IBA

Accounting in Multi-
National Enterprises

Tutorial 4 Exercise Solutions

 Accounting in Multi-National Enterprises

Exercises
Review –Cost concepts (Accounting 1.5)
Job costing –exercise 3.21
Process costing –exercises 4.22 and 4.23
Supporting department costs–exercise 5.18
 REVIEW: COST CONCEPTS (ACCOUNTING 1.5)

Directly attributable to cost objects?

Yes No

Variable Variable
direct costs indirect costs
Yes
E.g., material and E.g., electricity and
labor costs gas bill
Vary depending on
cost objects?
Fixed Fixed
direct costs indirect costs
No
E.g., special license E.g., rent, security,
for a product insurance

3
REVIEW: COST CONCEPTS (ACCOUNTING 1.5)
Anything for which separate
measurement is desired
(e.g., products, services, dept.)
Directly attributable to
Direct cost objects
Costs
TRACING

Cost
Costs Object

ALLOCATING
Indirect
Costs Allocated to cost objects
(Overhead) using cost drivers

Any factor that is (part of) the root

cause of why a cost occurs
Exercise 3.21 Job costing, accounting for manufacturing
overhead, budgeted rates (page 83)

Giannacopoulos SA uses a job-costing system at its Korinthos plant. The plant

has a Machining Department and an Assembly Department. Its job-costing
system has two direct-cost categories (direct materials and direct
manufacturing labour) and two manufacturing overhead cost pools (the
Machining Department, allocated using actual machine-hours, and the
Assembly Department, allocated using actual labour cost). The 2019 budget
for the plant is as follows:
Machining Assembly
Department Department
Manufacturing overhead € 1 800 000 € 3 600 000
Direct manufacturing labour cost € 1 400 000 € 2 000 000
Direct manufacturing labour-hours 100 000 200 000
Machine-hours 50 000 200 000
 Exercise 3.21 Job costing, accounting for manufacturing
overhead, budgeted rates (page 83)

Required:
1. Present an overview diagram of Giannacopoulos’s job-costing system. What is
the budgeted overhead rate that should be used in the Machining Department?
In the Assembly Department?
2. During the month of February, the cost record for Job 494 shows the following:
Machining Assembly
Department Department
Direct material used € 45 000 € 70 000
Direct manufacturing labour cost € 14 000 € 15 000
Direct manufacturing labour-hours 1 000 1 500
Machine-hours 2 000 1 000

What is the total manufacturing overhead allocated to Job 494?

3. Balances at the end of 2019 are as follows:
Machining Assembly
Department Department
Manufacturing overhead incurred € 2 100 000 € 3 700 000
Direct manufacturing labour cost - € 2 200 000
Machine-hours 55 000 -
Calculate the under-or overallocated manufacturing overhead for each department.
 Exercise 3.21 Job costing, accounting for manufacturing
overhead, budgeted rates (page 83)

Machining overhead rate: Assembly overhead rate:

€ 1,800,000/50,000 hrs € 3,600,000/€ 2,000,000
= € 36/mach.hr. = 180%
 Exercise 3.21 Job costing, accounting for manufacturing
overhead, budgeted rates (page 83)
Machining Assembly
Department Department
2. Total Manufacturing Overhead job 494: Direct material used € 45 000 € 70 000
Direct manufacturing labour cost € 14 000 € 15 000
Direct manufacturing labour-hours 1 000 1 500
Machine-hours 2 000 1 000

Machining: 2000 hrs x € 36/hr = € 72,000

Total: € 99,000
Assembly: € 15,000 x 180% = € 27,000

3. Under/Over allocation Manufacturing Overhead

Machining Assembly
Department Department
Manufacturing overhead incurred € 2 100 000 € 3 700 000
Direct manufacturing labour cost - € 2 200 000
Machining: Machine-hours 55 000 -
Actual MOH: € 2,100,000
Underallocation € 120,000
Allocated: € 36 x 55,000 hrs = € 1,980,000
Assembly:
Actual MOH: € 3,700,000
Overallocation € 260,000
Allocated: 180% x € 2,200,000 = € 3,960,000
 Exercise 4.22 Weighted-average method (question 1 only)

Sligo Toys Ltd manufactures one type of wooden toy figure. It buys wood as its direct material for
the Forming Department. The toys are transferred to the Finishing Department, where they are
hand-shaped and metal is added to them. Sligo Toys uses the weighted-average method of process
costing. Consider the following data for the Forming Department in April 2018:

Physical units Direct Conversion

(missiles) materials costs
Work in progress, 1 April 300 € 7 500 € 2 125
Started during April 2 200
Completed during April 2 000
Work in progress, 30 April 500
Costs added during April € 70 000 €42 500
Degree of completion rates for work in progress units on 1 April are 100% for direct materials and
40% for conversion costs. Degree of completion rates for work in progress units on 30 April are
100% for direct materials and 25% for conversion costs.
Required:
1. Summarize the total Forming Department costs for April 2018, and assign these costs to units
completed (and transferred out) and to units in closing work in progress using the weighted
average method.
 Exercise 4.22 Weighted-average method (question 1 only)

Required:
1. Summarize the total Forming Department costs for April 2018, and assign these costs to units
completed (and transferred out) and to units in closing work in progress using the weighted
average method.
Total costs to account for:
Direct materials: € 7 500 + € 70 000 = € 77 500
Conversion costs: € 2 125 + € 42 500 = € 44 625

Equivalent units
Physical units Direct Conversion
(missiles) materials costs
Work in progress, 1 April 300
Started during April 2 200
Completed during April 2 000 2000 2000
Work in progress, 30 April 500 500 (500 x 0.25) = 125
2500 2125
Degree of completion rates for work in progress units on 1 April are 100% for direct materials and
40% for conversion costs. Degree of completion rates for work in progress units on 30 April are
100% for direct materials and 25% for conversion costs.
 Exercise 4.22 Weighted-average method (question 1 only)

Required:
1. Summarize the total Forming Department costs for April 2018, and assign these costs to units
completed (and transferred out) and to units in closing work in progress using the weighted
average method.
Total costs to account for:
Direct materials: € 7 500 + € 70 000 = € 77 500
Conversion costs: € 2 125 + € 42 500 = € 44 625
€ 122 125
Equivalent units:
Completed and transferred out: 2000 (direct materials & conversion costs)
Work in progress, end April: 500 (direct materials); 125 (conversion costs)
Cost allocation per equivalent unit:
Direct materials: € 77 500 / 2500 = € 31
Conversion costs: € 44 625 / 2125 = € 21
Costs assigned:
Completed and transferred out: (2000 x € 31) + (2000 x € 21) =
€ 62 000 + € 42 000 = € 104 000
Work in progress, end April: (500 x € 31) + (125 x € 21) = Total assigned € 122 125
€ 15 500 + € 2 625 = € 18 125
 Exercise 4.23 FIFO method (additional question to 4.22)

Sligo Toys Ltd manufactures one type of wooden toy figure. It buys wood as its direct material for
the Forming Department. The toys are transferred to the Finishing Department, where they are
hand-shaped and metal is added to them. Sligo Toys uses the weighted-average method of process
costing. Consider the following data for the Forming Department in April 2018:

Physical units Direct Conversion

(missiles) materials costs
Work in progress, 1 April 300 € 7 500 € 2 125
Started during April 2 200
Completed during April 2 000
Work in progress, 30 April 500
Costs added during April € 70 000 €42 500
Degree of completion rates for work in progress units on 1 April are 100% for direct materials and
40% for conversion costs. Degree of completion rates for work in progress units on 30 April are
100% for direct materials and 25% for conversion costs.

Required:
How will using the FIFO method instead of the weighted average method change the assigned costs
to units completed and units in closing work in progress?
 Exercise 4.23 FIFO method (additional question to 4.22)

Required:
How will using the FIFO method instead of the weighted average method change the assigned costs
to units completed and units in closing work in progress?

Total costs to account for:

Direct materials: € 7 500 + € 70 000 = € 77 500
Conversion costs: € 2 125 + € 42 500 = € 44 625

Equivalent units
Physical units Direct Conversion
(missiles) materials costs
Work in progress, 1 April 300 0 (300 x 0.60) = 180
Started during April 2 200
Completed during April 2 000 1700 1700
Work in progress, 30 April 500 500 (500 x 0.25) = 125
2200 2005
Degree of completion rates for work in progress units on 1 April are 100% for direct materials and
40% for conversion costs. Degree of completion rates for work in progress units on 30 April are
100% for direct materials and 25% for conversion costs.
 Exercise 4.23 FIFO method (additional question to 4.22)

Required:
How will using the FIFO method instead of the weighted average method change the assigned costs
to units completed and units in closing work in progress?
Total costs to account for:
Direct materials: € 7 500 + € 70 000 = € 77 500
Conversion costs: € 2 125 + € 42 500 = € 44 625
€ 122 125
Cost allocation per equivalent unit (current period only):
Direct materials: € 70 000 / 2200 = € 31,82
Conversion costs: € 42 500 / 2005 = € 21,20

Costs assigned:
Completed and transferred out: € 7 500 + € 2 125 (work in progress costs begin April)
€ 21,20 x 180 (remaining conversion costs)
1700 x € 31,82 + € 21,20 x 1700 (remaining 1700 units costs)
Total: € 103566,28
Work in progress, end April: (500 x € 31,82) + (125 x € 21,20) = Total assigned € 122 125
Total: € 18 558,72
 Exercise 4.23 FIFO method (additional question to 4.22)

Required:
How will using the FIFO method instead of the weighted average method change the assigned costs
to units completed and units in closing work in progress?
Total costs to account for:
Direct materials: € 7 500 + € 70 000 = € 77 500
Conversion costs: € 2 125 + € 42 500 = € 44 625
€ 122 125
Cost assignment Weighted-average:
Completed and transferred out: € 104 000
Total assigned € 122 125
Work in progress, end April: € 18 125

Cost assignment FIFO:

Completed and transferred out: € 103566,28
Total assigned € 122 125
Work in progress, end April: € 18 558,72

Rate of completion:
Work in progress, begin April: 100 direct material, 40% conversion costs
Work in progress, end April: 100% direct material, 25% conversion costs
 Exercise 5.18 – Support department cost allocation; direct and
step-down methods (page 148)

Olympiakos SA provides outsourcing services and advice to both government and

corporate clients. For costing purposes, Olympiakos classifies its departments into two
support departments (Administrative & Human Resources and Information Systems)
and two operating departments (Government Consulting & Corporate Consulting). For
the first quarter of 2018, Olympiakos incurs the following costs in its four
departments:
Administrative/Human Resources (A/HR) € 600 000
Information Systems (IS) € 2 400 000
Government Consulting (GOVT) € 8 756 000
Corporate Consulting (CORP) € 12 452 000

The actual level of support relationships among the four departments for the first
quarter of 2018 was:
Used by
A/HR IS GOVT CORP
Supplied A/HR - 25% 40% 35%
by IS 10% - 30% 60%
The Administrative/Human Resource support percentages are based on headcount.
The Information Systems support percentages are based on actual hours of computer
time used.
Exercise 5.18 – Support department cost allocation; direct and
step-down methods (page 148)

Required:
1. Allocate the two support department costs to the two operating departments
using the following methods:
a. Direct method
b. Step-down method (allocate Administrative/Human Resources first)
c. Step-down method (allocate Information Systems first).
2. Compare and explain differences in the support department costs allocated to
each operating department.
3. What criteria could determine the sequence for allocating support departments
using the step-down method? What criterion should Olympiakos use if
government consulting jobs require the step-down method?
4. How would the allocation of the support department costs to the two operating
departments change when the company would use the reciprocal method?
Exercise 5.18 – Support department cost allocation; direct and
step-down methods (page 148)

1a. Direct method

Used by
A/HR IS GOVT CORP
Supplied A/HR - 25% 40% 35%
by IS 10% - 30% 60%

Costs support departments:

Administrative/Human Resources: € 600 000
Information Systems: € 2 400 000

Cost allocation rates:

Administrative/Human Resources: 40 / 75 (GOVT); 35 / 75 (CORP)
Information Systems: 30 / 90 (GOVT); 60 / 90 (CORP)

Allocation support departments costs to operational departments:

Administrative/Human Resources: € 600 000
GOVT: (40/75) * € 600 000 = € 320 000
CORP: (35/75) * € 600 000 = € 280 000 Total GOVT:
Total CORP: Information Systems: € 2 400 000 € 1 120 000
€ 1 880 000 GOVT: (30/90) * € 2 400 000 = € 800 000
CORP: (60/90) * € 2 400 000 = € 1 600 000
Exercise 5.18 – Support department cost allocation; direct and
step-down methods (page 148)

1b. Step-down method (A/HR first)

Used by
A/HR IS GOVT CORP
Supplied A/HR - 25% 40% 35%
by IS 10% - 30% 60%

Costs support departments:

Administrative/Human Resources: € 600 000
Information Systems: € 2 400 000
Cost allocation rates:
Administrative/Human Resources: 25 / 100 (IS); 40 / 100 (GOVT); 35 / 100 (CORP)
Information Systems: 30 / 90 (GOVT); 60 / 90 (CORP)

Allocation support departments costs to operational departments:

Administrative/Human Resources: € 600 000
IS: (25/100) * € 600 000 = € 150 000
GOVT: (40/100) * € 600 000 = € 240 000
CORP: (35/100) * € 600 000 = € 210 000 Total GOVT:
Total CORP: Information Systems: € 2 550 000 € 1 090 000
€ 1 910 000 GOVT: (30/90) * € 2 550 000 = € 850 000
CORP: (60/90) * € 2 550 000 = € 1 700 000
Exercise 5.18 – Support department cost allocation; direct and
step-down methods (page 148)

1c. Step-down method (IS first)

Used by
A/HR IS GOVT CORP
Supplied A/HR - 25% 40% 35%
by IS 10% - 30% 60%

Costs support departments:

Administrative/Human Resources: € 600 000
Information Systems: € 2 400 000
Cost allocation rates:
Information Systems: 10 / 100 (AH/R); 30 / 100 (GOVT); 60 / 100 (CORP)
Administrative/Human Resources: 40 / 75 (GOVT); 35 / 75 (CORP)

Allocation support departments costs to operational departments:

Information Systems: € 2 400 000
AH/R: (10/100) * € 2 400 000 = € 240 000
GOVT: (30/100) * € 2 400 000 = € 720 000
CORP: (60/100) * € 2 400 000 = € 1 440 000 Total GOVT:
Total CORP: Administrative/Human Resources: € 840 000 € 1 168 000
€ 1 832 000 GOVT: (40/75) * € 840 000 = € 448 000
CORP: (35/75) * € 840 000 = € 392 000
 Exercise 5.18 – Support department cost allocation; direct and
step-down methods (page 148)

2. Comparison of methods

GOVT CORP
Direct method € 1 120 000 € 1 880 000
Step-down (A/HR first) € 1 090 000 € 1 910 000
Step-down (IS first) € 1 168 000 € 1 832 000

€ 3 000 000

• Direct method ignores any services provided by support departments to other

support departments.
• The step-down methode partially recognizes services to other support departments.
• Outcome dependent on support department costs and usage percentages
Exercise 5.18 – Support department cost allocation; direct and
step-down methods (page 148)

3. Criteria for determining sequence in step-down method

a. Allocate support departments costs on a ranking of the % of their total services

provided to other support departments;
1. Administrative/HR 25%
2. Information Systems 10%

b. Allocate support departments costs on a ranking of the total monetary amount in

the support departmets;
1. Information Systems € 2 400 000
2. Administrative/HR € 600 000

c. Allocate support department costs on a ranking of the euro amounts of service

provided to other support departments;
1. Information Systems
(0.10 x € 2 400 000) = € 240 000
2. Administrative/HR
(0.25 x € 600 000) = € 150 000
Exercise 5.18 – Support department cost allocation; direct and
step-down methods (page 148)

4. Reciprocal method
Used by
A/HR IS GOVT CORP
Supplied A/HR - 25% 40% 35%
by IS 10% - 30% 60%

Costs support departments:

Administrative/Human Resources: € 600 000
Information Systems: € 2 400 000
Cost allocation rates:
Information Systems: 2 400 000 + 0.25 A/HR
Administrative/Human Resources: 600 000 + 0.10 IS
IS = 2 400 000 + 0.25 (600 000 + 0.10 IS)
IS = 2 400 000 + 150 000 + 0.025 IS
0.975 IS = 2 550 000
IS = 2 615 384,62
A/HR = 600 000 + 0.10 IS
A/HR = 600 000 + 0.10 x 2 615 384,62
A/HR = 600 000 + 261 538,46
A/HR = 861 538,46
 Exercise 5.18 – Support department cost allocation; direct and
step-down methods (page 148)

4. Reciprocal method
Used by
A/HR IS GOVT CORP
Supplied A/HR - 25% 40% 35%
by IS 10% - 30% 60%

Costs support departments (adapted):

Administrative/Human Resources: € 861 538,46
Information Systems: € 2 615 384,62
Cost allocation rates:
Information Systems: 10 / 100 (AH/R); 30 / 100 (GOVT); 60 / 100 (CORP)
Administrative/Human Resources: 25 / 100 (IS); 40 / 100 (GOVT); 35 / 100 (CORP)

Allocation support departments costs to operational departments:

Information Systems: € 2 615 384,62
AH/R: (10/100) * € 2 615 384,62 = € 261 538,46
GOVT: (30/100) * € 2 615 384,62 = € 784 615,39
CORP: (60/100) * € 2 615 384,62 = € 1 569 230,77
Total GOVT:
Administrative/Human Resources: € 861 538,46 € 1 129 230,77
Total CORP:
IS: (25/100) * € 861 538,46= € 215 384,62
€ 1 870 769,23
GOVT: (40/100) * € 861 538,46= € 344 615,39
CORP: (35/100) * € 861 538,46= € 301 538,46