Bio Labs is a genetic engineering firm manufacturing a variety of gene-spliced, agricultural-based seed products. The...

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Accounting

Bio Labs is a genetic engineering firm manufacturing a varietyof gene-spliced, agricultural-based seed products. The firm hasfive separate laboratories producing different product lines. Eachlab is treated as a profit center and all five labs are located inthe same facility. The wheat seed lab and corn seed lab manufacturetwo of the five product lines. These two labs are located next toeach other and are of roughly equal size in terms of sales. The twodepartments have close interaction, often sharing equipment and labtechnicians. Both use very similar technology and science andusually attend the same scientific meetings. Recent discoverieshave shown how low-power lasers can be used to significantlyimprove product quality. The wheat seed and corn seed managers areproposing the creation of a laser testing department to employ thisnew technology. Leasing the equipment and hiring the personnel cost$350,000 per year. Supplies, power, and other variable costs are$25 per testing hour. The testing department is expected to provide2,000 testing hours per year. The wheat seed manager expects to use700 testing hours per year of the laser testing department and thecorn seed manager expects to use 800 testing hours. The remaining500 hours of testing capacity can be used by the other three labsif the technology applies or can be left idle for future expectedgrowth of the two departments. Initially, only wheat and corn areexpected to use laser testing. The executive committee of Bio Labshas approved the proposal but is now grappling with how to treatthe costs of the laser testing department. The committee wants tocharge the costs to the wheat seed and corn seed labs but is unsureof how to proceed. At the end of the first year of operating thelaser, wheat seed used 650 testing hours, corn seed used 900 hours,and 450 hours were idle.
Required:
a. Calculate costs of the two labs, based on the expected hoursused by the two labs and on capacity hours.
b. What are the implications of these two alternatives?
c. Discuss advantages and disadvantages of these two costallocation options.
d. Assess theses two cost allocation option on strategicdecision perspective.
e. What are the other issues to be considered in designing costallocation problems.

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a Given below are the 2 methods given for the cost allocation of the Laser Testing Equipment 1 Expected Hours 350000 x 25 x 1500 1500 25833 per hour Here the total acquistion cost is added up the total variable cost of the 2 labs It is assumed that the balance hours in testing machine will be kept idle and hence the acquisition cost has been divided between the 2 labs only Wheat Lab cost 25833 x 700 180831 Corn Lab cost 25833 x 800 206669 2 Capacity Cost 350000 x 25 x 2000 2000 200 per testing hour Here the total acquisition cost has been added with the 100 capacity variable cost Wheat See Answer

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Transcribed Image Text

Bio Labs is a genetic engineering firm manufacturing a varietyof gene-spliced, agricultural-based seed products. The firm hasfive separate laboratories producing different product lines. Eachlab is treated as a profit center and all five labs are located inthe same facility. The wheat seed lab and corn seed lab manufacturetwo of the five product lines. These two labs are located next toeach other and are of roughly equal size in terms of sales. The twodepartments have close interaction, often sharing equipment and labtechnicians. Both use very similar technology and science andusually attend the same scientific meetings. Recent discoverieshave shown how low-power lasers can be used to significantlyimprove product quality. The wheat seed and corn seed managers areproposing the creation of a laser testing department to employ thisnew technology. Leasing the equipment and hiring the personnel cost$350,000 per year. Supplies, power, and other variable costs are$25 per testing hour. The testing department is expected to provide2,000 testing hours per year. The wheat seed manager expects to use700 testing hours per year of the laser testing department and thecorn seed manager expects to use 800 testing hours. The remaining500 hours of testing capacity can be used by the other three labsif the technology applies or can be left idle for future expectedgrowth of the two departments. Initially, only wheat and corn areexpected to use laser testing. The executive committee of Bio Labshas approved the proposal but is now grappling with how to treatthe costs of the laser testing department. The committee wants tocharge the costs to the wheat seed and corn seed labs but is unsureof how to proceed. At the end of the first year of operating thelaser, wheat seed used 650 testing hours, corn seed used 900 hours,and 450 hours were idle.Required:a. Calculate costs of the two labs, based on the expected hoursused by the two labs and on capacity hours.b. What are the implications of these two alternatives?c. Discuss advantages and disadvantages of these two costallocation options.d. Assess theses two cost allocation option on strategicdecision perspective.e. What are the other issues to be considered in designing costallocation problems.