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AC2620: Module 3 Cost Allocation and Management Decision Making
Exercise 3.1
Cost Decision Making

In this assessment, you will perform two tasks, while exploring the concept of cost decision making.
In Task 1, you will explore the choice of allocation base (Cost Driver) for service departments; in Task 2, you will explore make-or-buy decision on the basis of relevant costs.
 
Task 1: Choice of Allocation Base (Cost Driver) for Service Departments Auburn Banking and Loan Company, has six service departments:
•        Human Resources (hires employees and manages benefits)
•        Duplicating (performs copy services)
•        Janitorial (provides routine cleaning services)
•        Accounting (provides accounting services)
•        Graphic Design (designs forms)
•        Food Services (provides free breakfast and lunch to employees)
 
The services are used by the company’s two subsidiaries, Auburn Personal Banking and Auburn Business Banking. Based on this information, answer the following questions:
•        Explain allocation bases to be used in allocating the service department costs to the two subsidiaries. Substantiate your response with appropriate references from the textbook.
•        Food services are used by employees in the human resources department. Would a share of food service costs be allocated to human resources under the direct method of allocation? Support your response with appropriate reasoning.
 
Task 2: Make-or-Buy Decision: Relevant Costs
The Tufanzi Furniture Company manufactures leather furniture. The manufacturing process uses a variety of metal pieces, such as brackets, braces, and casters. Carla Reid, the resources officer of Tufanzi, has been asked to determine whether it is advisable to purchase these pieces rather than make them internally (the current practice).
                

 
AC2620: Module 3 Cost Allocation and Management Decision Making
Exercise 3.1
Cost Decision Making

Identify which of the following items are relevant to Carla’s decision and why.
•        The original cost of equipment currently used to make metal pieces.
•        The market value of equipment currently used to make metal pieces.
•        The cost of buying metal pieces from suppliers.
•        The space freed up if metal pieces are not made internally.
•        The salary of the president of the Tufanzi Furniture.
•        The quality of the metal pieces made internally.
•        The quality of the metal pieces purchased from suppliers.
•        Depreciation on the equipment used to make metal pieces (ignore taxes).
•        The labor contract with production workers.
•        The selling prices of furniture pieces.
Submission Requirements: 
•        Submit your answer in a Microsoft Word document in 250 words.
EvaluationCriteria: 
The exercise rubricwill be used to evaluate your responses.

 
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