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Cost AllocationIssues
Chapter 5
Managerial Accounting
Concepts and Empirical Evidence
Manageri
al A
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Manageri
al A
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Conce
pts
and E
mpir
ical Evid
ence
Conce
pts
and E
mpir
ical Evid
ence
Single Base vs. Multiple Base Approach to Allocating Indirect Costs
Y = b0+b1X1+b2X2+…+bnXn , … Eq. 5.3
IC = f (X 1 , X 2 ,…... X n) , … Eq. 5.1
Y = B0+B1X1+B2X2+….+BnXn+ , … Eq. 5.2
Manageri
al A
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Manageri
al A
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ng
Conce
pts
and E
mpir
ical Evid
ence
Conce
pts
and E
mpir
ical Evid
ence
Vad CorporationRegression Analysis
MonthIndirect
Costs ($) YLabor
Hours (X1)Machine
Hours (X2)Machine
Setup (X3)1 16,764 1,287 1,000 7
2 19,440 1,530 1,010 10
3 15,018 1,104 986 7
4 18,960 1,446 1,154 9
5 20,148 1,494 1,024 11
6 16,902 1,235 950 9
7 16,286 1,167 1,077 8
8 19,492 1,388 922 12
9 13,276 885 991 7
10 14,694 1,000 892 7
11 19,752 1,415 1,110 1
12 14,446 964 986 18
13 17,664 1,257 880 11
14 20,432 1,523 981 11
15 13,638 953 1,023 7
16 15,448 113 1,103 7
17 13,148 958 1,041 5
18 17,616 1,319 1,045 9
19 13,826 1,056 955 6
20 17,284 1,260 1,053 7
Data Summary
Estimated Model:
Y = 1,446.22 + 8.38 X1 + 1.68 X2 + 398.56 X3
^
Manageri
al A
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Manageri
al A
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Conce
pts
and E
mpir
ical Evid
ence
Conce
pts
and E
mpir
ical Evid
ence
Data Summary of Job # 33Data Summary of Job # 33Direct material costs $ 2,000
Direct labor costs $ 1,700
Machine hours 1,000
Machine set-ups 4
Direct labor hours 150Units produced 100
Vad CorporationSingle vs. Multiple Base Cost Allocation
Manageri
al A
ccou
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ng
Manageri
al A
ccou
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ng
Conce
pts
and E
mpir
ical Evid
ence
Conce
pts
and E
mpir
ical Evid
ence
Single BaseSingle Base Direct MaterialDirect Material $ $
2,000.002,000.00 Direct labor Direct labor $ 1,700.00$ 1,700.00
CostsCosts Indirect CostIndirect Cost $ 2,100.00$ 2,100.00
Allocated ($14.00 * 150)Allocated ($14.00 * 150)
Total CostsTotal Costs $ 5,800.00$ 5,800.00
Unit CostsUnit Costs $ 58.00$ 58.00
Vad CorporationSingle vs. Multiple Base Cost Allocation
Multiple baseMultiple base Direct MaterialDirect Material $ $
2,000.002,000.00 Direct labor Direct labor $ 1,700.00$ 1,700.00
CostsCosts Indirect CostIndirect Cost $ 4,712.02$ 4,712.02
AllocatedAllocated
Total CostsTotal Costs $ 8,412.02$ 8,412.02
Unit CostsUnit Costs $ 84.12$ 84.12[180.78 + 8.38*(150) +
1.68*(1,000) + 398.56*(4)]
Manageri
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Manageri
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ccou
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ng
Conce
pts
and E
mpir
ical Evid
ence
Conce
pts
and E
mpir
ical Evid
ence
Cost Flow with Reciprocal Service Dept.
P1Direct Costs F/GP2
… …Work in Progress … …
Indirect Costs
S2
S1:
:
:
:
:
:
Manageri
al A
ccou
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ng
Manageri
al A
ccou
nti
ng
Conce
pts
and E
mpir
ical Evid
ence
Conce
pts
and E
mpir
ical Evid
ence
Joint Costs & Joint Products
Joint Product
Joint Product
Split-offPoint
Joint Costs
Separable Costs
Separable Costs
Manageri
al A
ccou
nti
ng
Manageri
al A
ccou
nti
ng
Conce
pts
and E
mpir
ical Evid
ence
Conce
pts
and E
mpir
ical Evid
ence
West CompanyJoint Cost Illustration
A. Net Realizable Value Method
TOTAL
Revenues $270
PRODUCT A PRODUCT B
$870$600
Product:A: 400* $ 1.50 = $600B: 600* $ 0.45 = $270
Manageri
al A
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Manageri
al A
ccou
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ng
Conce
pts
and E
mpir
ical Evid
ence
Conce
pts
and E
mpir
ical Evid
ence
West CompanyJoint Cost Illustration
A. Net Realizable Value Method
TOTAL
Revenues
Separable Costs
$270
30
PRODUCT A PRODUCT B
$870
70
$600
40
Product:A: 400* $ 0.10 = $40B: 600* $ 0.05 = $30
Manageri
al A
ccou
nti
ng
Manageri
al A
ccou
nti
ng
Conce
pts
and E
mpir
ical Evid
ence
Conce
pts
and E
mpir
ical Evid
ence
West CompanyJoint Cost Illustration
A. Net Realizable Value Method
800240
Profi ts
J oint Costs ($415- $5) 410
TOTAL
Revenues
Separable Costs
$270
30
PRODUCT A PRODUCT B
$870
70
Net Realizable Value
$600
40
560
By-Product Revenue:$0.10 * 50 lbs. = $ 5
Manageri
al A
ccou
nti
ng
Manageri
al A
ccou
nti
ng
Conce
pts
and E
mpir
ical Evid
ence
Conce
pts
and E
mpir
ical Evid
ence
West CompanyJoint Cost Illustration
A. Net Realizable Value Method
800240
Profi ts
J oint Costs ($415- $5) 287 123 410
TOTAL
Revenues
Separable Costs
$270
30
PRODUCT A PRODUCT B
$870
70
Net Realizable Value
$600
40
560
Product A:560 / 800 = 70%70 % * 410 = $287
Product B:240 / 800 = 30%30 % * 410 = $123
Manageri
al A
ccou
nti
ng
Manageri
al A
ccou
nti
ng
Conce
pts
and E
mpir
ical Evid
ence
Conce
pts
and E
mpir
ical Evid
ence
West CompanyJoint Cost Illustration
A. Net Realizable Value Method
Net Realizable Value
$600
40
560
TOTAL
Revenues
Separable Costs
$270
30
PRODUCT A PRODUCT B
$870
70
800240
Profi ts
J oint Costs ($415- $5) 287 123 410
273 117 390
Manageri
al A
ccou
nti
ng
Manageri
al A
ccou
nti
ng
Conce
pts
and E
mpir
ical Evid
ence
Conce
pts
and E
mpir
ical Evid
ence
West CompanyJoint Cost Illustration
A. Net Realizable Value Method
B. Physical Units Method
273 117 390
$600 $270 $870
PRODUCT B TOTAL
J oint Costs ($415- $5) 287 123 410
TOTAL
Revenues
Separable Costs
$270
30
PRODUCT A PRODUCT B
$870
70
70
Net Realizable Value
$600
40
560
PRODUCT A
800240
Profi ts
Revenues
Net Realizable Value 560 240
Separable Costs 40 30
800
J oint Costs ($415- $5)
Profi ts
Manageri
al A
ccou
nti
ng
Manageri
al A
ccou
nti
ng
Conce
pts
and E
mpir
ical Evid
ence
Conce
pts
and E
mpir
ical Evid
ence
West CompanyJoint Cost Illustration
A. Net Realizable Value Method
B. Physical Units Method
273 117 390
$600 $270 $870
PRODUCT B TOTAL
J oint Costs ($415- $5) 287 123 410
TOTAL
Revenues
Separable Costs
$270
30
PRODUCT A PRODUCT B
$870
70
70
Net Realizable Value
$600
40
560
PRODUCT A
800240
Profi ts
Revenues
Net Realizable Value 560 240
Separable Costs 40 30
800
J oint Costs ($415- $5) 410
Profi ts
Manageri
al A
ccou
nti
ng
Manageri
al A
ccou
nti
ng
Conce
pts
and E
mpir
ical Evid
ence
Conce
pts
and E
mpir
ical Evid
ence
West CompanyJoint Cost Illustration
A. Net Realizable Value Method
B. Physical Units Method
273 117 390
$600 $270 $870
PRODUCT B TOTAL
J oint Costs ($415- $5) 287 123 410
TOTAL
Revenues
Separable Costs
$270
30
PRODUCT A PRODUCT B
$870
70
70
Net Realizable Value
$600
40
560
PRODUCT A
800240
Profi ts
Revenues
Net Realizable Value 560 240
Separable Costs 40 30
800
J oint Costs ($415- $5) 164 246 410
Profi ts
# of Product A:400 / 1000 = 40%40 % * 410 = $164
# of Product B:600 / 1000 = 60%60 % * 410 = $246
Manageri
al A
ccou
nti
ng
Manageri
al A
ccou
nti
ng
Conce
pts
and E
mpir
ical Evid
ence
Conce
pts
and E
mpir
ical Evid
ence
West CompanyJoint Cost Illustration
A. Net Realizable Value Method
B. Physical Units Method
273 117 390
$600 $270 $870
PRODUCT B TOTAL
J oint Costs ($415- $5) 287 123 410
TOTAL
Revenues
Separable Costs
$270
30
PRODUCT A PRODUCT B
$870
70
70
Net Realizable Value
$600
40
560
PRODUCT A
800240
Profi ts
Revenues
Net Realizable Value 560 240
Separable Costs 40 30
800
J oint Costs ($415- $5) 164 246 410
Profi ts $396 ($6) $390
Manageri
al A
ccou
nti
ng
Manageri
al A
ccou
nti
ng
Conce
pts
and E
mpir
ical Evid
ence
Conce
pts
and E
mpir
ical Evid
ence
West CompanyJoint Cost Illustration
A. Net Realizable Value Method
B. Physical Units Method
Profi ts $396 ($6) $390
800
J oint Costs ($415- $5) 164 246 410
Revenues
Net Realizable Value 560 240
Separable Costs 40 30 70
Net Realizable Value
$600
40
560
TOTAL
Revenues
Separable Costs
$270
30
PRODUCT A PRODUCT B
$870
70
PRODUCT A
800240
Profi ts
J oint Costs ($415- $5) 287 123 410
273 117 390
$600 $270 $870
PRODUCT B TOTAL
