I. Phoenix Partners provides management consulting services to government and corporate clients. Phoenix has two support departments—Administrative Services (AS) and Information Systems (IS)— and two operating departments—Government Consulting (GOVT) and Corporate Consulting (CORP). For the first quarter of 2009, Phoenix’s cost records indicate the following:
Budgeted overhead costs before any interdepartment cost allocations AS
Support work supplied by AS (Budgeted head count) — 25% 40% 35% 100%
Support work supplied by IS (Budgeted computer time) 10% — 30% 60% 100%
1. Allocate two support departments costs to the two operating departments using the following methods:
a. Direct method
b. Step-down method (allocate AS first)
c. Step-down method (allocate IS first)
2. Compare and explain differences in the support-department costs allocated to each operating department.
3. What approaches might be used to decide the sequence in which to allocate support departments when using the step-down method?
II. E-books, an online book retailer, has two operating departments- Corporate Sales and Consumer Sales- and two support departments- Human Resources and Information Systems. Each sales department conducts merchandising and marketing operational independently. E-books uses number of employees to allocate Human Resources costs and processing time to allocate Information Systems costs. The following data are available for September 2009:
Budgeted costs incurred before any interdepartment cost allocation Human Resources
$72,700 Information Systems
$234,000 Corporate Sales
$998,270 Consumer Sales
Support work supplied by Human Resources Department –
Budgeted number of employees
21 42 28
Support work supplied by Information Systems Department
Budgeted processing time (in minutes)
320 — 1,920 1,600
1. Allocate the support department’s costs to the operating departments using the direct method.
2. Allocate the support department’s costs to the operating departments based on the step-down method.
3. How could you have ranked the support departments differently?
III. Nascar Motors assembles and sells motor vehicles and uses standard costing. Actual data relating to April and May 2008 are:
Beginning Inventory 0 150
Production 500 400
Sales 350 520
Manufacturing costs per unit produced 10,000 10,000
Operating (marketing) cost per unit sold 3,000 3,000
Manufacturing costs 600,000 600,000
The selling price per vehicle is $24,000. The budgeted level of production used to calculate the budgeted fixed manufacturing cost per unit in 500 units. There is no price, efficiency, or spending variances. Any production-volume variance is written off to cost of goods sold in the month in which it occurs.
1. Prepare April and May 2008 income statements for Nascar Motors under (a) variable costing and (b) absorption costing.
Esquire Clothing is a manufacturer of designer suits. The cost of each suit is the sum of three variable costs (direct material costs, direct manufacturing labor costs, and manufacturing overhead costs) and one fixed-cost category (manufacturing overhead costs). Variable manufacturing overhead cost is allocated to each suit on the basis of budgeted direct manufacturing labor-hours per suit. For June 2009, each suit is budgeted to take four labor-hours. Budgeted variable manufacturing overhead cost per labor-hour is $12. The budgeted number of suits to be manufactured in June 2009 is 1,040. Actual variable manufacturing costs in June 2009 were $52,164 for 1,080 suits started and completed. There was no beginning or ending inventories of suits. Actual direct manufacturing labor-hours for June were 4,536.
1. Compute the flexible-budget variance, the spending variance, and the efficiency variance for variable manufacturing overhead.
2. Comment on the results.