Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 20

Cost Allocation with Cost Flow Diagram

Wayne Casting, Inc., produces a product made from a metal alloy. Wayne buys the alloy from two different suppliers, Chillicothe Metals and Ames Supply, in approximately equal amounts because of supply constraints at both vendors. The material from Chillicothe is less expensive to buy, but more difficult to use, resulting in greater waste. The metal alloy is highly toxic and any waste requires costly handling to avoid environmental accidents. Last year the cost of handling the waste totaled $300,000. Additional data from last year's operations are shown below.

	Chillicothe Metals	Ames Supply
Amount of material purchased (tons)	????130	??120
Amount of waste (tons)	12.8	2.2
Cost of purchases	??$624,000	$876,000

Required

a. Allocate the cost of the waste handling to the two suppliers based on:

1. Amount of material purchased.

2. Amount of waste.

3. Cost of material purchased.

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b. Draw a cost flow diagram to illustrate your answer to item (a), part (1).

Step 1 of 11

Cost allocation

Cost allocation refers to allocating the total costs incurred to either product or division. Cost allocation is undertaken to estimate the product cost or costs incurred by division. If cost is not allocated then it would be assumed that the cost incurred by product is zero which may not be correct.