TASK

Read the background information on the fictitious business, Divine Denim Pty Ltd, and then apply the knowledge you have gained in this subject to answer the various questions.

Background

Helen Croker owns Divine Denim, a growing company making made to measure, designer denim jeans and jackets. She uses organic yarn-dyed cotton denim of different weights depending on the garment that she is making. Although she prefers to take the measurements herself, she is now making denim clothes for international customers using the self-measuring system she has developed and put online. For her custom clients, she takes measurements or uses the measurements supplied through her customers’ online application. She uses these measurements to alter the pattern for the design chosen by the client. The pattern is sent to the Cutting Department and the cut material then transferred to the Machining Department.

Helen has recently expanded into a Ready to Wear (RTW) collection which is made in Australia and sold online at a cheaper price point than the made to measure clothing.

Helen designs the RTW clothes and sends the designs to a pattern maker. She previously had two machinists working for her and has just expanded to 8 machinists and a cutter in an expanded factory to manufacture the RTW clothing. One of the machinists uses the riveting and buttonhole machines. Helen has the latest computerised machines enabling her to complete a single setup for all machines from an iPad. She has an administrator who manages the payroll, orders, creditors, delivery and invoicing. An IT expert works 2.5 days a week and manages the company's website, other IT issues and online presence including monthly podcasts. A bookkeeping service is used for basic bookkeeping, GST returns and preparing information for the tax agent.

Helen decided that she needs better cost control and regular information and has asked your firm of accountants, Good Numbers, to provide her assistance to maintain and grow her expanding business.

Question 2 Cost allocation

You have explained to Helen the importance of understanding how indirect costs can be allocated to the cost of finished goods and the problems of using a cost of goods manufactured statement to apply these costs and appropriately cost and price her products. Divine Denim has 2 production departments (Cutting and Machining), and 3 support departments (Administration, IT and Design).

The IT Department's costs are allocated based on the number of computers. The Administration Department's costs are allocated based on the number of employees. The Design Department's costs are allocated 50% to cutting and 50% to Machining. Allocate the support department costs in the following order: Administration then IT. Helen has provided some estimates of costs for the current year (see below).

Required:

i. Allocate the support department costs to the operating departments using the direct method.

ii. Allocate the support department costs to the operating departments using the step-down method. Allocate first the costs for the support department with the largest direct costs.

iii. Allocate the support department costs to the operating departments using the reciprocal method. Use Excel Solver to prepare your answer.

Presentation: The input data above can be copied directly from the online subject outline into a spreadsheet. Cut and paste your spreadsheet results and formula view into your Word document. The formula view should include the column letters and the row numbers. See the 'Getting Started' menu tab on the Interact subject sitefor advice on spreadsheet layout and utilities.