Acc346 Managerial Accounting: Week 4 Homework (P6-2, P6-6, P7-4)

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Acc346 Managerial Accounting
Week 4 Homework (P6-2, P6-6, P7-4)

PROBLEM 6-2. Number of Cost Pools
Ball O’Fluff Company manufactures and ships children’s stuffed animals across the nation. The following are profit statements for the company’s two lines of business:
Stock Stuffed Animals (Stock) Custom Stuffed Animals (Custom)
Sales 6,500,000 5,000,000
Less direct costs 2,500,000 3,200,000
Less allocated costs 2,000,000 2,000,000
Income (loss) before taxes $2,000,000 $(200,000)

Costs that are easily associated with each line of business are included in the direct costs. Allocated costs include costs that are not directly traced to the business units. These costs include employee benefits, rent, telecommunications costs, and general and administrative costs, such as the salary of the CEO of Ball O' Fluff.
At the start of 2011, allocated costs were estimated as follows:
Employee benefits 1,000,000
Rent 1,500,000
Telecommunications 500,000
General and administrative costs 1,000,000
Total $4,000,000

In the past, allocations have been based on headcount (the number of employees in each business unit). There were 240 employees in Stock and 80 employees in Custom. The new controller of Ball O' Fluff believes that the key driver of employee benefits and telecommunications costs is headcount. However, rent is driven by space occupied, and general and administrative costs are driven by relative sales. Ball O' Fluff rents 20,000 square feet; approximately 10,000 is occupied by Stock employees and 10,000 by Custom personnel.

a. Prepare profits reports for stock and customs, assuming the company allocates costs using headcount, space occupied and sales as allocation bases. Compare the new levels of profit to the levels that result using a single allocation base (headcount). Round the two decimal places.
b. Which provides the best information on profitability; a single overhead cost pool with head count as the allocation base or multiple cost pools using headcount, sales, and space occupied?

PROBLEM 6-6. Allocating Service Department Costs
World Airlines has three service departments: (1) ticketing, (2) baggage handling, and (3) engine maintenance. The service department costs are estimated for separate cost pools formed by department and are allocated to two revenue-producing departments: (1) domestic flights and (2) international flights. World does not differentiate between fixed and variable costs in making allocations. The following data relate to the allocations:
Budgeted Data
Costs Air Miles
Ticketing 5,000,000
Baggage handling 3,000,000
Engine maintenance 7,000,000
Domestic flights 6,000,000
International flights 24,000,000

a. Allocate the service department costs to the revenue-producing departments using air miles as the allocation base.
b. Evaluate the cause-and-effect relationship resulting from the use of air miles as the allocation base. In which of the cost pools do you think the cause-and-effect relationship is the strongest? Suggest alternative allocation bases for the two remaining cost pools with the weakest cause-and-effect relationship.

PROBLEM 7-4. Make-or-Buy Decision
For most construction projects, Bradley Heating and Cooling buys sheet metal and forms the metal into heating/cooling ducts as needed. The company estimates the costs of making and installing ductwork for the Kerry Park shopping mall to be as follows:
Materials 35,000
Labor to form ductwork 3,000
Labor to install ductwork 9,000
Miscellaneous variable costs 1,500
Fixed costs allocated based on labor hours 3,000
Total cost $51,500
The fixed costs relate to the company’s building, equipment, and office staff. The company plans to bill the Kerry Park developer $68,000 for services. Bradley is currently behind schedule on other projects and is paying a late penalty of $1,200 per day. Walt Bradley, the owner of Bradley Heating and Cooling, is considering ordering prefabricated ductwork for the Kerry Park job. The prefabricated ductwork will cost $40,000 (including the cost of sheet metal). If Walt buys the prefabricated ductwork, he’ll be able to reassign workers to another project and avoid five days of late fees.

Should Bradley make the ductwork or buy it prefabricated?
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