The paper "Management Accounting Issues" is a wonderful example of an assignment on finance and accounting. Calculation of material handling rate that Eloise Smith’ s predecessorFor government contracts, rate = (Government direct materials cost/Total direct material cost=$2,006,000/ ($2,006,000 + 874,000)= ($2,006,000/$2,880,000)100%= 69.65%Thus, government contracts would have been allocated 69.65% of the material handling costs. Costs under old allocation formula = 69.65% *288,000 = $200,600 for government contractsBut there are also costs for high-dollar, low-volume government purchases includingAnnual salary $36,000An employee on cost$7,200Phone cost$2,800Total$46,000Thus, total government contracts cost =$200,600+46,000 = $246,600For commercial contracts, rate = Commercial direct material costs/Total direct material cost= ($874,000/$2,880,000)*100%=30.35%Thus, commercial contracts would have been allocated 30.35% of the material handling costsCosts under old allocation formula = ($288,000*30.35%) =$874,000Revised material handling costs to be allocated on a per purchase order basisThe allocation rate for: Government contracts = (Government contract orders/Total orders)*Material handling costs= (80,000/242,000)* 288,000= $95,207Commercial contracts = (Commercial contract orders/Total orders)*Material handling costs= (156,000/242,000)*288,000= $185,653Support departments =(total orders support departments/Total orders)*Material handling costs= (1,800+ 2,700 +500 +1,000)/242,000)*288,000= (6,000/242,000)*288,000=$7,140NB// Support department costs are reallocated as follows; Government = (Government orders/ (Government +Commercial orders)*Support departments allocation= (80,000/ (80,000+156,000)*7,140= (80,000/236,000)*7,140=$2,420Add initial allocation = $2,420 +$95,207Total government allocation =$97,627Add high-dollar, low-volume government costs = $97,627 + $46,000= $143,627Commercial = Commercial orders/ (Government +Commercial orders)*Support departments allocation= (156,000/236,000)*7,140= $4,120Add initial allocation = $4,120 +185,653Total commercial allocation = $190,373Purchase orders might be a more reliable cost driver than a dollar amount of direct material as it allocates costs more fairly.
This is because a single order might be expensive but incur the same cost as a cheap order in handling the materials. In other words, though the government orders are expensive, they are low volume meaning that they require few orders.
ReferencesMerchant, K2011, Management control systems, London, Rutledge.