Chapter 24 Cost Allocation and Responsibility Accounting Demonstration

E 24 -14 Aragon makes handheld calculators in two models: basic and professional. Aragon estimated $851, 500 of manufacturing overhead and 655, 000 machine hours for the year. The basic model actually consumed 180, 000 machine hours, and the professional model consumed 475, 000 machine hours. Compute the predetermined overhead allocation rate using machine hours (MHr) as the allocation base. How much overhead is allocated to the basic model? To the professional model? © 2016 Pearson Education, Inc. 24 -2

E 24 -14 Requirement 1: Compute the predetermined overhead allocation rate using machine hours as the allocation base. Predetermined Total estimated overhead costs Overhead = Total estimated quantity of the overhead allocation base Allocation Rate © 2016 Pearson Education, Inc. 24 -4

E 24 -14 Requirement 1: Compute the predetermined overhead allocation rate using machine hours as the allocation base. Predetermined Total estimated overhead costs Overhead = Total estimated quantity of the overhead allocation base Allocation Rate = $851, 500 total estimated overhead costs 655, 000 total estimated machine hours © 2016 Pearson Education, Inc. 24 -5

E 24 -14 Requirement 1: Compute the predetermined overhead allocation rate using machine hours as the allocation base. Predetermined Total estimated overhead costs Overhead = Total estimated quantity of the overhead allocation base Allocation Rate = $851, 500 total estimated overhead costs 655, 000 total estimated machine hours = $1. 30 per machine hour © 2016 Pearson Education, Inc. 24 -6

E 24 -14 Requirement 2: How much overhead is allocated to the basic model? To the professional model? Actual Quantity Predetermined of the Allocated Overhead × = Allocation Base Manufacturing Allocation Rate Used Overhead Cost © 2016 Pearson Education, Inc. 24 -7

E 24 -14 Requirement 2: How much overhead is allocated to the basic model? To the professional model? Actual Quantity Predetermined of the Allocated Overhead × = Allocation Base Manufacturing Allocation Rate Used Overhead Cost Basic model $1. 30 per MHr × 180, 000 MHrs © 2016 Pearson Education, Inc. = $ 234, 000 24 -8

E 24 -14 Requirement 2: How much overhead is allocated to the basic model? To the professional model? Actual Quantity Predetermined of the Allocated Overhead × = Allocation Base Manufacturing Allocation Rate Used Overhead Cost Basic model $1. 30 per MHr × 180, 000 MHrs = $ 234, 000 Professional $1. 30 per MHr model × 475, 000 MHrs = $ 617, 500 © 2016 Pearson Education, Inc. 24 -9

E 24 -22 One subunit of Xtreme Sports Company had the following financial results last month: Xtreme – Subunit X Direct materials Actual 28, 200 $ 26, 100 Direct labor 13, 500 14, 200 Indirect labor 26, 500 23, 500 Utilities 12, 700 11, 600 Depreciation 26, 000 4, 000 5, 000 Repairs and maintenance Total $ Flexible Budget Variance % Variance $ 110, 900 $ 106, 400 © 2016 Pearson Education, Inc. 24 -10

E 24 -22 Requirements 1. Complete the performance evaluation report for this subunit. Enter the variance percent as a percentage rounded to two decimal places. 2. Based on the data presented, what type of responsibility center is this subunit? 3. Which items should be investigated if part of management’s decision criteria is to investigate all variances exceeding $2, 500 or 10%? 4. Should only unfavorable variances be investigated? Explain. © 2016 Pearson Education, Inc. 24 -11

E 24 -22 Requirement 1: Complete the performance evaluation report for this subunit. Enter the variance percent as a percentage rounded to two decimal places. Xtreme – Subunit X Direct materials Actual 28, 200 $ 26, 100 Direct labor 13, 500 14, 200 Indirect labor 26, 500 23, 500 Utilities 12, 700 11, 600 Depreciation 26, 000 4, 000 5, 000 Repairs and maintenance Total $ Flexible Budget Variance % Variance $ 110, 900 $ 106, 400 © 2016 Pearson Education, Inc. 24 -12

E 24 -22 Requirement 1: Complete the performance evaluation report for this subunit. Enter the variance percent as a percentage rounded to two decimal places. Xtreme – Subunit X Direct materials Actual 28, 200 $ 26, 100 $ Direct labor 13, 500 14, 200 Indirect labor 26, 500 23, 500 Utilities 12, 700 11, 600 Depreciation 26, 000 4, 000 5, 000 Repairs and maintenance Total $ Flexible Budget Variance 2, 100 U % Variance 8. 05% U $ 110, 900 $ 106, 400 © 2016 Pearson Education, Inc. 24 -13

E 24 -22 Requirement 1: Complete the performance evaluation report for this subunit. Enter the variance percent as a percentage rounded to two decimal places. Xtreme – Subunit X Direct materials Actual 28, 200 $ 26, 100 $ Direct labor 13, 500 14, 200 Indirect labor 26, 500 23, 500 Utilities 12, 700 11, 600 Depreciation 26, 000 4, 000 5, 000 Repairs and maintenance Total $ Flexible Budget Variance % Variance 2, 100 U 8. 05% U 700 F 4. 93% F $ 110, 900 $ 106, 400 © 2016 Pearson Education, Inc. 24 -14

E 24 -22 Requirement 1: Complete the performance evaluation report for this subunit. Enter the variance percent as a percentage rounded to two decimal places. Xtreme – Subunit X Direct materials Actual $ Flexible Budget Variance 28, 200 $ 26, 100 $ Direct labor 13, 500 Indirect labor 26, 500 2, 100 U 8. 05% U 14, 200 700 F 4. 93% F 23, 500 3, 000 U 12. 77% U Utilities 12, 700 11, 600 Depreciation 26, 000 4, 000 5, 000 Repairs and maintenance Total % Variance $ 110, 900 $ 106, 400 © 2016 Pearson Education, Inc. 24 -15

E 24 -22 Requirement 1: Complete the performance evaluation report for this subunit. Enter the variance percent as a percentage rounded to two decimal places. Xtreme – Subunit X Direct materials Actual 28, 200 $ 26, 100 $ Direct labor 13, 500 Indirect labor 26, 500 Utilities Depreciation Repairs and maintenance Total $ Flexible Budget Variance 12, 700 % Variance 2, 100 U 8. 05% U 14, 200 700 F 4. 93% F 23, 500 3, 000 U 12. 77% U 1, 100 U 9. 48% U 11, 600 26, 000 4, 000 5, 000 $ 110, 900 $ 106, 400 © 2016 Pearson Education, Inc. 24 -16

E 24 -22 Requirement 1: Complete the performance evaluation report for this subunit. Enter the variance percent as a percentage rounded to two decimal places. Xtreme – Subunit X Direct materials Actual 28, 200 $ 26, 100 $ Direct labor 13, 500 Indirect labor 26, 500 Utilities Depreciation Repairs and maintenance Total $ Flexible Budget Variance 12, 700 % Variance 2, 100 U 8. 05% U 14, 200 700 F 4. 93% F 23, 500 3, 000 U 12. 77% U 1, 100 U 9. 48% U 11, 600 26, 000 4, 000 5, 000 0 0. 00% $ 110, 900 $ 106, 400 © 2016 Pearson Education, Inc. 24 -17

E 24 -22 Requirement 1: Complete the performance evaluation report for this subunit. Enter the variance percent as a percentage rounded to two decimal places. Xtreme – Subunit X Direct materials Actual 28, 200 $ 26, 100 $ Direct labor 13, 500 Indirect labor 26, 500 Utilities Depreciation Repairs and maintenance Total $ Flexible Budget Variance 12, 700 % Variance 2, 100 U 8. 05% U 14, 200 700 F 4. 93% F 23, 500 3, 000 U 12. 77% U 1, 100 U 9. 48% U 11, 600 26, 000 4, 000 5, 000 $ © 2016 Pearson Education, Inc. 110, 900 $ 106, 400 0 1, 000 F 0. 00% 20. 000% F 24 -18

E 24 -22 Requirement 1: Complete the performance evaluation report for this subunit. Enter the variance percent as a percentage rounded to two decimal places. Xtreme – Subunit X Direct materials Actual 28, 200 $ 26, 100 $ Direct labor 13, 500 Indirect labor 26, 500 Utilities Depreciation Repairs and maintenance Total $ Flexible Budget Variance 12, 700 % Variance 2, 100 U 8. 05% U 14, 200 700 F 4. 93% F 23, 500 3, 000 U 12. 77% U 1, 100 U 9. 48% U 11, 600 26, 000 4, 000 5, 000 $ © 2016 Pearson Education, Inc. 110, 900 $ 106, 400 $ 0 1, 000 F 4, 500 U 0. 00% 20. 000% F 24 -19 4. 23% U

E 24 -22 Requirement 2: Based on the data presented, what type of responsibility center is this subunit? Based on the data presented, the responsibility center is a cost center. © 2016 Pearson Education, Inc. 24 -21

E 24 -22 Requirement 2: Based on the data presented, what type of responsibility center is this subunit? Based on the data presented, the responsibility center is a cost center. Requirement 3: Which items should be investigated if part of management’s decision criteria is to investigate all variances exceeding $2, 500 or 10%? © 2016 Pearson Education, Inc. 24 -22

E 24 -22 Requirement 2: Based on the data presented, what type of responsibility center is this subunit? Based on the data presented, the responsibility center is a cost center. Requirement 3: Which items should be investigated if part of management’s decision criteria is to investigate all variances exceeding $2, 500 or 10%? The indirect labor and repairs and maintenance should be investigated. © 2016 Pearson Education, Inc. 24 -23

E 24 -22 Requirement 4: Should only unfavorable variances be investigated? Explain. © 2016

E 24 -22 Requirement 4: Should only unfavorable variances be investigated? Explain. Both unfavorable and favorable variances should be investigated. A favorable cost variance could indicate costs are being cut that might impact future operations. © 2016 Pearson Education, Inc. 24 -25