ACC 350 Exam 1 Study Materail

Halliburton Problem

ACC 503 Name ________________________
Service Department Costing
10 Points

Halliburton’s foods division specializes in the production and distribution of freeze-dried
dinners to the military and disaster relief. The first of the two operating departments
cooks the food. The second is responsible for packaging and freeze drying the dinners.
The dinners are sold by the case, each case containing 25 dinners. Two departments
provide support for Halliburton’s operating units: Maintenance and Power. Budgeted data
for the coming quarter are given below. The company does not separate fixed and
variable costs.

--Support Departments-- ----Producing Departments----

Maintanence Power Cooking Pack & Freeze Dry

Overhead costs $340,000 $200,000 $75,000 $55,000
Machine hours - 40,000 40,000 20,000
Kilowatt-hours
Direct labor hours 20,000 - 100,000 80,000

-- 5,000 30,000

The predetermined overhead rate for cooking is computed on the basis of
machine hours; direct labor hours are used for packaging and freeze drying. The
prime costs for one case of standard dinners total $16. It takes 2 machine hours to
produce a case of dinners in the cooking department and 0.5 direct labor hours to process
a case of standard dinners in the packaging and freeze-drying department.

Recently, the Federal Emergency Management Agency (FEMA) has requested a bid on a
three-year contract that would supply standard freeze-dried dinners to disaster relief
victims. FEMA has decided that providing freeze-dried dinners was the most economical
way to supply food for these victims at a moments notice (within 24 hours).

The bidding policy of Halliburton Foods is full manufacturing costs plus 20%. Assume
that the lowest bid of other competitors is $48.80 per case.

Required:

1. Prepare bids for Halliburton Foods using each of the following allocation methods:
a. Direct method
b. Step method

2. Refer to Requirement 1. Did both methods produce winning bids? If not,
explain why. Which method most accurately reflects the cost of producing the
cases of dinners? Why?

solutions

Halliburton Foods Division--Solution

1. Direct Method --Support Departments-- ----Producing Departments----
Overhead costs Maintanence Power
$340,000 $200,000 Cooking Pack & Freeze Dry
Step Method ($340,000)
Overhead costs $75,000 $55,000
($200,000)
226,667 113,333
111,111 88,889

$412,778 $257,222

/40,000 MH /30,000 DLH

$10.32/MH $8.57/DLH

* 2.00 *.50
$20.64 $4.29

Total Overhead for one case: $24.93
Prime costs: 16.00
Total $40.93
*1.20
Bid $49.12

--Support Departments-- ----Producing Departments----
Maintanence Power Cooking Pack & Freeze Dry
$340,000 $200,000
($340,000) 136,000 $75,000 $55,000

($336,000) 136,000 68,000

186,667 149,333

$397,667 $272,333
/40,000 MH /30,000 DLH

$9.94/MH $9.08/DLH

* 2.00 *.50

$19.88 $4.54

Total Overhead for one case: $24.42
Prime costs: 16.00
Total $40.42
*1.20
Bid $48.50

2. Only the step method produced the winning bid, because it allocated costs to
Cooking and Pack & Freeze using a different methodology from the direct
method. The step method more accurately reflects the cost of producing the cases
of dinners because it considers some allocations among the support departments.

service Dept Problem
.
ACC 350
Service Department Costing

San Juan Minerals (SJM) has two service departments and two production departments.

Service Departments Production Departments

Maintenance Cafeteria Mining Processing

Overhead costs ................................$48,000 $45,000 $70,000 $130,000
Machine hours................................ 2,000 1,000 11,000 9,000

Number of employees ..............................4..0 30 400 360
Number of labor hours 1,500 1,000 5,000 15,000

1. Assuming that SJM allocates service department costs using the direct method, the total cost
allocated from Cafeteria to Mining would be closest to:
A) $21,687.
B) $15,750.
C) $23,684.
D) $22,500.

2. Assume that SJM uses the sequential method to allocate service department costs, starting with
Maintenance. The total overhead allocated from Maintenance to Mining would be closest to:
A) $25,143.
B) $22,957.
C) $51,150.
D) $16,800.

3. Using the direct method, what is the predetermined overhead rate for the Mining department if its
costs are allocated to jobs using machine hours?

4. Using the direct method, what is the predetermined overhead rate for the Processing department if
its costs are allocated to jobs using labor hours?

5. Assume that SJM will bid on job 101 that has the following requirements:
Mining Processing

Machine hours 200 150
Labor hours 100 225

Assume further that job 101 has prime costs of $3,000 and marks up its products by 25% over full
cost. Using the direct method, what is the bid price for job 101?

Problem 2

Hull Company uses two producing departments (A and B) and two service departments (S1 and
S2). The costs incurred in S1 and S2 are allocated to Departments A and B and included in their
factory overhead rates for costing products. S1 costs are allocated based on the number of
employees, and S2 costs are allocated based on the number of direct labor-hours. Production
department A costs are allocated to products based on machine hours and Production department
B costs are allocated to products based on direct labor hours. The following data are available:

Direct department costs S1 S2 A B
Number of employees $24,000 $36,000 $140,000 $235,000
Direct labor-hours
Machine hours 6 4 24 36
900 650 4,500 3,600
9,000 1,800

a. Prepare a schedule allocating the service department costs to the producing departments using
the step allocation method. Allocate the service department that has the highest departmental
costs first.

b. Determine the overhead rates for Departments A and B, based on the step method.

c. How much overhead should be allocated to product XYZ using the step method?

Product XYX

Departments A B
Direct labor hours 2 3

Machine hours 6 2

solutions

ACC 350
Service Department Costing

San Juan Minerals (SJM) has two service departments and two operating departments.

Service Departments Operating Departments

Maintenance Cafeteria Mining Processing

Overhead costs ................................$48,000 $45,000 $70,000 $130,000
Machine hours................................ 2,000 1,000 11,000 9,000

Number of employees ..............................4..0 30 400 360
Number of labor hours 5,000 15,000

Costs of the Maintenance Department are allocated on the basis of machine hours. Cafeteria costs are
allocated on the basis of number of employees. SJM does not distinguish between variable and fixed
overhead costs.

1. Assuming that SJM allocates service department costs using the direct method, the total cost

allocated from Cafeteria to Mining would be closest to:
A) $21,687.

B) $15,750.

C) $23,684. $45,000 * 400/760 = $23,684

D) $22,500.

2. Assume that SJM uses the step method to allocate service department costs, starting with

Maintenance. The total overhead allocated from Maintenance to Mining would be closest to:

A) $25,143. $48,000 * 11,000/21,000 = $25,143

B) $22,957.

C) $51,150.
D) $16,800.

3. Using the direct method, what is the predetermined overhead rate for the Mining department if its

costs are allocated to jobs using machine hours? $10.92/MH
Maint. Café. Mining Processing

$70,000 $130,000
($48,000) 26,400 21,600

($45,000) 23,684 21,316
$120,084 $172,916

/11,000 /15,000
$10.92 $11.53

4. Using the direct method, what is the predetermined overhead rate for the Processing department if
its costs are allocated to jobs using labor hours? $11.53/LH (See above)

5. Assume that SJM will bid on job 101 that has the following requirements:
Mining Processing

Machine hours 200 150
Labor hours 100 225

Assume further that job 101 has prime costs of $3,000 and marks up its products by 25% over full
cost. Using the direct method, what is the bid price for job 101?

Mining: 200 * $10.92 = $2,184
Processing: 225 * $11.53 = 2,594

Prime costs = 3,000
Sum $7,778 * 1.25 = $9,723

Problem #2

Hull Company uses two producing departments (A and B) and two service departments (S1 and
S2). The costs incurred in S1 and S2 are allocated to Departments A and B and included in their
factory overhead rates for costing products. S1 costs are allocated based on the number of
employees, and S2 costs are allocated based on the number of direct labor-hours. Production
department A costs are allocated to products based on machine hours and Production department
B costs are allocated to products based on direct labor hours. The following data are available:

Direct department costs S1 S2 A B
Number of employees $24,000 $36,000 $140,000 $235,000
Direct labor-hours
Machine hours 6 4 24 36
900 650 4,500 3,600
9,000 1,800

a. Prepare a schedule allocating the service department costs to the producing departments using
the step allocation method. Allocate the service department that has the highest departmental
costs first.

Note: Allocate S2 costs first.

Direct department costs S2 S1 A B
Overhead rates $36,000 $24,000 $140,000 $235,000
(36,000)
3,600 18,000 14,400
27,600 11,040 16,560
169,040 265,960
/ 9,000 / 3,600 Total for Product XYZ:
= 18.78 = 73.88 =334.32

*6 *3
= 112.68 = 221.64

b. Determine the overhead rates for Departments A and B, based on the step method.

See above

c. How much overhead should be allocated to product XYZ using the step method?

Product XYX

Departments A B
Direct labor hours 2 3

Machine hours 6 2

See above

Page 41

Sarah Allison Takash
Arizona State University, ACC 350, Spring 2018

Exam 1 Study Material

Time-Driven Activity Based Costing

TDABC Article Information

Background:

● Article M​ eta-Facts:​
○ Title:
■ “Time-Driven Activity-Based Costing”
○ Author:
■ Robert S. Kaplan
○ Year Published:
■ 2009

● Setting of problem:
○ 1990’s

● Company involved in problem:
○ Carolina Distributors​ = a distributor of medical supplies

The Problem:

● 1st c​ ompany loss​ in decades​ due to gross margins decrease by 1%
○ Financial-Statement Reason:
■ “Super-variable” period costs
● Specifically: SG&A expenses increased faster than Sales Revenue
○ Sales increased by 325% (to nearly $3BN)

Textbook​ r​ eferenced:​ H​ orngren’s Cost Accounting, a Managerial Emphasis, Datar and Rajan 16n​ d​ Edition, Pearson Education

Page 42

Sarah Allison Takash
Arizona State University, ACC 350, Spring 2018

Exam 1 Study Material

○ SG&A increased by 337%
○ Note: usually SG&A is thought to be fixed
○ Operating Reason:
■ Expanded services provided without making new pricing policy

The Solution:

● ABC measurement → includes “cost-to-serve”
● Time-Driven ABC

The Moral of The Story:

● Lessons learned from ABC:
○ Not all revenue is good revenue
○ Not all customers are profitable

● Traditional ABC:
○ Difficult to implement & maintain
■ Because: hard to keep information:
● Effective
● Timely
● Up-to-date

● Time-Driven ABC:
○ Overcomes difficulties associated with traditional ABC
○ Positive features:
■ Implementation --- easy & fast
■ ERP & CRM systems --- integrates well with
■ Maintenance & Updates --- inexpensive & fast
■ Enterprise-wide models --- can scale to
■ Specific features (incorporated)--- for orders, processes, suppliers & customers
■ Visibility (increased)--- of process efficiency & capacity utilization
■ Forecasting (enhanced)--- demand, order quantities, order complexity

Textbook​ r​ eferenced​: H​ orngren’s Cost Accounting, a Managerial Emphasis, Datar and Rajan 16n​ d​ Edition, Pearson Education

Page 43

Sarah Allison Takash
Arizona State University, ACC 350, Spring 2018

Exam 1 Study Material

Concepts and Terms (from the Article)

47. Super-variable

a. A variable cost that increases at a faster rate revenue increases

48. Traditional ABC

a. Uses interviews and surveys, usu. N​ OT direct observation
i. Problems:
1. Theoretically incorrect:
a. Cost-driver rates calculated assuming resources working at full
capacity
i. Because employees report productivity levels to be 100%,
ignoring idle time
2. Costly:
a. Collecting & updating data is time consuming/labor intensive
b. Storing data & running models requires expensive information system

49. Time-Driven Activity-Based Costing (TDABC)

a. Uses direct observation or interviews
b. simpler, more powerful & incorporates more complexity (than tradition ABC)
c. Parameter Estimates required:

i. Cost-rates of of supplying the resource capacities
ii. Unit-times consumed by the activities performed for products, services and

customers

Textbook​ ​referenced:​ H​ orngren’s Cost Accounting, a Managerial Emphasis, Datar and Rajan 16n​ d​ Edition, Pearson Education

Page 44

Sarah Allison Takash
Arizona State University, ACC 350, Spring 2018

Exam 1 Study Material

50. Practical capacity of resources supplied

a. Amount of time available for work done by the resource over a specified period
i. When calculating:
1. EXCLUDE:
a. Breaks
b. Training activities
2. For depts:
a. Use labor-time
3. For equip:
a. Use operating-time

51. Unit-time

a. The time required to perform a transactional activity

52. Transactional activity

a. An activity, related to a process
b. Examples

i. Process a customer order
ii. Handle customer inquiry
iii. Perform credit check

53. Cost of capacity supplied

a. Total costs associated with the resource
i. Example:
1. Dept-Costs associated with customer service dept

Textbook​ ​referenced:​ H​ orngren’s Cost Accounting, a Managerial Emphasis, Datar and Rajan 16n​ d​ Edition, Pearson Education

Page 45

Sarah Allison Takash
Arizona State University, ACC 350, Spring 2018

Exam 1 Study Material

54. Capacity-Cost Rate

a. Formula:
i. Cost of capacity supplied divided by practical capacity of resources:

Cost of capacity supplied (-or- resource cost)
Practical capacity of resources supplied (-or- available

amount of time for resource work)

55. Cost-driver rate

a. The dollar amount estimate it costs to perform one unit of transactional activity
i. Formula:
1. = (Capacity-cost rate)*(unit-time for an activity)

How-to: TDABC

Example:

Textbook​ ​referenced:​ H​ orngren’s Cost Accounting, a Managerial Emphasis, Datar and Rajan 16​nd​ Edition, Pearson Education

Page 46

Sarah Allison Takash
Arizona State University, ACC 350, Spring 2018

Exam 1 Study Material

Textbook​ r​ eferenced​: H​ orngren’s Cost Accounting, a Managerial Emphasis, Datar and Rajan 16​nd​ Edition, Pearson Education

Page 47

Sarah Allison Takash
Arizona State University, ACC 350, Spring 2018

Exam 1 Study Material

56. Steps:

a. Calculate the ​capacity-cost rate​ of a resource
i. Resource cost / available time for resource work

b. Obtain u​ nit-time estimates​ for each activity done by the resource
i. Either by direct observation or surveys

c. Calculate the ​cost-driver rate​ for each activity
i. (Capacity-cost rate) * (unit-time)

d. Calculate the t​ otal-activity time applied
i. (unit-time) * (total qty of activity)

e. Apply the rates to the activities to get each ​activity’s total cost
1. (cost-driver rate for activity) * (total qty of activity)

ii. -or-
1. (total time applied to activity) * (capacity-cost rate)

f. Sum the times applied to each activity to get the ​total-resource time applied
g. Subtract the practical capacity estimated for the resource from the total-resource time applied →

this is u​ nused-time capacity
h. Sum the costs applied to each activity to get the t​ otal-activity costs applied
i. Subtract the total-activity costs applied from the total-activity costs actual or budgeted → this is

unused-cost capacity

Textbook​ r​ eferenced​: ​Horngren’s Cost Accounting, a Managerial Emphasis, Datar and Rajan 16n​ d​ Edition, Pearson Education