Accounting: Allocation of Costs
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Allocation of Costs
Analyze the following scenario: Jump Hospital currently allocates all maintenance department costs based on departmental square feet. However, the manager of the pharmacy department has suggested that an ABC approach be used for the portion of the maintenance department costs that relate to repairing equipment. Her contention is that the pharmacy has relatively little equipment that breaks. However, it must subsidize many high-tech departments that require expensive equipment repairs. Using the tables below, calculate the maintenance cost assigned to the pharmacy using the existing method and using an ABC approach. Clearly label your calculations in your analysis. Respond to at least two of your classmates’ postings.
|
Maintenance Costs | |||
|
Routine Maintenance |
Repairs |
Total | |
Volume (Square Feet) | 100,000 | 800 | |
Labor Hours | 10,000 | 4000 |
14,000 |
Labor Cost/Hour | $12.00 | $18.00 |
$13.71 |
Supplies | $20,000 |
$80,000 |
$100,000 |
|
Administration |
$15,000 |
|
Department Information | |||
|
Pharmacy |
All Other Departments |
Total | |
Square Feet | 2,000 |
98,000 |
100,000 |
Volume of Repairs | 3 |
797 |
800 |
Hours of Repairs | 6 |
3,994 |
4,000 |
|
Supplies Used for Repairs |
$200 |
$79,800 |
$80,000 |
Investment Decision
Analyze the following scenario: Duncombe Village Golf Course is considering the purchase of new equipment that will cost $1,200,000 if purchased today and will generate the following cash disbursements and receipts. Should Duncombe pursue the investment if the cost of capital is 8 percent? Why? Clearly label your calculations in your analysis. You must respond to at least two of your classmates’ postings to receive full credit.
|
Year |
Cash Receipts |
Cash Disbursements |
Net Cash Flow |
|
1 |
1,000,000 |
500,000 |
500,000 |
|
2 |
925,000 |
475,000 |
450,000 |
|
3 |
800,000 |
450,000 |
350,000 |
|
4 |
750,000 |
430,000 |
320,000 |
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