Exercise 7.19 Fixed and Variable Cost Allocation Kumar, Inc., evaluates managers

Question

Exercise 7.19
Fixed and Variable Cost Allocation

Kumar, Inc., evaluates managers of producing departments on their ability to control costs. In addition to the costs directly traceable to their departments, each production manager is held responsible for a share of the costs of a support center, the Human Resources (HR) Department. The total costs of HR are allocated on the basis of actual direct labor hours used. The total costs of HR and the actual direct labor hours worked by each producing department are as follows:

When the capacity of the HR Department was originally established, the normal usage expected for each department was 20,000 direct labor hours. This usage is also the amount of activity planned for the two departments in Year 1 and Year 2.

Required:

1. Allocate the costs of the HR Department using the direct method and assuming that the purpose is product costing.

2. Allocate the costs of the HR Department using the direct method and assuming that the purpose is to evaluate performance.

Department A Department B Variable costs $ $ Fixed costs Total cost $ $

Explanation / Answer

Part 1)

The cost allocation for product costing purposes is given below:

________

Part 2)

The cost allocation for performance evaluation purposes is given below:

Product Costing Department A Department B Variable Costs 5,000 (20,000*.25) 5,000 (20,000*.25) Fixed Costs (100,000*.50) 50,000 (100,000*.50) 50,000 Total Cost $55,000 $55,000

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