Nevada Company has three producing departments (p1, p2, and p3) for which direct

Question

Nevada Company has three producing departments (p1, p2, and p3) for which direct department costs are accumulated. In January, the following indirect costs of operation were incurred. Plant manager's salary and office expense- $14,400

Plant security- 2,400

Plant nurse's salary and office expense- 3,000

Plant depreciation- 4,000

Machine Maintenance- 4,800

Plant cafeteria cost subsidy- 3,600

The following additional data have been collected for the three producing departments:

P1 P2 P3

Number of employees 10(p1) 15(p2) 5(p3)

Space occupied 2000(p1) 5000(p2) 3000(p3)

Direct labor hours 1600(p1) 4000(p2) 750(p3)

Machine hours 4800(p1) 8000(p2) 3200(p3)

Number of nurse office visits 30(p1) 35(p2) 10(p3)

a. Group the indirect cost items into cost pools based on the nature of the costs and their common basis for allocation. Identify the most appropriate allocation basis for each cost pool and determine the total January costs in the pool. (hint: a cost pool may consist of one or more cost items).

b. Allocate the cost pools directly to the three producing departments using the allocation bases selected in requirement (a).

c. How much indirect cost would be allocated to each producing department if Nevada Company were using a plant wide rate based on direct labor hours? Based on machine hours?

d. Comment on the benefits of allocating costs in pools compared with using a plantwide rate.

Explanation / Answer

a Cost Pool Cost Item Total Cost Allocation Basis/Cost Driver Total QTY Cost Driver Activity Rate Plant Admin & Supervision Plant Managers Salary & Office Expense     14,400 No of Employees             30      480.00 Security Plant Security       2,400 Space Occupied    10,000           0.24 Depreciation & Maintenance Plant Depreciation       4,000 Machine Hours    16,000           0.25 Depreciation & Maintenance Machine Maintenance       4,800 Machine Hours    16,000           0.30 Labor Welfare Cafeteria Subsidy       3,600 No of Employees             30            120 Labor Welfare Nurse's slalry & Office Exp       3,000 No of Employees             30            100 Total Cost     32,200 Activity details b Cost Allocation Allocation Cost Item Allocation Basis/Cost Driver Activity Rate P1 P2 P3 Total P1 P2 P3 Plant Managers Salary & Office Expense No of Employees     480.00            10             15                 5             30       4,800    7,200 2,400    14,400 Plant Security Space Occupied         0.24      2,000       5,000        3,000     10,000          480    1,200      720      2,400 Plant Depreciation Machine Hours         0.25      4,800       8,000        3,200     16,000       1,200    2,000      800      4,000 Machine Maintenance Machine Hours         0.30      4,800       8,000        3,200     16,000       1,440    2,400      960      4,800 Cafeteria Subsidy No of Employees     120.00            10             15                 5             30       1,200    1,800      600      3,600 Nurse's slalry & Office Exp No of Employees     100.00            10             15                 5             30       1,000    1,500      500      3,000 c Total Direct Labor Hours                                      6,350 Total Overheads                                    32,200 Plantwide rate per Direct Labor Hrs $                                  5.071 Activity details Allocation Plantwide rate/DLH P1 P2 P3 Total P1 P2 P3 Direct Labor Hrs $                                  5.071       1,600      4,000          750        6,350       8,114    20,284    3,803 d Cost pools provide more accurate basis for allocation based on the nature of the cost instead of a common base used for   plantwide rate. The basis for plantwide rate may not have any relevance with a particular cost item , like depreciation has no link to direct labor hours

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