Exercise 1: Allocating mixed service costs
Instructions - Spend a few minutes reading through the exercise. Work together as a team to complete the requirements. Elect a spokesperson for your table.
Facts - Big Pane Inc., a manufacturer of custom designed glass windows, has:
- Total §263A labor costs $6 million (excluding mixed service costs)
- Total labor costs $15 million, including $3 million of mixed service labor costs
- Total §263A production costs $10 million (excluding mixed service costs)
- Total costs $30 million (excluding mixed service costs)
- Total mixed service costs $5 million
Required
1. What amount of mixed service costs would Big Pane treat as being capitalizable using the simplified service cost method with a production cost allocation ratio?
2. What amount of mixed service costs would Big Pane treat as being capitalizable using the simplified service cost method with a labor-based allocation ratio?
3. Based on your answers above, which allocation ratio should Big Pane prefer for allocating its mixed service costs?
Exercise 2: Simplified resale method
Instructions - Spend a few minutes reading through the exercise. Work together as a team to complete the requirements. Elect a spokesperson for your table.
Facts - Nice Threads Co., a retailer of fine clothing, has:
|
Item
|
Cost
|
|
Section 263A purchasing costs
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$2,200,000
|
|
Section 263A storage and handling costs
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$800,000
|
|
Section 471 costs for current year purchases
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$44,000,000
|
|
Section 471 costs in beginning inventory
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$36,000,000
|
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Total §471 costs in ending FIFO inventory
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$20,000,000
|
Required -
1. If Nice Thread uses the simplified resale method, then:
- What is its purchasing absorption ratio?
- What is its storage and handling absorption ratio?
2. What is its UNICAP adjustment for the current year?