Problem
Krueger Corporation provides a variety of consulting services to a diverse range of clients. The company has three service departments and two operating departments whose cost details for a typical quarter are presented below.
Service Departments
Information Systems 468,000
Administration 647,000
Legal 292,000
Operating Departments
Research 972,000
Preparation 790,000
Total $3,169,000
The existing cost allocation system is designed as follows: (1) the service department costs are allocated to the two operating departments, (2) the operating department costs are then allocated to individual jobs. Information Systems department costs are allocated to Research and Preparation using a 60:40 ratio, Administration using a 30:70 ratio, and Legal using a 50:50 ratio. The costs accumulated in the two operating departments are allocated on the basis of professional labour hours. The Research and Preparation departments recorded 9,000 and 7,500 research and preparation labour hours respectively for the quarter.
Required
1. Compute the pre-determined cost allocation rates for the two operating departments.
2. Using the rates computed in #1 above, assign the costs to Job L123 and L342. The two jobs consumed 340 and 480 research professional labour hours respectively, and 600 and 750 preparation professional labour hours respectively.
3. You have recently learnt about activity-based costing and decide to use five activity cost pools, one for each department. The additional information you have collected is as follows:
|
Activity cost pool
|
Cost driver (Allocation base)
|
Quantity of allocation base
|
|
Information Systems
|
IS time
|
14,970 hours
|
|
Administration
|
Number of consultants
|
40
|
|
Legal
|
Sales value
|
$8,000,000
|
|
Research
|
Research labour hours
|
9,000 hours
|
|
Preparation
|
Preparation labour hours
|
7,500 hours
|
4. In addition, to the professional research and preparation labour hours specified in #2 for jobs L123 and L342, they consume additional resources as follows: Resource Job L123 Job L342 IS time Number of consultants Sales value 350 2 $1,350,000 150 2 $900,000 Using the allocated rates computed in #3 above, assign the costs to the two jobs.
5. Comment on the difference in costs under the two allocation methods.