ACB 10203 : MANAGEMENT ACCOUNTING

TUTORIAL : COST ALLOCATION

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QUESTION 1

Sepatu Sera Sdn. Bhd. (SSSB) has two operating departments, Cutting and Sewing, and
three support departments Sales, General Administrative and Maintenance. Departmental
overhead cost for the coming year have been budgeted as follows:

Department (RM)
Cutting 175,000
Sewing 130,000
Sales 76,000
General Administrative 200,000
Maintenance 100,000

Maintenance cost are distributed based on hours of maintenance service used. General
Administrative cost are distributed based on number of employees during the year while
sales department is based on number of purchased order.

Factory overhead will be applied to products using predetermined departmental overhead

rate. The predetermined rate in Cutting department is based on machine hour, and
predetermined rate in sewing is based on direct labor hours. The survey for the coming year
is summarized as follows:

Cutting Sewing Sales General Maintenance

Administrative
Direct labor hour 7,500 30,000 - - -
Machine hour 4,000 2,000 - - -
No. of purchase order 20 10 50 5 15
Number of employees 15 10 5 6 5
Hours of maintenance 180 540 200 120 300
service

Required:

a) Compute the predetermined overhead rate for two operating departments for the
coming year, using direct method to distribute support departments costs.

b) Compute the predetermined overhead rate for two operating departments for the
coming year, using step down method to distribute support departments costs. (Use
the following department distribution sequence : Sales, General Administrative and
Maintenance)

c) Briefly explain the difference between operating department and support department.
 Solution question 1

a) direct method

Sales General Maintenan Cutting Sewing

Administrati ce
ve
Cost before 76,000 200,000 100,000 175,000 130,000
allocation
Allocate sale dept - - 20/30 x 76,000 10/30 x 76,000
(76,000) = 50,667 = 25,333
0
Allocate cost under (200,000) - 15/25 x 200,000 10/25 x 200000
Gen Admin 0 =120,000 = 80,000

Allocate cost (100,000) 180/720 x 100000 540/720 x 100000

maintenance 0 = 25,000 = 75,000
Total cost 370,667 310,333

POHR / 4000 MH / 30,000 DLH

92.67/ MH 10.34 / DLH

b) step down method

Sales General Maintenance Cutting Sewing

Administrative
Cost before 76,000 200,000 100,000 175,000 130,000
allocation
Allocate sale dept 5/50 x 76,000 15/50 x 76000 20/50 x 76,000 10/50 x 76,000
(76,000) = 7600 = 22,800 = 30,400 = 15,200
0
Total cost 207,600
Allocate cost (207,600) 5/30 x 207,600 15/30 x 207,600 10/30 x 207,600
under Gen Admin 0 = 34,600 = 103,800 =69,200

total 157,400
Allocate cost (157,400) 180/720 X 540/720 X
maintenance 0 157,400 157,400
=39,350 =118,050

Total cost 348,550 332,450

POHR / 4000 MH / 30,000 DLH
87.14/MH 11.08 / DLH

c)
QUESTION 2

Selamanya Dota Sdn. Bhd. produces driving simulation and computer games for personal
computer. The CEO has a complaint about the accounting for support department costs and
decided to outsource some tasks. As an accountant, you are required to compute a total
allocated product cost per unit for driving simulation and computer games. These costs will
be used as a benchmark for future operation.

Records are available for April 2018 as follows:

Department Costs (RM)

Support department:
Administration 41,010
Maintenance 78,270
Information System 4,920
Operating Department :
Simulation 104,100
Games 146,700
Total 375,000

The following is available and can be used as possible allocation bases.

Number of Machine Number of Total Direct

employees hours Purchase Orders Labor Hours
Administration - - - -
Maintenance 2 - - -
Information System 4 1,000 - -
Simulation Dept 5 3,000 2,000 8,000
Games Dept 4 6,000 1,000 10,000

Required:

a) Allocate support department cost to each operating departments using the direct
method and calculate an overhead rate per direct labor hour for each of the operating
department.

b) Allocate support department cost to each operating departments using the step down
method and calculate an overhead rate per direct labor hour for each of the operating
department.

c) Give TWO (2) causes of the differences between the rates you calculated in (a) and
(b).
QUESTION 3

Spinning Sdn Bhd. produces two type of Secure Digital Card (SD Card) use in portable
devices, Speed Class 90MB use in digital cameras and UHS 30MB use in the android
phone. The company has two producing departments, Mechanical and Electronic. In
addition, there are three service departments, Building Service, Material Handling and
Cafeteria to support the production.

The Electronic Department is highly automated. The manufacturing costs depend on the
number of sub component in each card. In contrast, Mechanical Department relies on a
labor force, its costs depends on direct labor hour. The costs of Building Service depend
primarily on the square footage occupied. The cost of Material Handling depend primarily on
the total of component handled, and Cafeteria depend on number of employees.

Speed Class 90MB is produced in the Mechanical Department and UHS 30MB is
produced in the Electronic Department. Data about the products as follows.

Direct material Number of Direct Labor

costs (RM) Components Hours

Speed Class 90MB 75 20 4.0

UHS 30MB 60 10 1.5

The following is the data about the production and service department for the year of
2018:

Building Material Cafeteria Mechanica electronic

Service Handling l

Direct department cost 14,000 10,000 24,000 68,000 54,000

(excluding direct material
cost) (RM)

Square footage occupied - 500 1,000 4,000 2,500

Number of components - - 10 20 15

Number of employees - - - 50 30

Direct Labor Hour - - - 3,000 8,000

Required:

a) Allocate the cost of service departments using the direct method. Compute the cost per
direct labor hour in Mechanical department and the cost per component in Electronic
department

b) Allocate the cost of service departments using the step down method. Compute the
 cost per direct labor hour in Mechanical department and the cost per component in
Electronic department.

c) Using the result in (b), compute the cost per unit for Speed Class 90MB and UHS
30MB.

d) Briefly explain TWO (2) purposes of cost allocation.