Question

Analyze Horsepower Hookup, Inc.

Horsepower Hookup, Inc., is a large automobile company that specializes in the production of high-powered trucks. The company is determining cost allocations for purposes of performance evaluation. A portion of company bonuses depends on divisions achieving cost management goals. This necessitates highly accurate support department cost allocation. Management has also stated that it has the means to implement as complex a method as necessary.

The general manager over the Mid-Size D wants to get a good idea of what factors are driving the costs of the support departments in order to make accurate cost allocations, so finding accurate support department cost drivers is important. Support department costs include Janitorial ($163,100) and Security ($285,400). The Janitorial costs vary depending on the number of vehicles produced, increasing with larger production volumes. Security costs are fixed based on the size of the lot, and do not change with respect to how many vehicles are in the lot or warehouse. Joint costs involved in producing the trucks before the split-off point where the various makes, models, and colors are produced are $946,000 for the period. All makes, models, and colors sell at relatively similar margins, but the sports models and metallic colors are normally more difficult to produce during the joint production process.

If Janitorial costs were to be allocated based on square footage, and Security costs based on asset value, what percentage of each support department’s costs would be allocated to each production department using the sequential method (allocating Security costs first) given the following:

	Square Footage	Asset Value
Janitorial Department	3,000	$ 10,000
Security Department	2,000	2,300
Production Department 1	54,000	450,000
Production Department 2	36,000	540,000

Security Department cost allocation:
Janitorial Department:	%
Production Department 1:	%
Production Department 2:	%
Janitorial Department cost allocation:
Production Department 1:	%
Production Department 2:	%

2. next question

Support department cost allocation

Blue Mountain Masterpieces produces pictures, paintings, and other home decor. The Printing and Framing production departments are supported by the Janitorial and Security departments. Janitorial costs are allocated to the production departments based on square feet, and security costs are allocated based on asset value. Information about these departments is detailed in the following table:

	Janitorial Department	Security Department	Printing Department	Framing Department
Square feet	760	1,040	4,230	4,770
Asset value	$900	$1,240	$12,390	$8,610
Department cost	$5,200	$6,600	$33,000	$29,000

Management has experimented with different support department cost allocation methods in the past. The different allocation methods did not yield large differences of cost allocation to the production departments.

Determine the total costs allocated from each support department to each production department using the method you determined in part (1).

	Printing Department	Framing Department
Janitorial Department cost allocation	$	$
Security Department cost allocation	$	$

Joint Cost Allocation—Market Value at Split-off Method

Toil & Oil processes crude oil to jointly produce gasoline, diesel, and kerosene. One batch produces 3,415 gallons of gasoline, 2,732 gallons of diesel, and 1,366 gallons of kerosene at a joint cost of $12,000. After the split-off point, all products are processed further, but the estimated market price for each product at the split-off point is as follows:

Gasoline	$2 per gallon
Diesel	1 per gallon
Kerosene	3 per gallon

Using the market value at split-off method, allocate the $12,000 joint cost of production to each product.

Joint Product	Allocation
Gasoline	$
Diesel
Kerosene
Totals	$

Answer 1

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Horsepower	Security	Janitorial	Production 1	Production 2	Total
Asset Value	2,300.00	10,000.00	450,000.00	540,000.00	1,002,300.00
Asset Value %		1.0000%	45.0000%	54.0000%	100.0000%
Square Footage	2,000.00	3,000.00	54,000.00	36,000.00	95,000.00
Square Footage %			60.0000%	40.0000%	100.0000%
Total costs	285,400.00	163,100.00	-	-	448,500.00
Security cost to be allocated- Asset Value %	(285,400.00)	2,854.00	128,430.00	154,116.00	-
Total	-	165,954.00	128,430.00	154,116.00	448,500.00
Janitorial cost to be allocated- Square Footage %		(165,954.00)	99,572.40	66,381.60
Total cost after allocation	-	-	228,002.40	220,497.60	448,500.00
Blue Mountain	Security	Janitorial	Printing	Framing	Total
Asset Value	1,240.00	900.00	12,390.00	8,610.00	23,140.00
Asset Value %		4.1096%	56.5753%	39.3151%	100.0000%
Square Footage	1,040.00	700.00	4,230.00	4,770.00	10,740.00
Square Footage %			47.0000%	53.0000%	100.0000%
Total costs	6,600.00	5,200.00	33,000.00	29,000.00	73,800.00
Security cost to be allocated- Asset Value %	(6,600.00)	271.23	3,733.97	2,594.79	-
Total	-	5,471.23	36,733.97	31,594.79	73,800.00
Janitorial cost to be allocated- Square Footage %		(5,471.23)	2,571.48	2,899.75
Total cost after allocation	-	-	39,305.45	34,494.55	73,800.00
Toll & Oil
Calculation of market value	Gasoline	Diesel	Kerosene	Total
Weight	3,415.00	2,732.00	1,366.00		A
Sell price per gallon	2.00	1.00	3.00		B
Revenue	6,830.00	2,732.00	4,098.00	13,660.00	C=A*B
Joint costs				12,000.00	D
Calculation of Allocation rate				0.88	E=D/C
	E	C	F=E*C
Allocation on the basis of market value	Allocation rate	Revenue	Allocated cost
Gasoline	0.88	6,830.00	6,000.00
Diesel	0.88	2,732.00	2,400.00
Kerosene	0.88	4,098.00	3,600.00
Total Allocated cost			12,000.00