Explaining the preconditions available for classification of costs or gains as being partially allocated, giving a practical example in detail.
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This is often done when the cost or gain is shared among multiple categories or projects, and a fair distribution is required. Show more…
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1.1 Scot Chemical started production in period 1 with no opening inventory. This company uses only one type of raw material to produce two products which are A and B. Products A and B are liquids and they only represent 1% of the total Scot Chemical sales revenue. Joint cost for period 1 is ÂŁ200,000. Details of the production process and sales values are given in the table below. Predictions for sales value for products A and B is not always easy to estimate but in period 1, there is already an order to buy all production since the demand for these products have increased significantly over the last months. Product | Units Produced | Sales Value (ÂŁ) --- | --- | --- A | 10,000 | 60,000 B | 15,000 | 90,000 a. Calculate the allocated costs for product A and B using sales value at the split-off point, considering that all outputs are sold in period 1 and at the split-off point. (4 marks) b. Discuss the advantages and disadvantages of allocated costs using sales value at the split-off point, considering Scot Chemical's context. (6 marks) c. Define the "Physical Measure Method" and explain whether you would recommend this method to Scot Chemical. (5 marks)
Akash M.
Distinguish between two methods of allocating common costs.
In 20X0, Haley's Department store devoted 6,000 square feet to the display and sale of clothing, 1,500 square feet to linens and bedding, and 2,000 square feet to jewelry and cosmetics. The store is 10,000 square feet, and 500 square feet were unused. The cost to maintain the store was $95,000, which was allocated among the three departments based on 9,500 square feet of occupied space. In 20X1, management put a confectionery shop in the previously unused space. However, the allocation was not updated for this change. In 20X1, the four departments' contribution margins before the allocation of building costs were: - Clothing: $72,000 - Bedding: $19,500 - Jewelry: $40,000 - Confections: $4,000 During 20X2, the four department managers each requested that they be allowed to expand their floor space. They argued that the floor space of one of the other departments should be reduced so that their own department could be expanded. Determine earnings after the building costs have been allocated for 20X1 for each department (remember that the firm allocated costs to only three departments). Suppose the managers mistakenly used the earnings after building costs were allocated to determine the contribution per unit of constrained resource (per square foot) for each department. Also assume the confections department was allocated store maintenance costs based on its use of 500 square feet. Which department would be allowed to expand, and which one should be reduced or dropped? Suppose that managers properly calculated the contribution margin per unit of constrained resource (per square foot) for part B by ignoring allocated costs. Which department would be allowed to expand, and which one would be reduced? Explain why the method in part C is better for making this decision. What are the qualitative factors related to this decision?
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