(Appendix 12B)Lopez Company Has a Purchasing Department That Provides Services

question 7

Essay

(Appendix 12B)Lopez Company has a purchasing department that provides services to a factory located in Muncie and another in North Bend.Budgeted costs for the purchasing department consist of $72, 000 per year of fixed costs and $5 per purchase order for variable costs.
The level of budgeted fixed costs is determined by peak-period requirements.The Muncie factory requires 4/9 of the peak-period capacity and the North Bend factory requires 5/9.Variable costs are driven by the number of purchase orders processed.
During the year, 3, 500 purchase orders were processed for the Muncie factory and 4, 500 purchase orders for the North Bend factory.
Required:
Compute the amount of purchasing department cost that should be charged to each factory for the year.

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Definitions:

Absorption Costing

A costing method that includes all manufacturing costs—direct materials, direct labor, and both variable and fixed manufacturing overhead—in the cost of a unit of product.

Inventory

Items held for sale in the ordinary course of business, as well as supplies and materials used in producing goods for sale.

Gross Profit

The profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services.

Absorption Costing

A pricing strategy that encompasses all expenses associated with production, including direct materials, direct labor, as well as both variable and fixed overhead costs, in the product's price.