Managerial Accounting - Swedish Hospital uses a step-down method

Managerial Accounting

1) Swedish Hospital uses a step-down method to allocate 25 indirect service department costs (information technology, laundry, security, records, food service, etc.) to the six direct patient care units (surgery, maternity, psychiatry, etc.). The Food Service (FS) department (patient and staff dining) currently is the third service department to be allocated in the step-down methodology. Swedish is revamping its step-down methodology and is considering moving FS from its 3rd place position to the 23rd position.

Required:

a. FS costs are allocated based on the number of meals served. Does the FS allocated cost per

meal served increase or decrease if FS moves from its 3rd place position to the 23rd position

in the step-down methodology? Also, describe exactly what causes the allocated cost per

meal to increase or decrease.

b. Describe the issues that Swedish management should consider before moving FS from its

3rd place position to the 23rd position in the step-down methodology

 

 

2) Vigdor processes cut trees into various wood products, veneers, lumber, wood chips, and so forth. Each of the products can be sold immediately upon processing the trees, or processed further and sold as a finished product. The following table lists the five products produced from each batch of trees, the tons of each product per batch, and the prices for the intermediate and finished products. The net cash outflow to convert each intermediate product into a finished product is $12 per ton. The net cash outflow to process one batch of trees into the five separate wood products is $800.

Outputs	Number of tons per batch	Intermediate sales (price/ton)	Finished sales (price/ton)
A342	1	$75	$88
A453	2	68	82
B691	4	62	73
B722	3	60	71
C132	6	40	57

 

Required:

a. Given that Vigdor processes batches of trees into the five wood products, which of the five

wood products should be sold as intermediate products (i.e., not processed further), and

which ones should be sold as finished products (i.e., processed further)?

 

b. If Vigdor’s cost to process trees into the five wood products is $800, should Vigdor process

trees?

 

c. Assuming that the quantities and prices in the preceding table do not change, how high can

the $800 cost to process one batch rise before Vigdor stops processing trees into the five

wood products?

 

d. Assuming that the cost to process trees into the five wood products is $800, and given your

decisions in part (a), calculate the profit per ton of each of the five wood products after

allocating the $800 processing cost to the five wood products using:

(1) Tons of wood products produced.

(2) Net realizable value of wood products produced.

 

e. Given the allocations of the $800 cost of processing trees in part (d), would you want to

change any of your decisions in part (a), assuming your objective is to maximize the net

cash flows for Vigdor?

 

f. Describe how the allocation of the $800 cost of processing trees into the five wood products

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