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

Exercise 21

Plantwide versus Department Allocation

Munoz Sporting Equipment manufactures baseball bats and tennis rackets. Department B produces the baseball bats, and Department T produces the tennis rackets. Munoz currently uses plantwide allocation to allocate its overhead to all products. Direct labor cost is the allocation base. The rate used is 200 percent of direct labor cost. Last year, revenue, materials, and direct labor were as follows:

	Baseball Bats	Tennis Rackets
Revenue	$1,350000	$900,000
Direct labor	250000	125,000
Direct materials	550,000	275,000

Required

a.Compute the profit for each product using plantwide allocation.

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b.Maria, the manager of Department T, was convinced that tennis rackets were really more profitable than baseball bats. She asked her colleague in accounting to break down the overhead costs for the two departments. She discovered that had department rates been used, Department B would have had a rate of 150 percent of direct labor cost and Department T would have had a rate of 300 percent of direct labor cost. Recompute the profits for each product using each department's allocation rate (based on direct labor cost).

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c.Why are the results different in requirements (a) and (b)?

Step 1 of 5

a.

The cost poll is entire plant in the plant wide allocation method. In this method only one overhead allocation rate assigned to all departments in a particular plant. Generally, a word plant refers to multidepartment segment, store, and university. These concepts of plant wide allocation can be used to both the manufacturing and nonmanufacturing organizations.

Compute the profit for the each product using plant wide allocation:

Profit is calculated as follows using plant wide allocation method for both products.

Details	Baseball bats	Tennis Rackets
Revenue (a)	$ 1,350,000	$ 900,000
Direct labor	$ 250,000	$ 125,000
Direct material	$ 550,000	$ 275,000
Total direct cost	$ 800,000	$ 400,000
Overhead	$ 500,000	$ 250,000
Total overhead	$ 500,000	$ 250,000
Total cost (b)	$ 1,300,000	$ 650,000
Profit (a)-(b)	$ 50,000	$ 250,000