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Cost Allocation

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Cost Allocation


October 26, 2009

Cost Allocation

12.59. EXCEL Application Exercise 12-59.

This problem is an Excel exercise. Please see Excel spreadsheet attached.

We have used both methods for allocating costs from two servicing departments: Personnel and Administrative to two producing departments: Residential and commercial.

Direct method ignores other service departments when allocating services of given department's costs to producing departments.

Step-down method recognizes that other service departments support activity in other service departments as well as in producing departments.

1. The total costs for the Residential department using the direct method-$315,750

2. Total costs for the Commercial department using the direct method-$484,250

3. The total costs for the Residential department using the step-down method-$313,500

4. The total costs for the Commercial department using the step-down method-$486,500

Residential appears to be more expensive operation using the direct method than if we use step-down method.

On a contrary Commercial appears to be more expensive when using step-down method.

I would recommend the company to use step-down method as it counts effects of other service departments provided to both service and producing departments.


Application of Overhead Using Budgeted Rates

Budgeted Actual

Pharmacy Medical Records Pharmacy Medical Records

Department overhead cost $225,000 $300,000 $217,000 $325,000

Number of prescriptions filled 90,000

Number of patient visits 60,000

Budgeted Overhead Rate per number of prescriptions filled: $225,000/90,000 $2.50

Budgeted Overhead Rate per number of patient visits $300,000/60,000 $5

Actual number of prescriptions filled 85,000

Actual number of patient visits 63,000

Overapplied/underapplied overhead -$4,500.00 -$10,000.00

1. Pharmacy overhead rate is $2.50 per number of prescriptions filled.

Medical Records Department overhead rate is $5.00 per number of patient visits.

2. Overhead costs applied to patient David Li in June 20X7 would be 2 visits X $5.00 overhead rate =$10.00. Plus 4 prescriptions X $2.50 overhead cost =$10.00. Total Overhead cost for David Li is $20.00

3. For Pharmacy Department underapplied overhead is $4,500 because the amount applied is less than amount incurred. We find out if we have overapplied or underapplied overhead by multiplying actual prescriptions filled by budgeted rate and subtracting from the result actual overhead applied.

For Medical Records Department under applied overhead is $10,000 because the amount applied is less than amount.


Sales: 12,000 units at $17 each

Actual Production 15,000

Expected volume of 18,000

Manufacturing costs incurred

Variable $120,000

Fixed $63,000

Nonmanufacturing costs incurred

Variable $24,000

Fixed $18,000

1. Operating Income using variable-costing approach

Sales $204,000

Variable cost per unit of production $10

Variable cost of goods manufactured at standard $144,000

Ending Inventory $28,800

Total variable expenses $115,200

Contribution Margin $88,800

Fixed expenses $81,000

Operating Income, variable costing $7,800

Comment: Formulas and calculations



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