showing Departmental Contribution to Overhead For Year Ended December 31, 2015 Acoustic Dept. Electric Dept. Combined Sales $112,500 $105,500 $218,000 Cost of goods sold 55,675 66,750 122,425 Gross profit 56,825 38,750 95,575 Direct expenses Salaries expense 17,300 13,500 30,800 Depreciation expense—equipment 10,150 9,000 19,150 Supplies expense 2,030 1,700 3,730 Total direct expenses 29,480 24,200 53,680 Departmental contributions to overhead $27,345 $14,550 $41,895 Indirect expenses Rent expense 12,055 Utilities expense 5,595 Advertising expense 14,325 Total indirect expenses 31,975 Net income $9,920

2.	Based on contribution to overhead, should the electric guitar department be eliminated?

 No 

-----------------------------------------------------------------------------------------------------------------------------------

5.

Williams Company began operations in January 2015 with two operating (selling) departments and one service (office) department. Its departmental income statements follow.

WILLIAMS COMPANY Departmental Income Statements For Year Ended December 31, 2015
		Clock			Mirror		Combined
Sales	$	130,000		$	55,000		$	185,000
Cost of goods sold		63,700			34,100			97,800
Gross profit		66,300			20,900			87,200
Direct expenses
Sales salaries		20,000			7,000			27,000
Advertising		1,200			500			1,700
Store supplies used		900			400			1,300
Depreciation—Equipment		1,500			300			1,800
Total direct expenses		23,600			8,200			31,800
Allocated expenses
Rent expense		7,020			3,780			10,800
Utilities expense		2,600			1,400			4,000
Share of office department expenses		10,500			4,500			15,000
Total allocated expenses		20,120			9,680			29,800
Total expenses		43,720			17,880			61,600
Net income	$	22,580		$	3,020		$	25,600

Williams plans to open a third department in January 2016 that will sell paintings. Management predicts that the new department will generate $50,000 in sales with a 55% gross profit margin and will require the following direct expenses: sales salaries, $8,000; advertising, $800; store supplies, $500; and equipment depreciation, $200. It will fit the new department into the current rented space by taking some square footage from the other two departments. When opened the new painting department will fill one-fifth of the space presently used by the clock department and one-fourth used by the mirror department. Management does not predict any increase in utilities costs, which are allocated to the departments in proportion to occupied space (or rent expense). The company allocates office department expenses to the operating departments in proportion to their sales. It expects the painting department to increase total office department expenses by $7,000. Since the painting department will bring new customers into the store, management expects sales in both the clock and mirror departments to increase by 8%. No changes for those departments’ gross profit percents or their direct expenses are expected except for store supplies used, which will increase in proportion to sales.

Required:

Prepare departmental income statements that show the company’s predicted results of operations for calendar year 2016 for the three operating (selling) departments and their combined totals. (Do not round intermediate calculations. Round your final answer to nearest whole dollar amount.)

WILLIAMS COMPANY Forecasted Departmental Income Statements For Year Ended December 31, 2016 Clock Mirror Paintings Combined Sales $140,400 $59,400 $50,000 $249,800 Cost of goods sold 68,796 36,828 22,500 128,124 Gross profit 71,604 22,572 27,500 121,676 Direct expenses Sales salaries 20,000 7,000 8,000 35,000 Advertising 1,200 500 800 2,500 Store supplies used 972 432 500 1,904 Depreciation of equipment 1,500 300 200 2,000 Total direct expenses 23,672 8,232 9,500 41,404 Allocated expenses Rent expense 5,616 2,835 2,349 10,800 Utilities expense 2,080 1,048 872 4,000 Share of office dept. expenses 12,364 5,236 4,400 22,000 Total allocated expenses 20,060 9,119 7,621 36,800 Total expenses 43,732 17,351 17,121 78,204 Net income $27,872 $5,221 $10,379 $43,472

-----------------------------------------------------------------------------------------------------------------------------------

6.

Pirate Seafood Company purchases lobsters and processes them into tails and flakes. It sells the lobster tails for $21 per pound and the flakes for $14 per pound. On average, 100 pounds of lobster are processed into 52 pounds of tails and 22 pounds of flakes, with 26 pounds of waste. Assume that the company purchased 2,400 pounds of lobster for $4.50 per pound and processed the lobsters with an additional labor cost of $1,800. No materials or labor costs are assigned to the waste. If 1,096 pounds of tails and 324 pounds of flakes are sold,calculate the allocated cost of the sold items and the allocated cost of the ending inventory. The company allocates joint costs on a value basis.(Round cost per pound answers to 2 decimal places.)

Yield per 2,400 lb. Purchase Market Value per 2,400 lb. Purchase Percent of Market Value Cost to be Allocated Allocated Cost 2,400 Pound Purchase Cost per Pound Numerator Denominator % of Mkt Value Lobster Tails 1,248 $26,208 $26,208 $33,600 78.00% $12,600 $9,828 $7.88 Lobster Flakes 528 7,392 7,392 33,600 22.00% 12,600 2,772 5.25 Totals $33,600 100.00% $12,600 1) What is the allocated cost of the sold items? Cost per Pound Pounds sold Cost of Goods Sold Lobster Tails $7.88 1,096 $8,631 Lobster Flakes $5.25 324 1,701 Totals $10,332 2) What is the allocated cost of the ending inventory? Cost per Pound Pounds in Ending Inventory Cost of Ending Inventory Lobster Tails $7.88 152 $1,197 Lobster Flakes $5.25 204 1,071 Totals $2,268

-----------------------------------------------------------------------------------------------------------------------------------

Jansen Company reports the following for its ski department for the year 2017. All of its costs are direct, except as noted.

Departmental income statements are prepared for service departments but not operating departments.
False

In the preparation of departmental income statements, the preparer completes the following steps in the following order:
Identify direct expenses; allocate indirect expenses; allocate service department expenses.

In a decentralized organization, decisions are made by managers throughout the company rather than by a few top executives.
True

A cost center is a unit of a business that incurs costs without directly generating revenues. All of the following are considered cost centers except:
Juice division at Coca Cola.

Return on investment can be split into which of the following two measures?
Profit margin and investment turnover.

A unit of a business that generates revenues and incurs costs is called a:
Profit center.

A responsibility accounting performance report usually compares actual costs to budgeted costs amounts by management level.
True

A department's direct expenses are usually considered uncontrollable costs.
False

A selling department is usually evaluated as a profit center.
True

Which of the following is not one of the perspectives used to analyze performance using the balanced scorecard?
Number of employees

Measures used to evaluate the manager of an investment center include investment turnover and profit margin.
True

Canfield Technical School allocates administrative costs to its respective departments based on the number of students enrolled, while maintenance and utilities are allocated per square feet of the classrooms. Based on the information below, what is the total amount allocated to the Welding Department (rounded to the nearest dollar) if administrative costs for the school were $50,000, maintenance fees were $12,000, and utilities were $6,000?

Department	Students	Classrooms
Electrical	120	10,000 sq. ft.
Welding	70	12,000 sq. ft.
Accounting	50	8,000 sq. ft.
Carpentry	40	6,000 sq. ft.
Total	280	36,000 sq. ft.

$18,500.

A college uses advisors who work with all students in all divisions of the college. The most useful allocation basis for the salaries of these employees would likely be:
number of students advised from each division.