7-30
Joint Products; Blood Donation Donation of blood through the American Red Cross and other organizations is an important way to maintain the blood supplies that are critical to patient treatment in hospitals.
Three blood products are produced from blood received from donors: (1) red cells, used primarily in surgery; (2) platelets, used to prevent spontaneous bleeding in leukemia patients; and (3) plasma, used after further processing, for the treatment of protein deficiency. The joint cost of producing the three products consists of the blood collection costs, the safety testing costs, and further processing in a laboratory to split off the three joint products. Commonly, the joint costs are allocated to the three products on the basis of physical units produced. The National Blood Authority (NBA) in the UK observed the unfavorable effect of this approach in that the cost of each blood product could change significantly from time to time, as the demand for the products varied; the demand for the platelets was particularly volatile. In response, the NBA decided to allocate all joint costs to red cells, on the basis, in part, that plasma was routinely discarded to minimize the risk of Creutzfeldt-Jakob disease.
Required What are the advantages and disadvantages of the allocation approach proposed by the NBA? What allocation method would you suggest as an alternative, if any?
7-25
Selection of an Allocation Base Great Ape Glassworks manufactures glass used for the screens on smartphones. It has two producing departments, P1 and P2, and only one service department, S1. The company is able to track overhead to the various departments but wants to allocate the service department costs to the producing departments. However, the company is not sure which of the multiple allocation bases should be selected. The data it collected appear in the table below:
| Department | Overhead Assigned | |||
|---|---|---|---|---|
| P1 | $150,000 | |||
| P2 | 250,000 | |||
| S1 | 74,000 | |||
| Potential allocation base | P1 | P2 | ||
| Employee headcount | 60 | 20 | ||
| Space used (in square feet) | 2,000 | 6,000 | ||
| Productive capacity (in units) | 50,000 | 75,000 | ||
| 3-year average percentage of S1 output used | 60% | 40% | ||
Required
- Determine the total estimated overhead cost for each of the producing departments after allocating the cost of the service department:
- Using employee headcount as the allocation base.
- Using occupied space as the allocation base.
- Using productive capacity as the allocation base.
- Using the 3-year average use as the allocation base.
- Which of the four proposed allocation bases would you recommend and why?
