Cost Allocation with Cost Flow Diagram
Response to the following problem:
Wayne Casting, Inc., produces a product made from a metal alloy. Wayne buys the alloy from two different suppliers, Chillicothe Metals and Ames Supply, in approximately equal amounts because of supply constraints at both vendors. The material from Chillicothe is less expensive to buy, but more difficult to use, resulting in greater waste. The metal alloy is highly toxic and any waste requires costly handling to avoid environmental accidents. Last year the cost of handling the waste totaled $300,000. Additional data from last year's operations are shown below.
| |
Chillicothe |
Ames |
|
Metals
|
Supply
|
|
Amount of material purchased (tons)
|
130
|
120
|
|
Amount of waste (tons)
|
12.8
|
2.2
|
|
Cost of purchases
|
$624,000
|
$876,000
|
Required
a. Allocate the cost of the waste handling to the two suppliers based on:
1. Amount of material purchased.
2. Amount of waste.
3. Cost of material purchased.
b. Draw a cost flow diagram to illustrate your answer to item (a), part (1).