Blue Incs Copy Department Handles All Photocopying 865501

Blue Incs Copy Department Does All Of The Photocopying For The Marke

Blue Inc.'s copy department does all of the photocopying for the marketing and human resources departments. Blue Inc. budgets the following costs for the coming year based on 5,000,000 copies: Salaries and wages (fixed) $60,000 Employee Benefits (fixed) $8,000 Paper (variable $.01 per copy) $50,000 Toner (variable $.01 per copy) $50,000 Depreciation (fixed) $10,000 Utilities (fixed) $4,000 Total $182,000 The copy department's costs are allocated to the marketing and human resources departments based on $.037 per copy. 1. If actual copies made are 4,800,000 what are the costs allocated to each department assuming the marketing department requested 2,500,000 copies and HR requested 2,300,000 copies. 2. What are the problems with using one allocation rate for the copy department's costs? 3. Devise a better allocation system based on pooling costs. Show how the costs would be allocated based on your new system.

Paper For Above instruction

The assignment involves analyzing the allocation of costs incurred by Blue Inc.'s Copy Department, focusing on the limitations of using a single allocation rate and proposing an improved pooling-based system. Specifically, the discussion includes calculating the allocated costs based on actual copies and departmental requests, identifying problems with a uniform rate, and devising a more accurate distribution method.

Introduction

Cost allocation is an essential aspect of managerial accounting, facilitating the equitable distribution of shared expenses among various departments within an organization. Accurate allocation ensures that departments are accountable for their usage of resources and helps in preparing precise financial reports. In this context, analyzing Blue Inc.'s copy department offers insight into the challenges and solutions associated with cost allocation, especially when service demand varies across departments.

Understanding the Cost Structure

Blue Inc.'s copy department incurs fixed and variable costs. Fixed costs, such as salaries, wages, depreciation, and utilities, remain unchanged regardless of the number of copies made, whereas variable costs, such as paper and toner, fluctuate with production volume. For the upcoming year, the budgeted costs based on 5 million copies total $182,000. The fixed costs include salaries and wages ($60,000), employee benefits ($8,000), depreciation ($10,000), and utilities ($4,000). The variable costs, dependent on copy volume, are paper ($0.01 per copy) and toner ($0.01 per copy), totaling $50,000 each when budgeting for 5 million copies.

Analysis of Cost Allocation Based on Actual Copies

Given that actual copies produced are 4.8 million, the total costs incurred are expected to be proportionally less than budgeted, considering fixed costs remain unchanged. The total expenses include fixed costs of $82,000 (sum of fixed components) and variable costs for 4.8 million copies: (0.01 + 0.01) x 4,800,000 = $96,000, leading to total costs of $178,000.

Dividing $178,000 by the 4.8 million copies results in an actual per-copy cost of approximately $0.0371. The departments' requested copies are 2.5 million (marketing) and 2.3 million (HR). Accordingly, the allocated costs are calculated as:

• Marketing: 2,500,000 x $0.0371 ≈ $92,750
• Human Resources: 2,300,000 x $0.0371 ≈ $85,330

This allocation assumes that the costs are proportionally shared based on the number of copies requested by each department, which aligns with the allocation rate of $0.037 per copy.

Problems with a Single Allocation Rate

While using a uniform rate simplifies cost distribution, it presents several issues. First, it ignores differences in departmental usage patterns and resource consumption, potentially misallocating costs. For example, departments with higher copy volumes may seem to subsidize lower-volume departments excessively. Second, fixed costs are allocated proportionally based on copies, but these costs remain constant regardless of departmental activity, leading to inaccuracies. Third, this approach may distort departmental profitability or cost control, as departments are not bearing costs truly reflective of their usage.

Moreover, fixed costs like salaries and depreciation are unrelated to copy volume; allocating them based solely on copy counts can cause misrepresentations. Thus, a more nuanced approach that considers the nature of costs—distinguishing fixed from variable—is necessary to allocate costs more fairly and accurately.

A Pooling System for Better Cost Allocation

To improve upon the single-rate approach, a pooling system can be implemented, wherein costs are divided into fixed and variable pools and allocated based on their respective drivers.

First, separate costs into fixed and variable categories:

• Fixed costs: Salaries and wages, employee benefits, depreciation, utilities — total $82,000.
• Variable costs: Paper and toner — budgeted at $50,000 each based on 5 million copies, so at 4.8 million copies, they are (0.01 x 4,800,000) = $48,000 each, totaling $96,000.

Next, allocate the fixed costs based on a method that doesn't depend on copy volume—such as equal distribution or based on department-specific usage history. Usually, fixed costs are allocated based on departmental headcount, square footage, or a predetermined basis reflecting fixed resource consumption. For simplicity, suppose fixed costs are allocated equally or based on departmental headcount, but as specific data are not provided, an equal split could serve as a proxy:

• Fixed costs allocated equally: $82,000 split equally between marketing and HR: $41,000 each.

Variable costs are allocated based directly on the number of copies requested, as they fluctuate with volume. The total estimated variable costs at 4.8 million copies is $96,000, leading to per-copy variable costs of $0.02.

Therefore, the total costs allocated to each department would be:

• Marketing: Fixed ($41,000) + Variable (2,500,000 x $0.02) = $41,000 + $50,000 = $91,000
• HR: Fixed ($41,000) + Variable (2,300,000 x $0.02) = $41,000 + $46,000 = $87,000

This method more accurately reflects each department's cost responsibility by recognizing that fixed costs are apportioned evenly or by other relevant bases, while variable costs follow usage.

Conclusion

Allocating costs based solely on a single per-copy rate simplifies managerial calculations but can misrepresent departmental costs and impede effective cost control. Differentiating between fixed and variable costs and allocating them accordingly offers a more accurate and fair approach. Implementing a pooling system that divides costs into fixed and variable pools, and then allocating each based on appropriate drivers, enhances the precision of cost distribution, ensures more equitable departmental accountability, and supports better managerial decision-making.

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