Responsibility Accounting, Support Department

1

Chapter 13

CHAPTER 13

RESPONSIBILITY ACCOUNTING, SUPPORT DEPARTMENT

ALLOCATIONS, AND TRANSFERPRICING

24. a. From HR to Fabricating [(0.35 ÷ 0.80) × $630,000] $275,625

From Admin. to Fabricating [(0.50 ÷ 0.90) × $450,000] 250,000

Total $525,625

b. From HR to Finishing [(0.45 ÷ 0.80) × $630,000] $354,375

From Admin. to Finishing: [(0.40 ÷ 0.90) × $450,000] 200,000

Total $554,375

25.Checking:

Administration (.30 ÷ 0.80) x $540,000 $ 202,500

Human Resources(.30 ÷ 0.80) x $360,000 135,000

Accounting (.40 ÷ 0.80) x $300,000 150,000

Direct costs 630,000

$1,117,500

Savings:

Administration (.40 ÷ 0.80) x $540,000 $270,000

Human Resources(.20 ÷ 0.80) x $360,000 90,000

Accounting (.20 ÷ 0.80) x $300,000 75,000

Direct costs 337,500

$772,500

Loans:

Administration (.10 ÷ 0.80) x $540,000 $ 67,500

Human Resources(.30 ÷ 0.80) x $360,000 135,000

Accounting (.20 ÷ 0.80) x $300,000 75,000

Direct costs 675,000

$952,500

26.Administration ($540,000)

Human Resources($540,000 x 0.10) $ 54,000

Accounting($540,000 x 0.10) 54,000

Checking($540,000 x 0.30) 162,000

Savings($540,000 x 0.40) 216,000

Loans($540,000 x 0.10) 54,000

$540,000

Human Resources ($360,000 + $54,000 = $414,000)

Accounting $414,000 x (0.10 ÷ .90) $ 46,000

Checking $414,000 x (0.30 ÷ .90) 138,000

Savings$414,000 x (0.20 ÷ .90) 92,000

Loans$414,000 x (0.30 ÷ .90) 138,000

$414,000

Accounting ($300,000 + $54,000 + $46,000 = $400,000)

Checking$400,000 x (0.40 ÷ .80) $200,000

Savings$400,000 x (0.20 ÷ .80) 100,000

Loans$400,000 x (0.20 ÷ .80) 100,000

$400,000

Checking: $630,000 + $162,000 + $138,000 + $200,000 = $1,130,000

Savings: $337,500 + $216,000 + $92,000 + $100,000 = $745,500

Loans: $675,000 + $54,000 + $138,000 + $100,000 = $967,000

27.a. Human Resources ($360,000)

Administration ($360,000 x 0.10) $ 36,000

Maintenance($360,000 x 0.15) 54,000

Assembly($360,000 x 0.40) 144,000

Finishing($360,000 x 0.35) 126,000

$360,000

Administration ($558,000 + $36,000 = $594,000)

Maintenance $594,000 x (.10 ÷ 0.90) $ 66,000

Assembly$594,000 x (.50 ÷ 0.90) 330,000

Finishing $594,000 x (.30 ÷ 0.90) 198,000

$594,000

Maintenance ($170,000 + $54,000 + $66,000 = $290,000)

Assembly$290,000 x (.45 ÷ 0.80)$163,125

Finishing $290,000 x (.35 ÷ 0.80) 126,875

$290,000

b.Assembly:

(0.40 × $360,000) + [(0.5/0.9) × $594,000] + [(0.45/0.8) × $290,000] = $144,000 + $330,000 + $163,125 = $637,125

Finishing:

(0.35×$360,000) + [(0.3/0.9) × $594,000] + [(0.35/0.8) × $290,000] = $126,000 + $198,000 + $126,875 = $450,875

c.The cost allocation is affected by the order in which costs are assigned because the cost allocated from a particular service department depends on the amount of cost allocated to that service department from other service departments. The amount of costs allocated from other service departments depends on the benefits-provided ranking.

28. Admin. HR Acctg.

Administration 0.10 0.10

Human Resources 0.10 0.10

Accounting 0.10 0.10

Checking 0.30 0.30 0.40

Savings 0.40 0.20 0.20

Loans 0.10 0.30 0.20

(A) Administration = $540,000 + 0.10B + 0.10C

(B) Human Resources= $360,000 + 0.10A + 0.10C

(C) Accounting= $300,000 + 0.10A + 0.10B

B = $360,000 + 0.10($540,000 + 0.10B + 0.10C) + 0.10C

C = $300,000 + 0.10($540,000 + 0.10B + 0.10C) + 0.10B

B= $360,000 + $54,000 + 0.01B + 0.01C + 0.10C

B= $414,000 + 0.01B + 0.11C

.99 B= $414,000 + 0.11C

C= $300,000 + $54,000 + 0.01B + 0.01C + 0.10B

C= $354,000 + 0.11B + 0.01C

0.99C= $354,000 + 0.11B

C= $357,578 + 0.1111B

0.99B = $414,000 + 0.11($357,578 + 0.1111B)

0.99B = $414,000 + $39,333 + 0.0122B

0.9778B = $453,333

B = $463,625

C = $357,578 + 0.1111($463,625)

= $357,578 + 51,509

= $409,087

A = $540,000 + 0.10($463,625) + 0.10($409,087)

= $540,000 + $46,362.50 + $40,908.70

= $627,271.20

Admin. HRAcctg.Check.Sav,Loans

Direct costs $540,000 $360,000 $300,000 $ 630,000 $337,500 $ 675,000

Admin. (627,271) 62,727 62,727 188,181 250,908 62,727

HR 46,363 (463,625) 46,363 139,088 92,725 139,088

Acctg. 40,909 40,909 (409,087) 163,635 81,817 81,817

Total costs $ 0 $ 0 $ 0 $1,120,904 $762,950 $ 958,632

Note: The Administration, Human Resources, and Accounting columns do not sum to $0 because of rounding.

29.S1 = $170,000 + .40S2 + .20S3

S2 = $360,000 + .10S1 + .30S3

S3 = $600,000 + .20S1 + .30S2

a.Substitute S3 into the equations for S1 and S2:

(1)S1 = $170,000 + .40S2 + .20($600,000 + .20S1 + .30S2)

(2)S2 = $360,000 + .10S1 + .30($600,000 + .20S1 + .30S2)

Simplifying:

(1) S1= $170,000 + .40S2 + $120,000 + .04S1 + .06S2

.96S1= $290,000 + .46S2

S1= $302,083 + .48S2

(2)S2= $360,000 + .10S1 + $180,000 + .06S1 + .09S2

.91S2= $540,000 + .16S1

S2= $593,407 + .18S1

Substitute S2 into the equation for S1:

S1= $302,083 + .48($593,407 + .18S1)

S1= $302,083 + $284,835 + .09S1

.91 S1= $586,918

S1= $644,965

b.Substitute S1 ($644,965) into the original S2 and S3 equations:

(1) S2 = $360,000 + .10($644,965) + .30S3

(2) S3 = $600,000 + .20($644,965) + .30S2

Simplifying:

(1)S2= $360,000 + $64,497 + .30S3

S2= $424,497 + .30S3

(2)S3= $600,000 + $128,993 + .30S2

S3= $728,993 + .30S2

Substitute S3 into the equation for S2:

S2 = $424,497 + .30($728,993 + .30S2)

S2 = $424,497 + $218,698 + .09S2

.91S2 = $643,195

S2 = $706,808

Substitute S1 and S2 into the original equations and solve for S3:

S3 = $600,000 + .20($644,965) + .3($706,808)

S3 = $600,000 + $128,993 + $212,042

S3 = $941,035

Allocate the service department costs to the other departments:

S1S2S3RP1RP2

Direct costs $170,000 $360,000 $600,000

S1 (644,965) 64,497 128,993 $193,490 $257,986

S2 282,723 (706,808) 212,042 141,362 70,681

S3 188,207 282,311 (941,035) 376,414 94,104

To RP $ (4,035)* $ 0* $ 0 $711,266 $422,771

*off due to rounding

48. Assets # of Hours of.

Employed % Employees % Operation %

Surgery $3,948,500 53 20 20 24,850 35

In-patient 2,458,500 33 36 36 28,400 40

Out-patient 1,043,000 14 44 44 17,750 25

$7,450,000 100 71,000

Administration costs

Surgery: $5,400,000 x .53 = $2,862,000

In-patient: $5,400,000 x .33 = $1,782,000

Out-patient: $5,400,000 x .14 = $756,000

Public relations cost:

Surgery: $1,100,000 x .20 = $220,000

In-patient: $1,100,000 x .36 = $396,000

Out-patient: $1,100,000 x .44 = $484,000

Maintenance & janitorial cost:

Surgery: $1,700,000 x .35 = $595,000

In-patient: $1,700,000 x .40 = $680,000

Out-patient: $1,700,000 x .25 = $425,000

Surgery In-Patient Out-Patient

Administration $2,862,000$1,782,000$ 756,000

Public Relations 220,000 396,000 484,000

Maintenance 595,000 680,000 425,000

Total $3,677,000 $2,858,000$1,665,000

49.a.Administration Costs ($1,500,000)

Base Allocation

Accounting 15 ÷ 300 $ 75,000

Promotion 12 ÷ 300 60,000

Commercial 45 ÷ 300 225,000

Residential 210 ÷ 300 1,050,000

P. Mgmt. 18 ÷ 300 90,000

Total (rounded) $1,500,000

Accounting Costs ($990,000 + $75,000 = $1,065,000)

Base Allocation

Promotion $720,000 ÷ $3,600,000 $ 213,000

Commercial $900,000 ÷ $3,600,000 266,250

Residential $1,440,000 ÷ $3,600,000 426,000

P. Mgmt. $540,000 ÷ $3,600,000 159,750

Total (rounded) $ 1,065,000

Promotion ($720,000 + $60,000 + $213,000 = $993,000)

Base Allocation

Commercial $10,000,000 ÷ $30,000,000 $331,000

Residential $18,000,000 ÷ $30,000,000 595,800

P. Mgmt. $2,000,000 ÷ $30,000,000 66,200

$993,000

Summary of allocations:

Commercial:$225,000 + $266,250 + $331,000 = $822,250

Residential: $1,050,000 + $426,000 + $595,800 = $2,071,800

P. Mgmt.: $90,000 + $159,750+ $66,200 = $315,950

b. Commercial Residential P. Management

Revenues $10,000,000 $18,000,000 $ 2,000,000

Direct costs (10,490,000) (9,179,000) (398,400)

Indirect costs (822,250) (2,071,800) (315,950)

Income $ (1,312,250) $ 6,749,200 $ 1,285,650

The Property Management Department is the most profitable with a return on revenues of 64.3%.

50. Administration Editorial

Department Base % Base %

Admin. (A) n/a n/a 5 11.11

Editorial (E) $ 75,000 6.25 n/an/a

College Texts 600,000 50.00 25 55.56

Prof. Pubs. 525,000 43.75 15 33.33

Total $1,200,000 100.00 45 100.00 rounded

A = $225,000 + 0.1111E

E = $175,000 + 0.0625A

A = $225,000 + 0.1111($175,000 + 0.0625A)

A = $225,000 + $19,444 + 0.0069A

0.9931A = $244,444

A = $246,142

E = $175,000 + 0.0625($246,142)

E = $175,000 + $15,384

= $190,384

College

Dept. Admin. Edit. Texts Prof. Pubs.

Direct costs $225,000 $175,000 $2,250,000 $ 950,000

Admin. (246,142) 15,384 123,071 107,687

Edit. 21,154 (190,384) 105,769 63,461

Total $ 0 $ 0 $ 2,478,840 $1,121,148

Note: The Administration column does not sum to zero because of rounding.