ch15 - Cost Accounting, 13e (Horngren et al.) Chapter 15 1...

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Unformatted text preview: Cost Accounting, 13e (Horngren et al.) Chapter 15 1 Allocation of SupportDepartment Costs, Common Costs, and Revenues 1) The dual cost-allocation method classifies costs into two pools, a budgeted cost pool and an actual cost pool. Answer: FALSE Explanation: The dual cost-allocation method classifies costs into two pools, a variable cost pool and a fixed cost pool. Diff: 1 Terms: dual-rate costallocation method Objective: 1 AACSB: Reflective thinking 2) The single-rate method makes a distinction between fixed and variable costs. Answer: FALSE Explanation: The single-rate method makes no distinction between fixed and variable costs. Diff: 1 Terms: single-rate method Objective: 1 AACSB: Reflective thinking 3) Using the single-rate method transforms the fixed costs per hour into a variable cost to users of that facility. Answer: TRUE Diff: 3 Terms: single-rate costallocation method Objective: 1 AACSB: Communication 4) The single-rate cost-allocation method provides better information for decision making than the dual-rate method. Answer: FALSE Explanation: The dual-rate costallocation method provides better information for decision making than the singlerate method. Diff: 2 Terms: single-rate costallocation method, dual-rate costallocation method Objective: 1 AACSB: Reflective thinking 5) An advantage of the single-rate method is that it is easier and always the most accurate cost-allocation choice. Answer: FALSE Explanation: The single-rate method is the easiest cost allocation method, but it is the least accurate cost-allocation choice. Diff: 2 Terms: single-rate method Objective: 1 AACSB: Reflective thinking 6) When cost-allocation rates are used, user-division managers face uncertainty about the allocation rates for that budget period. budgeted Answer: FALSE Explanation: When budgeted costallocation rates are used, user-division managers face no uncertainty about the allocation rates for that budget period. Diff: 2 Terms: single-rate costallocation method, dual-rate costallocation method Objective: 2 AACSB: Reflective thinking 7) When budgeted cost-allocation rates are used, managers of the supplier division are motivated to improve efficiency. Answer: TRUE Diff: 2 Terms: single-rate costallocation method, dual-rate costallocation method Objective: 2 AACSB: Reflective thinking 8) When cost-allocation rates are used, variations in actual usage by one division affect the costs allocated to other divisions. budgeted Answer: FALSE Explanation: When actual costDiff: 2 Terms: single-rate costallocation method, dual-rate costallocation method Objective: 2 AACSB: Communication 9) The only choices that a firm has for support department cost allocation rates are to use either a budgeted rate or an actual rate. Answer: FALSE Explanation: The choices a firm has for support department cost allocation rates include using a budgeted rate, an actual rate, or some negotiated rate. Diff: 2 Terms: single-rate method, dual-rate method Objective: 2 AACSB: Reflective thinking 10) The most method to allocate support department costs is to employ actual rates based on the costs realized during the period. common Answer: FALSE Explanation: This method is very uncommon due to the level of uncertainty it imposes on user divisions. Diff: 2 Terms: single-rate method, dual-rate method Objective: 2 AACSB: Reflective thinking 11) The direct allocation method highlights recognition of services rendered by support departments to other support departments. Answer: FALSE Explanation: The direct allocation method allows for no recognition of services rendered by support departments to other support departments. Diff: 2 Terms: direct allocation method Objective: 3 AACSB: Communication 12) The direct method allocates each support department's costs to operating departments only. Answer: TRUE Diff: 2 Terms: direct method Objective: 3 AACSB: Reflective thinking 13) The reciprocal allocation method incorporates mutual services provided among all support departments. Answer: TRUE Diff: 2 Terms: reciprocal allocation method Objective: 3 AACSB: Communication 14) Budgeted amounts for a support department will always exceed complete reciprocated costs for that department. Answer: FALSE Explanation: Complete reciprocated costs equal budgeted amounts for the support department plus any interdepartmental cost allocations, therefore, complete reciprocated costs always exceed budgeted amounts. Diff: 3 Terms: complete reciprocated costs, support department Objective: 3 AACSB: Analytical skills 15) The direct allocation method provides key information for outsourcing decisions regarding support services. Answer: FALSE Explanation: Complete reciprocal costs of a support department provide key information for outsourcing decisions regarding support services. The direct allocation method does not provide this information. Diff: 3 Terms: support department, direct allocation method Objective: 3 AACSB: Communication 16) The incremental method of allocating common costs often creates the incentive to be the first-ranked user. Answer: FALSE Explanation: The incremental method creates a disincentive to be the first-ranked user because the first-ranked user receives the greatest allocation of cost. Diff: 3 Terms: incremental costallocation method Objective: 3 AACSB: Analytical skills 17) The direct method allocates each support department's costs to operating departments and to support departments. Answer: FALSE Explanation: The direct method allocates each support department's costs to operating departments but not to other support departments. Diff: 2 Terms: direct method Objective: 3 AACSB: Communication 18) The step- method allocates support department costs to other support departments and to operating departments in a sequential down manner. Answer: TRUE Diff: 2 Terms: step-down method Objective: 3 AACSB: Communication 19) The reciprocal method of support department cost allocation is the most precise method and therefore is used most often. Answer: FALSE Explanation: The reciprocal method of support department cost allocation is the most precise method but is not often used due to its relative complexity. Diff: 2 Terms: reciprocal method Objective: 3 AACSB: Reflective thinking 20) The stand-alone method of allocating common costs emphasizes fairness and equity among users. Answer: TRUE Diff: 2 Terms: stand-alone costallocation method Objective: 4 AACSB: Ethical reasoning 21) Under the incremental method, the first incremental user usually receives the highest allocation of the common costs. Answer: FALSE Explanation: Under the incremental method of allocating common costs, the primary user receives the highest allocation of the common costs. Diff: 2 Terms: incremental costallocation method Objective: 4 AACSB: Reflective thinking 22) A common cost is a cost of operating a facility or activity that is shared by two or more users. Answer: TRUE Diff: 2 Terms: common cost Objective: 4 AACSB: Reflective thinking 23) Allocatin g common costs is clear-cut and can best be achieved by using the stand-alone cost-allocation method. Answer: FALSE Explanation: Allocating common costs is not clear-cut and can generate disputes. Whenever feasible, the rules for the allocation of common costs should be agreed on in advance. Diff: 2 Terms: common cost Objective: 4 AACSB: Reflective thinking 24) The stand- alone cost allocation method ranks the individual users of a cost object in order of users most responsible for a common cost and then uses these rankings to allocate the costs among the users. Answer: TRUE Diff: 2 Terms: stand-alone costallocation method Objective: 4 AACSB: Reflective thinking 25) The Shapley value method of allocating common costs considers each party as first the primary party and then the incremental party and computes an average allocation. Answer: TRUE Diff: 3 Terms: incremental costallocation method Objective: 4 AACSB: Reflective thinking 26) All with U.S. government agencies must comply with the cost accounting standards issued by the Cost Accounting Standards contracts Board. Answer: TRUE Diff: 1 Terms: Cost Accounting Standards Board (CASB) Objective: 5 AACSB: Ethical reasoning 27) Without explicit written cost-plus contracts, producer costs can be passed on to the buyer. Answer: TRUE Diff: 2 Terms: allowable costs Objective: 5 AACSB: Analytical skills 28) If the to contract a very large scale project with significant uncertainty about what the final cost will be; often a cost-plus governme contract is awarded to attract qualified contractors who may otherwise not be willing to accept the risks inherent in a nt wants guaranteed bid price. Answer: TRUE Diff: 2 Terms: cost-plus pricing Objective: 5 AACSB: Analytical skills 29) The issue of "allowable costs" is not applicable in government cost-plus contracts. Answer: FALSE Explanation: The issue of "allowable costs" is very important in government cost-plus contracts. Diff: 2 Terms: allowable costs Objective: 5 AACSB: Analytical skills 30) An example of a bundled product is when a resort hotel charges a single price for lodging, food, and recreational activities. Answer: TRUE Diff: 1 Terms: bundled product Objective: 6 AACSB: Analytical skills 31) Revenue allocation is required to determine the profitability of individual items within a bundled product. Answer: TRUE Diff: 2 Terms: bundled product, revenue allocation Objective: 6 AACSB: Reflective thinking 32) The stand-alone method may use selling price or unit costs to allocate revenues. Answer: TRUE Diff: 2 Terms: revenue allocation, stand-alone method Objective: 7 AACSB: Reflective thinking 33) Under the incremental revenue-allocation method, there is an incentive to be the first-ranked user. Answer: TRUE Diff: 2 Terms: incremental revenue-allocation method, revenue allocation Objective: 7 AACSB: Reflective thinking 34) It is most e to base revenue allocation on the number of physical units when individual products in the bundle are of unequal value. appropriat Answer: FALSE Explanation: Revenue allocation based on the number of physical units is only appropriate when individual products in the bundle are of equal value. Diff: 2 Terms: revenue allocation Objective: 7 AACSB: Reflective thinking 35) When the revenues between a bundled product offering, there are only two methods which can be used: 1) the stand-alone allocating revenue-method and 2) the incremental revenue-allocation method. Answer: FALSE Explanation: Although those are the formula-based methods, it is possible for management judgement to be used in issuing revenue-allocation weights. Diff: 2 Terms: revenue allocation Objective: 7 AACSB: Reflective thinking 36) The method that allocates costs in each cost pool using the same rate per unit is known as the: A) incremental B) cost-allocation method reciprocal cost- allocation method C) single-rate cost allocation method D) dual-rate cost- allocation method Answer: C Diff: 2 Terms: single-rate costallocation method Objective: 1 AACSB: Reflective thinking 37) The dual- rate cost-allocation method classifies costs in each cost pool into a: A) budgeted-cost pool and an actual-cost pool B) variable-cost C) pool and a fixed-cost pool used-capacity- cost pool and a practical-capacity-cost pool D) direct-cost pool and a reciprocal-cost pool Answer: B Diff: 1 Terms: dual-rate costallocation method Objective: 1 AACSB: Reflective thinking 38) The single-rate cost-allocation method may base the denominator choice on: A) master-budget capacity utilization B) normal capacity utilization C) practical D) capacity All of these answers are correct. Answer: D Diff: 2 Terms: single-rate costallocation method Objective: 1 AACSB: Reflective thinking 39) When using the single-rate method, fixed cost allocation may be based on: A) actual usage B) budgeted usage C) incremental cost allocation D) Either A or B are correct. Answer: D Diff: 1 Terms: single-rate costallocation method Objective: 1 AACSB: Reflective thinking 40) Benefits of the single-rate method include: A) the low cost of implementation B) fixed costs that are transformed into variable costs for user decision making C) signals D) regarding how variable and fixed costs behave differently information that leads to outsourcing decisions that benefit the organization as a whole Answer: A Diff: 3 Terms: single-rate costallocation method Objective: 1 AACSB: Reflective thinking 41) Benefits of the dual-rate method include: A) variable costs that are transformed into fixed costs for user decision making B) the low cost of implementation C) avoidance of D) expensive analysis for categorizing costs as either fixed or variable information that leads to outsourcing decisions that benefit the organization as a whole Answer: D Diff: 3 Terms: dual-rate costallocation method Objective: 1 AACSB: Reflective thinking 42) The advantage of using practical capacity to allocate costs: A) is that it allows a downward demand spiral to develop B) is that it focuses management's attention on managing unused capacity C) is that budgets are much easier to develop D) Either A or B are correct. Answer: B Diff: 3 Terms: support department Objective: 1 AACSB: Reflective thinking Answer the following questions using the information below: The Bonawitz Corporation has a central copying facility. The copying facility has only two users, the Marketing Department and the Operations Department. The following data apply to the coming budget year: Budgeted costs of operating the copying facility for 200,000 to 300,000 copies: Fixed costs per year Variable costs Budgeted long-run usage in copies per year: Marketing Department Operations Department $30,000 3 cents (.03) per copy 60,000 copies 190,000 copies Budgeted amounts are used to calculate the allocation rates. Actual usage for the year by the Marketing Department was 40,000 copies and by the Operations Department was 180,000 copies. 43) If a single- rate cost-allocation method is used, what amount of copying facility costs will be budgeted for the Marketing Department? A) $9,000 B) $1,800 C) $7,200 D) $8,400 Answer: A Explanation: A) [ Diff: 2 T 1 AACSB: Analytical skills 44) If a single- rate cost-allocation method is used, what amount of copying facility costs will be allocated to the Marketing Department? Assume actual usage is used to allocate copying costs. A) $8,400 B) $9,000 C) $6,000 D) $4,800 Answer: C Explanation: C) [ Diff: 3 T 1 AACSB: Analytical skills 45) If a dual- rate cost-allocation method is used, what amount of copying facility costs will be budgeted for the Operations Department? A) $28,500 B) $28,200 C) $30,245 D) $29,945 Answer: A Explanation: A) [ Diff: 2 T 1 AACSB: Analytical skills 46) If a dual- allocation method is used, what amount of copying facility costs will be allocated to the Operations Department? Assume rate cost- budgeted usage is used to allocate fixed copying costs and actual usage is used to allocate variable copying costs. A) $30,245 B) $29,945 C) $28,500 D) $28,200 Answer: D Explanation: D) [ Diff: 3 T 1 AACSB: Analytical skills Answer the following questions using the information below: The Fancy Flier Airplane Corporation has a central materials laboratory. The laboratory has only two users, the Large Plane Department and the Small Plane Department. The following data apply to the coming budget year: Budgeted costs of operating the materials laboratory for 10,000 to 20,000 technician hours per year: Fixed costs per year Variable costs Budgeted long-run usage in hours per year: Large Plane Department Small Plane Department Budgeted amounts are used to calculate the allocation rates. Actual usage for the year by the Large Plane Department was 6,000 technician hours and by the Small Plane Department was 6,500 technician hours. 47) $600,000 $80 per technician hour 9,000 technician hours 7,000 technician hours If a single-rate cost-allocation method is used, what is the allocation rate per hour used? A) $80.00 B) $117.50 C) $146.67 D) $100.00 Answer: B Explanation: B) Diff: 2 T 1 AACSB: Analytical skills 48) If a dual- allocation method is used, what amount of materials laboratory costs will bebudgeted for the Large Plane Department? rate costA) $1,057,500 B) $822,500 C) $1,880,000 D) $1,600,000 Answer: A Explanation: A) [ Diff: 2 T 1 AACSB: Analytical skills 49) If a single- rate cost-allocation method is used, what amount of materials laboratory costs will be allocated to the Large Plane Department? Assume actual usage is used to allocate copying costs. A) $1,057,500 B) $822,500 C) $763,750 D) $705,000 Answer: D Explanation: D) [ Diff: 3 T 1 AACSB: Analytical skills 50) If a dual- method is used, what amount of materials laboratory costs will be allocated to the Large Plane Department? Assume rate cost- budgeted usage is used to allocate fixed materials laboratory costs and actual usage is used to allocate variable materials allocation laboratory costs. A) $782,500 B) $817,500 C) $822,500 D) $705,000 Answer: B Explanation: B) [ Diff: 3 T 1 AACSB: Analytical skills 51) If a dual- allocation method is used, what amount of materials laboratory costs will be budgeted for the Small Plane Department? rate costA) $1,057,500 B) $763,750 C) $705,000 D) $822,500 Answer: D Explanation: D) [ Diff: 2 T 1 AACSB: Analytical skills 52) If a dual- method is used, what amount of materials laboratory costs will be allocated to the Small Plane Department? Assume rate cost- budgeted usage is used to allocate materials laboratory costs and actual usage is used to allocate variable materials allocation laboratory costs. A) $822,500 B) $782,500 C) $817,500 D) $763,750 Answer: B Explanation: B) [ Diff: 3 T 1 AACSB: Analytical skills Answer the following questions using the information below: The Borders Corporation operates one central plant that has two divisions, the Flashlight Division and the Night Light Division. The following data apply to the coming budget year: Budgeted costs of operating the plant for 2,000 to 3,000 hours: Fixed operating costs per year $900,000 Variable operating costs $1,200 Budgeted long-run usage per year: Flashlight Division 2,000 Night Light Division 500 Practical capacity 3,000 Assume that practical capacity is used to calculate the allocation rates. Actual usage for the year by the Flashlight Division was 1,400 hours and by the Night Light Division was 600 hours. 53) per hour hours hours hours If a single-rate cost-allocation method is used, what amount of operating costs will be budgeted for the Flashlight Division? A) $3,000,000 B) $3,120,000 C) $2,280,000 D) $2,820,000 Answer: A Explanation: A) [ Diff: 2 T 1 AACSB: Analytical skills 54) If a single- rate cost-allocation method is used, what amount of cost will be allocated to the Flashlight Division? Assume actual usage is used to allocate operating costs. A) $2,280,000 B) $2,400,000 C) $3,000,000 D) $2,100,000 Answer: D Explanation: D) [ Diff: 3 T $ 1 AACSB: Analytical skills 55) If a dual- rate cost-allocation method is used, what amount of operating costs will be budgeted for the Night Light Division? A) $780,000 B) $900,000 C) $750,000 D) $870,000 Answer: C Explanation: C) [ Diff: 2 T 1 AACSB: Analytical skills 56) If a dual- allocation method is used, what amount of cost will be allocated to the Night Light Division? Assume budgeted usage is rate cost- used to allocate fixed operating costs and actual usage is used to allocate variable operating costs. A) $750,000 B) $870,000 C) $780,000 D) $900,000 Answer: B Explanation: B) [ Diff: 3 T 1 AACSB: Analytical skills 57) When budgeted cost-allocations rates are used: A) variations in B) actual usage by one division affect the costs allocated to other divisions the manager of the supplier division bears the risk of unfavorable cost variances C) user divisions pay for costs that exceed budgeted amounts D) user divisions pay for inefficiencies of the supplier department Answer: B Diff: 3 Terms: single-rate costallocation method, dual-rate costallocation method Objective: 2 AACSB: Reflective thinking 58) When actual cost-allocations rates are used: A) user divisions pay for costs that exceed budgeted amounts B) managers of the supplier division are motivated to improve efficiency C) user divisions do not know allocated amounts until the end of the accounting period D) managers of the user divisions may be tempted to underestimate planned usage Answer: C Diff: 3 Terms: single-rate costallocation method, dual-rate costallocation method Objective: 2 AACSB: Reflective thinking 59) Under the dual-rate cost-allocation method, when fixed costs are allocated based on actual usage then: A) user-division B) managers are motivated to make accurate long-run usage forecasts user-division C) managers can better plan for the short-run and for the long-run the costs of D) unused capacity are highlighted variations in one division's usage affect another division's allocation Answer: D Diff: 3 Terms: dual-rate costallocation method Objective: 2 AACSB: Reflective thinking 60) The costs of unused capacity are highlighted when: A) actual usage B) based allocations are used budgeted usage allocations are used C) practical D) capacity-based allocations are used the dual-rate cost-allocation method allocates fixed costs based on actual usage Answer: C Diff: 2 Terms: single-rate costallocation method, dual-rate costallocation method Objective: 2 AACSB: Reflective thinking 61) To discourage unnecessary use of a support department, management might: A) not allocate any support department costs to user departments B) allocate support department costs based upon user department usage C) allocate a fixed amount of support department costs to each department regardless of use D) issue memos on useful services provided by the support department Answer: B Diff: 3 Terms: single-rate costallocation method, dual-rate costallocation method Objective: 2 AACSB: Analytical skills 62) The biggest advantage of using practical capacity to allocate costs is that it: A) is a value that is readily available B) never causes C) over or under-allocated overhead burdens the user divisions with the costs of unused capacity D) focuses management's attention on unused capacity Answer: D Diff: 3 Terms: single-rate method, dual-rate method, practical capacity Objective: 2 AACSB: Reflective thinking 63) The practical capacity method of allocating costs is: A) based on the B) budgeted capacity demanded. based on actual capacity used. C) based on the D) practical capacity supplied. based on the using departments negotiating the charges they will accept. Answer: C Diff: 3 Terms: single-rate method, dual-rate method, practical capacity Objective: 2 AACSB: Reflective thinking 64) Special cost-allocation problems arise when: A) support B) department costs exceed budgetary estimates practical C) capacity is used as the allocation base support D) departments provide reciprocal services to other support departments there is more than one operating department Answer: C Diff: 2 Terms: support department Objective: 3 AACSB: Communication 65) Which of the following departments is NOT a support department for a boat manufacturing company? A) Personnel B) Molding and C) assembly Data processing D) Accounting Answer: B Diff: 1 Terms: support department Objective: 3 AACSB: Analytical skills 66) The support department allocation method that is the most widely used because of its simplicity is the: A) step-down B) method reciprocal C) allocation method direct allocation method D) sequential allocation method Answer: C Diff: 1 Terms: direct allocation method Objective: 3 AACSB: Reflective thinking 67) The method that allocates costs by explicitly including all the services rendered among all support departments is the: A) direct method B) step-down C) method reciprocal D) method sequential method Answer: C Diff: 2 Terms: reciprocal method Objective: 3 AACSB: Reflective thinking 68) Under which allocation method are one-way reciprocal support services recognized? A) direct method B) artificial cost C) method reciprocal D) method step-down method Answer: D Diff: 2 Terms: step-down allocation method Objective: 3 AACSB: Reflective thinking 69) The direct allocation method: A) partially B) recognizes the services provided among support departments is also referred to as the sequential method C) is conceptually the most precise method D) results in allocating only the support costs used by operating departments Answer: D Diff: 3 Terms: direct allocation method Objective: 3 AACSB: Reflective thinking 70) The step- down allocation method: A) typically begins with the support department that provides the highest percentage of its total services to other support departments B) recognizes the total amount of services that support departments provide to each other C) allocates D) complete reciprocated costs offers key input for outsourcing decisions Answer: A Diff: 3 Terms: step-down allocation method Objective: 3 AACSB: Reflective thinking 71) The reciprocal allocation method: A) is the most B) widely used because of its simplicity requires the C) ranking of support departments in the order that the allocation is to proceed is conceptually the most precise D) results in allocating more support costs to operating departments than actually incurred Answer: C Diff: 3 Terms: reciprocal allocation method Objective: 3 AACSB: Reflective thinking 72) Complete reciprocated costs: A) are less than the support department's own costs B) include the C) support department's costs plus any interdepartmental cost allocations are used for D) step-down allocations are also referred to as budgetedcosts Answer: B Diff: 2 Terms: complete reciprocated costs Objective: 3 AACSB: Reflective thinking Answer the following questions using the information below: Jake's Battery Company has two service departments, Maintenance and Personnel. Maintenance Department costs of $160,000 are allocated on the basis of budgeted maintenance-hours. Personnel Department costs of $40,000 are allocated based on the number of employees. The costs of operating departments A and B are $80,000 and $120,000, respectively. Data on budgeted maintenance-hours and number of employees are as follows: Production Departments A B Budgeted costs Budgeted maintenance-hours Number of employees 73) Support Departments Maintenance Personnel Department Department $160,000 $40,000 NA 400 20 NA $80,000 $120,000 480 320 80 240 Using the direct method, what amount of Maintenance Department costs will be allocated to Department B? A) $48,000 B) $64,000 C) $78,000 D) $96,000 Answer: B Explanation: B) 3 Diff: 2 T 3 AACSB: Analytical skills 74) Using the direct method, what amount of Personnel Department costs will be allocated to Department B? A) $10,000 B) $16,000 C) $24,000 D) $30,000 Answer: D Explanation: D) 2 Diff: 2 T 3 AACSB: Analytical skills 75) Using the method, what amount of Maintenance Department cost will be allocated to Department B if the service department with step-down the highest percentage of interdepartmental support service is allocated first? (Round up) A) $32,000 B) $42,667 C) $57,334 D) $64,000 Answer: B Explanation: B) M P M step-down allocation method Objective: 3 AACSB: Analytical skills Answer the following questions using the information below: Jake's Battery Company has two service departments, Maintenance and Personnel. Maintenance Department costs of $160,000 are allocated on the basis of budgeted maintenance-hours. Personnel Department costs of $40,000 are allocated based on the number of employees. The costs of operating departments A and B are $80,000 and $120,000, respectively. Data on budgeted maintenance-hours and number of employees are as follows: Production Departments A B Budgeted costs Budgeted maintenance-hours Number of employees 76) Support Departments Maintenance Personnel Department Department $160,000 $40,000 NA 400 20 NA $80,000 $120,000 480 320 80 240 Using the direct method, what amount of Maintenance Department costs will be allocated to Department A? A) $48,000 B) $64,000 C) $78,000 D) $96,000 Answer: D Explanation: D) 4 Diff: 2 T 3 AACSB: Analytical skills 77) Using the direct method, what amount of Personnel Department costs will be allocated to Department A? A) $10,000 B) $16,000 C) $24,000 D) $30,000 Answer: A Explanation: A) 8 Diff: 2 T 3 AACSB: Analytical skills 78) Using the method, what amount of Maintenance Department cost will be allocated to Department A if the service department with step-down the highest percentage of interdepartmental support service is allocated first? (Round up) A) $32,000 B) $42,667 C) $57,334 D) $64,000 Answer: D Explanation: D) M P M D step-down allocation method Objective: 3 AACSB: Analytical skills Answer the following questions using the information below: Betty's Book and Music Store has two service departments, Warehouse and Data Center. Warehouse Department costsof $175,000 are allocated on the basis of budgeted warehouse-hours. Data Center Department costs of $75,000 are allocated based on the number of computer log-on hours. The costs of operating departments Music and Books are $125,000 and $150,000, respectively. Data on budgeted warehouse-hours and number of computer log-on hours are as follows: Production Departments Music Books Budgeted costs Budgeted warehouse-hours Number of computer hours 79) Support Departments Warehouse Data Center Department Department $175,000 $75,000 NA 250 100 NA $125,000 $150,000 500 750 400 500 Using the direct method, what amount of Warehouse Department costs will be allocated to Department Books? A) $70,000 B) $105,000 C) $75,000 D) $87,500 Answer: B Explanation: B) 7 direct allocation method Objective: 3 AACSB: Analytical skills 80) Using the direct method, what amount of Data Center Department costs will be allocated to Department Music? A) $75,000 B) $33,333 C) $41,667 D) $30,000 Answer: B Explanation: A) direct allocation method Objective: 3 AACSB: Analytical skills 81) Using the method, what amount of Data Center Department cost will be allocated to the Warehouse Department if the service step-down department with the highest percentage of interdepartmental support service is allocated first? (Round up) A) $25,000 B) $75,000 C) $7,500 D) $0 Answer: D Explanation: D) W D W step-down allocation method Objective: 3 AACSB: Analytical skills 82) Using the method, what amount of Warehouse Department cost will be allocated to Department Music if the service department with step-down the highest percentage of interdepartmental support service is allocated first? (Round up) A) $58,333 B) $116,667 C) $60,833 D) $121,667 Answer: A Explanation: A) W D W D step-down allocation method Objective: 3 AACSB: Analytical skills 83) Using the method, what amount of Data Center Department cost will be allocated to Department Music if the service department step-down with the highest percentage of interdepartmental support service is allocated first? (Round up) A) $58,671 B) $33,333 C) $46,296 D) $41,667 Answer: C Explanation: C) W D Diff: 3 T D A 3 AACSB: Analytical skills Answer the following questions using the information below: Alfred, owner of Hi-Tech Fiberglass Fabricators, Inc., is interested in using the reciprocal allocation method. The following data from operations were collected for analysis: Budgeted manufacturing overhead costs: Plant Maintenance PM (Support Dept) Data Processing DP (Support Dept) Machining M (Operating Dept) Capping C (Operating Dept) Services furnished: By Plant Maintenance (budgeted labor-hours): to Data Processing to Machining to Capping By Data Processing (budgeted computer time): to Plant Maintenance to Machining to Capping 84) $350,000 $ 75,000 $225,000 $125,000 3,500 5,000 8,200 600 3,500 600 Which of the following linear equations represents the complete reciprocated cost of the Data Processing Department? A) DP= $75,000 + (600/4,700) PM B) DP= $75,000 + (3,500/16,700) PM C) DP= $75,000 × (600/4,700) + $350,000 × (3,340/16,700) D) DP= $350,000 + (600/16,700) DP Answer: B Diff: 3 Terms: service department, complete reciprocated costs Objective: 3 AACSB: Analytical skills 85) What is the complete reciprocated cost of the Plant Maintenance Department? A) $393,750 B) $369,459 C) $365,000 D) $375,773 Answer: B Explanation: B) D P Diff: 3 T 0 P 3 AACSB: Analytical skills 86) What is the complete reciprocated cost of the Data Processing Department? A) $90,000 B) $118,750 C) $122,971 D) $152,432 Answer: D Explanation: D) D P P Diff: 3 T P D 3 AACSB: Analytical skills Answer the following questions using the information below: Joanne, owner of Automated Fabric, Inc., is interested in using the reciprocal allocation method. The following data from operations were collected for analysis: Budgeted manufacturing overhead costs: Maintenance M (Support Dept) Personnel P (Support Dept) Weaving W (Weaving Dept) Colorizing C (Colorizing Dept) Services furnished: By Maintenance (budgeted labor-hours): to Personnel to Weaving to Colorizing By Personnel (Number of employees serviced): Plant Maintenance Weaving Colorizing 87) $150,000 $ 80,000 $325,000 $175,000 500 3,500 2,000 5 15 10 Which of the following linear equations represents the complete reciprocated cost of the Personnel Department? A) P= $150,000 - $80,000 (500/6,000) M B) P= (500/6,000) M C) P= $80,000 + D) (500/6,000) M P= $80,000 Answer: C Diff: 3 Terms: service department, complete reciprocated costs Objective: 3 AACSB: Analytical skills 88) What is the complete reciprocated cost of the Maintenance Department? A) $165,634 B) $163,333 C) $150,000 D) $0 Answer: A Explanation: A) P M Diff: 3 T 0 M 3 AACSB: Analytical skills 89) What is the complete reciprocated cost of the Personnel Department? A) $92,500 B) $93,803 C) $80,000 D) $105,000 Answer: B Explanation: B) P M M Diff: 3 T P P P 3 AACSB: Analytical skills 90) Which of the following departments is not an operating (or value added) department? A) Machining B) Accounting C) Assembly D) Finishing Answer: B Diff: 2 Terms: operating department Objective: 3 AACSB: Reflective thinking 91) Which of the following is NOT one of the three methods of allocating support department costs to operating departments? A) direct method B) incremental C) method step-down D) method reciprocal method Answer: B Diff: 3 Terms: operating dept, support dept; direct, step-down, and reciprocal method Objective: 3 AACSB: Reflective thinking 92) The cost- allocation method that allocates support department costs only to production departments is the: A) direct method B) sequential C) method step-down D) method reciprocal method Answer: A Diff: 2 Terms: operating dept, support dept; direct, step-down, and reciprocal method Objective: 3 AACSB: Reflective thinking 93) A cost of operating a facility, department, activity area, or like cost object that is shared by two or more users is called a: A) direct cost B) joint cost C) fixed cost D) common cost Answer: D Diff: 1 Terms: common cost Objective: 4 AACSB: Reflective thinking 94) Under the stand-alone method of allocating common costs: A) a ranking is B) used to allocate costs among the users disputes can C) arise over who is the primary user each party bears a proportionate share of the total costs in relation to their individual stand-alone costs D) an incentive is created to be the first-ranked user Answer: C Diff: 3 Terms: stand-alone costallocation method Objective: 4 AACSB: Reflective thinking 95) Under the incremental method of allocating common costs: A) the parties are interested in being viewed as primary users B) each party bears a proportionate share of the total costs in relation to their individual stand-alone costs C) fairness and D) equity are emphasized there is a disincentive to be titled the primary user Answer: D Diff: 3 Terms: incremental costallocation method Objective: 4 AACSB: Reflective thinking Answer the following questions using the information below: The Sturgeon Bay Corporation currently uses a manufacturing facility costing $400,000 per year; 80% of the facility's capacity is currently being used. A start-up business has proposed a plan that would utilize the other 20% of the facility and increase the overall costs of maintaining the space by 5%. 96) If the stand-alone method were used, what amount of cost would be allocated to the start-up business? A) $20,000 B) $100,000 C) $80,000 D) $84,000 Answer: D Explanation: D) $ Diff: 2 T 4 AACSB: Analytical skills 97) If the incremental method were used, what amount of cost would be allocated to the start-up business? A) $20,000 B) $100,000 C) $80,000 D) $84,000 Answer: A Explanation: A) $ Diff: 2 T 4 AACSB: Analytical skills Answer the following questions using the information below: The Egg Harbor Corporation currently leases a corporate suite in an office building for a cost of $90,000 a year. Only 70% of the corporate suite is currently being used. A start-up business has proposed a plan that would use the other 30% of the suite and increase the overall costs of maintaining the space by $10,000. 98) If the stand-alone method were used, what amount of cost would be allocated to the start-up business? A) $10,000 B) $27,000 C) $30,000 D) $37,000 Answer: C Explanation: C) $ Diff: 2 T 4 AACSB: Analytical skills 99) If the incremental method were used, what amount of cost would be allocated to the start-up business? A) $10,000 B) $27,000 C) $30,000 D) $37,000 Answer: A Explanation: A) $ Diff: 2 T 4 AACSB: Analytical skills 100) All contracts with U.S. government agencies must comply with cost accounting standards issued by the: A) FASB B) SEC C) IRS D) CASB Answer: D Diff: 2 Terms: Cost Accounting Standards Board (CASB) Objective: 5 AACSB: Analytical skills 101) Contract disputes regarding cost allocation can be reduced by defining: A) the cost items allowed B) the terms used, such as what constitutes direct labor C) permissible D) cost-allocation bases All of these answers are correct. Answer: D Diff: 2 Terms: allowable costs Objective: 5 AACSB: Reflective thinking 102) Cost- based prices: A) are one way of setting prices in a competitive market B) provide an C) inherit incentive for the producer to control costs pass the D) majority of risk to the buyer are required in all government contracts Answer: C Diff: 3 Terms: allowable costs Objective: 5 AACSB: Reflective thinking 103) ________ is a cost that the contract parties agree to include in the costs to be reimbursed. A) An allowable B) cost An unallowable cost C) An incremental cost D) A stand-alone cost Answer: A Diff: 1 Terms: allowable costs Objective: 5 AACSB: Reflective thinking 104) In certain defense contracts involving new weapons and equipment, contracts are rarely subject to competitive bidding because: high-cost A) the government is concerned that one firm might monopolize defense contracts B) there is an C) implicit agreement among defense contractors to "share contracts" all defense D) contractors have essentially the same cost structure None of these answers is correct. Answer: D Diff: 3 Terms: allowable costs Objective: 5 AACSB: Ethical reasoning 105) ________ occurs where revenues, related but not traceable to individual products, are assigned to those individual products. A) Revenue tracing B) Revenue C) allocation Stand-alone D) pricing Reciprocal pricing Answer: B Diff: 1 Terms: revenue allocation Objective: 6 AACSB: Reflective thinking 106) An example of a revenue object is a: A) customer B) specific product C) division of a D) company All of these answers are correct. Answer: D Diff: 1 Terms: revenue object Objective: 6 AACSB: Reflective thinking 107) AAA offers towing services, auto routing, travel brochures, and other travel services for one annual fee. This is an example of: A) revenue tracing B) revenue C) allocation a bundled D) product a joint product Answer: C Diff: 2 Terms: bundled product Objective: 6 AACSB: Analytical skills 108) Businesse s offer bundled products to: A) increase B) customer exposure increase overall company profitability C) avoid the D) problems of revenue allocation Both A and B are correct. Answer: D Diff: 2 Terms: bundled product Objective: 6 AACSB: Reflective thinking 109) ________ package of two or more products (or services) that is sold for a single price but whose individual components may be sold is a as separate items at their own "stand-alone" prices. A) An assembly B) A subassembly C) A bundled D) product A good deal Answer: C Diff: 1 Terms: bundled product Objective: 6 AACSB: Reflective thinking 110) The method LEAST likely to cause disputes among product managers is: A) stand-alone B) revenue-allocation method incremental C) revenue-allocation method the direct D) revenue-allocation method All of these answers are correct. Answer: A Diff: 2 Terms: stand-alone costallocation method Objective: 7 AACSB: Communication 111) The method that ranks individual products in a bundle for revenue allocation is the: A) stand-alone B) revenue-allocation method incremental C) revenue-allocation method unit-cost D) weighting method physical-unit weighting method Answer: B Diff: 2 Terms: incremental revenue-allocation method Objective: 7 AACSB: Reflective thinking 112) Approach es used to rank products for revenue allocation might include: A) surveying B) customers on the importance of each product using recent C) data on stand-alone sales performance having D) managers use their knowledge and intuition All of these answers are correct. Answer: D Diff: 2 Terms: incremental revenue-allocation method, revenue allocation Objective: 7 AACSB: Analytical skills 113) To give more weight to the product that most likely drives the sales of the bundled product, the revenue allocation should be weighted using: A) selling prices B) unit costs C) physical units D) stand-alone product revenues Answer: D Diff: 2 Terms: stand-alone method Objective: 7 AACSB: Reflective thinking 114) The revenue allocation may be weighted using physical units when: A) the individual products within the bundle have approximately the same value B) selling prices C) are unstable and unit costs are difficult to calculate other methods cannot be used for various reasons D) All of these answers are correct. Answer: D Diff: 2 Terms: revenue allocation Objective: 7 AACSB: Reflective thinking Answer the following questions using the information below: Elmo's Educational Software Outlet sells two or more of the video games as a single package. Managers are keenly interested in individual product-profitability figures. Information pertaining to three bundled products and the stand-alone prices is as follows: Stand-Alone Selling Price Reading Fun Math Fun Analysis 115) $50 $60 $90 Cost $7.20 $8.00 $10.00 Package 1. Reading Fun & Math Fun 2. Reading Fun & Analysis 3. All three Packaged Price $88 $112 $152 Using the alone method with selling price as the weight for revenue allocation, what amount of revenue will be allocated to Reading standFun in the first package (Reading Fun & Math Fun)? A) $40 B) $44 C) $38 D) $50 Answer: A Explanation: A) [ Diff: 2 T 7 AACSB: Analytical skills 116) Using the al method for revenue allocation, what amount of revenue will be allocated to Reading Fun in the first package (Reading increment Fun & Math Fun)? Assume Reading Fun is the primary product, followed by Math Fun, and then Analysis. A) $40 B) $44 C) $38 D) $50 Answer: D Explanation: D) $ Diff: 2 T 7 AACSB: Analytical skills 117) Using the alone method with selling price as the weight for revenue allocation, what amount of revenue will be allocated to Math Fun standin the package that contains all three products? A) $48.25 B) $60.00 C) $45.60 D) $50.67 Answer: C Explanation: C) [ Diff: 2 T 7 AACSB: Analytical skills 118) Using the incremental method, what amount of revenue will be allocated to Math Fun in the package that contains all three products? A) $48.25 B) $60.00 C) $45.60 D) $50.67 Answer: B Explanation: B) $ Diff: 2 T 7 AACSB: Analytical skills Answer the following questions using the information below: The Appliance Store sells a refrigerator and a freezer as a single package for $1,000. Other data are in the chart below. Refrigerator $825 $620 $1,225,000 Full-size Freezer $375 $180 $775,000 Packaged Price $1,000 Selling price Manufacturing cost per unit Stand-alone product revenues 119) Using the alone method with selling price as the weight for revenue allocation, what amount will be allocated to the refrigerator? standA) $500.00 B) $825.00 C) $687.50 D) $625.00 Answer: C Explanation: C) R Diff: 2 T 7 AACSB: Analytical skills 120) Using the alone method with stand-alone product revenues as the weight for revenue allocation, what amount will be allocated to the standrefrigerator? A) $687.50 B) $612.50 C) $625.00 D) $825.00 Answer: B Explanation: B) R Diff: 2 T 7 AACSB: Analytical skills 121) Using the alone method with manufacturing cost per unit as the weight for revenue allocation, what amount will be allocated to the standrefrigerator? A) $500.00 B) $612.50 C) $620.00 D) $775.00 Answer: D Explanation: D) R Diff: 2 T 7 AACSB: Analytical skills 122) Using the alone method with physical units as the weight for revenue allocation, what amount will be allocated to the refrigerator? standA) $500 B) $20 C) $775 D) $825 Answer: A Explanation: A) ( Diff: 2 T 7 AACSB: Analytical skills 123) The fixed The facility averages 40,000 maintenance-hours a year. Budgeted and actual hours per user for 20X3 are as follows: costs of operating Budgeted hours Actual hours the Building and grounds 10,000 12,000 maintenan Operating and emergency 8,000 8,000 ce facility Patient care 21,000 22,000 of Administration 1,000 1,200 General Total 40,000 43,200 Hospital are Assume that budgeted maintenance-hours are used to calculate the allocation rates. $4,500,00 0 Required: annually. a. If a single-rate cost-allocation method is used, what amount of maintenance cost will be budgeted for each Variable department? costs are b. If a single-rate cost-allocation method is used, what amount of maintenance cost will be allocated to each department incurred based on actual usage? Based on budgeted usage? at the rate c. If a dual-rate cost-allocation method is used, what amount of maintenance cost will be budgeted for each department? of $30 per d. If a dual-rate cost-allocation method is used, what amount of maintenance cost will be allocated to each department maintenan based on actual usage? Based on budgeted usage for fixed operating costs and actual usage for variable operating costs? ce-hour. Answer: a. Total costs + $4,500,000 + ($30 × 40,000) = $5,700,000 Single rate = $5,700,000 / 40,000 mh = $142.50 per maintenance-hour Single-rate budgeted amounts: Building and grounds $142.50 × 10,000 = $1,425,000 Operating and emergency $142.50 × 8,000 = $1,140,000 Patient care $142.50 × 21,000 = $2,992,500 Administration $142.50 × 1,000 = $ 142,500 b. Total costs + $4,500,000 + ($30 × 40,000) = $5,700,000 Single rate = $5,700,000 / 40,000 mh = $142.50 per maintenance-hour Single-rate allocated amounts: Building and grounds $142.50 × 12,000 = $1,710,000 Operating and emergency $142.50 × 8,000 = $1,140,000 Patient care 22,000 = $3,135,000 Administration $142.50 × 1,200 = $ 171,000 c. Dual-rate budgeted amounts: Building and grounds: Fixed ($4,500,000 × 10/40) $1,125,000 Variable ($30 × 10,000) 300,000 Total $1,425,000 Operating and emergency: Fixed ($4,500,000 × 8/40) $ 900,000 Variable ($30 × 8,000) 240,000 Total $1,140,000 Patient care: Fixed ($4,500,000 × 21/40) $2,362,500 Variable ($30 × 21,000) 630,000 Total $2,992,500 Administration: Fixed ($4,500,000 × 1/40) $112,500 Variable ($30 × 1,000) 30,000 Total $142,500 Diff: 2 Terms: single-rate costallocation method, dual-rate costallocation method Objective: 1 AACSB: Analytical skills 124) The Alex Budgeted costs of the operating the plant Miller for 10,000 to 20,000 hours: Corporati Fixed operating costs per year $240,000 on Variable operating costs $10 per hour operates Practical capacity 20,000 hours per year one Budgeted long-run usage per year: central Lamp Division 800 hours × 12 months = 9,600 hours per year plant that Flashlight Division 450 hours × 12 months = 5,400 hours per year has two divisions, Assume that practical capacity is used to calculate the allocation rates. Further assume that actual usage of the Lamp the Division was 700 hours and the Flashlight Division was 400 hours for the month of June. Flashlight Division Required: and the a. If a single-rate cost-allocation method is used, what amount of operating costs will be budgeted for the Lamp Division Night each month? For the Flashlight Division each month? Light Division. b. For the month of June, if a single-rate cost-allocation method is used, what amount of cost will be allocated to the The Lamp Division? To the Flashlight Division? Assume actual usage is used to allocate operating costs. following data apply c. If a dual-rate cost-allocation method is used, what amount of operating costs will be budgeted for the Lamp Division to the each month? For the Flashlight Division each month? coming budget d. For the month of June, if a dual-rate cost-allocation method is used, what amount of cost will be allocated to the Lamp year: Division? To the Flashlight Division? Assume budgeted usage is used to allocate fixed operating costs and actual usage is used to allocate variable operating costs. Answer: a. Fixed costs $240,000 / 20,000 practical capacity hours = $12 / hour Single-rate costallocation = $12 + $10 = $22 per hour Lamp Division 800 × $22 / hour = $17,600 per month Flashlight Division 450 × $22 / hour = $9,900 per month Lamp Division 700 × $22 / hour = $15,400 per month Flashlight Division 400 × $22 / hour = $8,800 per month b. c. Fixed costs $240,000 / 20,000 practical capacity hours = $12 / hour Budgeted costs Lamp Division (800 × $12/ hour) + (800 × $10/hour) = $17,600 per month Budgeted costs Flashlight Division (450 × $12/ hour) + (450 × $10/hour) = $9,900 per month d. Allocated costs for June Lamp Division (800 × $12 / hour) + (700 × $16,600 per month Allocated costs for June Flashlight Division (450 × $12 / hour) + (400 × $10/hour) = $9,400 per month Diff: 2 Terms: single-rate costallocation method, dual-rate costallocation method Objective: 1 AACSB: Analytical skills 125) Blaster operating costs of the company are $5,000 per month. The controlling shareholder, interested in product profitability and Drive-In pricing, wants all costs allocated to either the burgers or the hot dogs. The following information is provided for the is a fast- operations of the company: food restaurant Burgers Hot Dogs that sells Sales for January 4,000 2,400 burgers Sales for February 6,400 2,400 and hot dogs in a Required: 1950s a. What amount of fixed operating costs is assigned to the burgers and hot dogs when actual sales are used as the environm allocation base for January? For February? ent. The b. Hot dog sales for January and February remained constant. Did the amount of fixed operating costs allocated to hot fixed dogs also remain constant for January and February? Explain why or why not. Comment on any other observations. Answer: January sales: Burgers $5,000 × 4,000/ (4,000 + 2,400) = $3,125 Hot dogs $5,000 × 2,400/6,400 = $1,875 a. February sales: Burgers $5,000 × 6,400 / (6,400 + 2,400) = $3,636.36 Hot dogs $5,000 × 2,400 / (6,400 + 2,400) = $1,363.64 b. Even though hot dog sales remained constant for both months, the allocation of fixed operating costs decreased by more than $500. The reason is that fixed overhead costs are allocated based on actual sales. The dollar amount is fixed, and since burger sales increased, more of the fixed costs were allocated to the burgers. Another observation is that burger sales increased by more than 50% from January to February, while the fixed operating costs assigned to burgers increased by only 16%. Diff: 2 Terms: single-rate costallocation method, dual-rate costallocation method Objective: 2 AACSB: Analytical skills 126) Marvelou company are $300,000 per year. The controlling shareholder, interested in product profitability and pricing, wants all costs s Motors allocated to the motors and wants to review the company status on a quarterly basis. The shareholder is trying to determine is a small whether the costs should be allocated each quarter based on the 25% of the annual fixed operating costs ($75,000) or by motor using an annual forecast budget to allocate the costs. The following information is provided for the operations of the supply company: outlet that sells Forecast Actual motors to Sales for First Quarter 5,000 4,850 companie Sales for Second Quarter 8,000 7,900 s that Sales for Third Quarter 8,000 8,125 make Sales for Fourth Quarter 3,000 3,125 various small Required: motorized a. What amount of fixed operating costs are assigned to each motor by quarter when actual sales are used as the appliance allocation base and $75,000 is allocated? s . The b. How much fixed cost is recovered each quarter under requirement a.? fixed c. What amount of fixed operating costs are assigned to each motor by quarter when forecast sales are used as the operating allocation base and the rate is calculated annually as part of the budgetary process? costs of d. How much fixed cost is recovered each quarter under requirement c.? the e. Which method seems more appropriate in this case? Explain. Answer: a. Rate per unit using Actual Sales by Quarter: Q1 $75,000 / 4,850 = $15.46 per motor Q2 $75,000 / 7,900 = $ 9.49 per motor Q3 $75,000 / 4,850 = $ 9.23 per motor Q4 $75,000 / 4,850 = $24.00 per motor b. $75,000 cost is recovered each quarter => $300,000 cost recovered over the year. c. Quarterly Cost Recovery using Annual Forecast of Sales: Forecast Sales for the year = 5,000 + 8,000 + 8,000 + 3,000= 24,000 Rate per motor = $300,000 / 24,000 = $12.50 per motor d. Quarterly Cost Recovery using Annual Forecast of Sales as the allocation basis: Q1 4,850 × $12.50 = $ 60,625 Q2 7,900 × $12.50 = $ 98,750 Q3 8,125 × $12.50 = $101,563 Q4 3,125 × $12.50 = $ 39,062 => $300,000 cost recovered over the e. The budgeted rate based on an annualized forecast of sales is more appropriate to use. The fluctuations in sales was predictable and using actual quantities per quarter to calculate the cost recovery rates would distort the objective of assigning appropriate costs to the units. There would be uncertainty in interpretation of why one quarter has a very high rate per unit and another quarter has a very low rate per unit if the actual quarters fixed costs were spread to the actual units sold each quarter. Diff: 2 Terms: actual rates, budgeted rates Objective: 2 AACSB: Analytical skills 127) Gotham departments, Facility and Technology Maintenance and Enrollment Services. The base used to allocate facility and Universit technology maintenance is budgeted total maintenance hours. The base used to allocate enrollment services is number of y offers credit hours for a department. The Facility and Technology Maintenance budget is $350,000, while the Enrollment only high- Services budget is $950,000. The following chart summarizes budgeted amounts and allocation-base amounts used by each tech department: graduatelevel Services Provided: (Annually) programs. Computer F&T Enrollment Budget Engineering Gotham Sciences Maintenance Service has two F&T principal Maintenance $350,000 2,000 5,000 Zero 1,000 operating (in hours) departme Enrollment nts, $950,000 24,000 36,000 2,000 Zero Service Engineeri (in credit hrs) ng and Computer Required: Sciences, and two Use the direct method to allocate support costs to each of the two principal operating departments, Engineering and support Computer Sciences. Prepare a schedule showing the support costs allocated to each department. Answer: Engineering F&T Maintenance Diff: 2 Terms: Computer Science Enrollme $350,000 × 2/7 = $100,000 direct allocation method Objective: 3 AACSB: Analytical skills 128) Gotham departments, Facility and Technology Maintenance and Enrollment Services. The base used to allocate facility and Universit technology maintenance is budgeted total maintenance hours. The base used to allocate enrollment services is number of y offers credit hours for a department. The Facility and Technology Maintenance budget is $350,000, while the Enrollment only high- Services budget is $950,000. The following chart summarizes budgeted amounts and allocation-base amounts used by each tech department: graduatelevel Services Provided: (Annually) programs. Computer F&T Enrollment Budget Engineering Gotham Sciences Maintenance Service has two F&T principal Maintenance $350,000 1,000 2,000 Zero 5,000 operating (in hours) departme Enrollment nts, $950,000 24,000 36,000 2,000 Zero Service Engineeri (in credit hrs) ng and Computer Required: Sciences, Prepare a schedule which allocates service department costs using the step-down method with the sequence of allocation and two based on the highest-percentage support concept. Compute the total amount of support costs allocated to each of the two support principal operating departments, Engineering and Computer Sciences. Answer: F&T Maintenance provided to enrollment services = 5,000/8,000 Enrollment services provided to maintenance = 2,000/62,000 F&T Maintenance provides the greatest amount of service to support departments, so it is allocated first. F&T Maintenance $350,000 to Enrollment Services = $350,000 × 5/8= $218,750 to Engineering = $350,000 × 1/8= $ 43,750 to Computer Science = $350,000 × 2/8= $ 87,500 Enrollment Service costs of $950,000 + $218,750 = $1,168,750 are allocated to Engineering and Computer Science to Engineering = $1,168,750 × 24/60 = $467,500 to Computer Science = $1,168,750 × 36/60 = $701,250 F&T Maintenance $350,000 ($350,000) Enrollment Engineering Service $950,000 $218,750 $ 43,750 Computer Science $ 87,500 Tot Diff: 3 Terms: step-down allocation method Objective: 3 AACSB: Analytical skills 129) Gotham and Technology Maintenance and Enrollment Services. The base used to allocate facility and technology maintenance is Universit budgeted total maintenance hours. The base used to allocate enrollment services is number of credit hours for a y offers department. The Facility and Technology Maintenance budget is $350,000, while the Enrollment Services budget is only high- $950,000. The following chart summarizes budgetedamounts and allocation-base amounts used by each department: tech graduateServices Provided: (Annually) level Computer F&T Enrollment Budget Engineering programs. Sciences Maintenance Service Gotham Engineering $3,500,000 has two Computer $1,400,000 principal Sciences operating F&T departme $350,000 2,000 1,000 Zero 5,000 Maintenance nts, (in hours) Engineeri Enrollment ng and $950,000 24,000 36,000 2,000 Zero Service Computer (in credit hrs) Sciences, and two Required: support a. Set up algebraic equations in linear equation form for each activity. departme b. Determine total costs for each department by solving the equations from part (a) using the reciprocal method. nts, (Engineering= Eng; Computer Sciences = CS; Facility and Technical Maintenance = FTM; Enrollment Service = Facility ES) Answer: a. Eng = $1,400,000 + 2/8 (FTM) + 24/62 (ES) CS = $3,500,000 + 1/8 (FTM)+ 36/62 (ES) FTM = $350,000 + 2/62 (ES) ES = $950,000 + 5/8 (FTM) b. Enrollment Service = $950,000 + 0.625 (FTM) ES = $950,000 + .625 (350,000 + 2/62 ES) ES = $950,000 + $218,750 + .02 ES 0.98 ES = $1,168,750 ES = $1,192,602 FTM = $350,000 + 2/62 ($1,192,602) = $388,471 Engineering = $1,400,000 + 2/8 ($388,471) + 24/62 ($1,192,602) $1,400,000 + 97,118 + 461,652 = $1,958,770 CS = $3,500,000 + 1/8 ($388,471) + 36/62 ($1,192,602) = $3,500,000 + $48,559 + $692,479 = $4,241,038 Diff: 3 Terms: reciprocal allocation method Objective: 3 AACSB: Analytical skills 130) Campaign The data for May were as follows: Printing has two Services provided to: service Activity Costs S1 S2 P1 P2 departme S1 $90,000 10% 40% 50% nts, S1 S2 $60,000 20% 55% 25% and S2, Fixed Costs and two P1 $360,000 productio P2 $520,000 n departme Required: nts, P1 and P2. a. Set up algebraic equations in linear form for each activity. b. Determine total costs for each department by solving the equations from part (a) using the reciprocal method. Answer: a. S1= $90,000 + 0.20 (S2) S2= $60,000 + 0.10 (S1) P1=$360,000 + 0.40 (S1) + 0.55 (S2) P2= $520,000 + 0.50 (S1) + 0.25 (S2) b. S1 = $90,000 + 0.20 ($60,000 + 0.10 (S1)) S1 = $90,000 + $12,000 + 0.02 (S1) 0.98 (S1) = $102,000 = $104,082 S2 = $60,000 + (0.10 × $104,082) = $70,408 P1 = $360,000 + (0.40 × $104,082) + (0.55 × $70,408) = $440,357 P2 = 520,000 +(0.50 × $104,082) + (0.25 × $70,408) = $589,643 Diff: 3 Terms: reciprocal allocation method Objective: 3 AACSB: Analytical skills 131) The Maintena nce Departme nt has been servicing Gizmo Productio n for four years. Beginning next year, the company is adding a Scrap-Processing Department to recycle the materials from Gizmo Production. As a result, maintenance costs are expected to increase from $480,000 per year to $500,000 per year. The Scrap-Processing Department will use 25% of the maintenance efforts. Required: a. Using the stand-alone cost-allocation method, identify the amount of maintenance cost that will be allocated to Gizmo Production and the Scrap-Processing Department next year. b. Using the incremental cost-allocation method, identify the amount of maintenance cost that will be allocated to Gizmo Production and the Scrap-Processing Department next year. Answer: a. Gizmo Production = $500,000 × 0.75 = $375,000 ScrapProcessing Department = $500,000 × 0.25 = $125,000 b. Gizmo Production would receive $480,000. ScrapProcessing Department would receive $20,000, the incremental amount Diff: 1 Terms: stand-alone costallocation method, incremental costallocation method Objective: 4 AACSB: Analytical skills 132) The Product Data Center has been servicing the Struble Productio n Casting Departme nt for five years. Beginning next year, the company is adding a Production Molding Department to compliment the materials produced by the Struble Production Casting Department. As a result, data center costs are expected to increase from $700,000 per year to $800,000 per year. The Production Molding Department will use 20% of the data center efforts. Required: a. Using the stand-alone cost-allocation method, identify the amount of data center cost that will be allocated to Struble Production Casting and the Production Molding Department next year. b. Using the incremental cost-allocation method, identify the amount of data center cost that will be allocated to Struble Production Casting and the Production Molding Department next year. Answer: a. Struble Production Casting Department = $800,000 × 0.80 = $640,000 Production Molding = $800,000 × 0.20 = $160,000 b. Struble Production Casting Department would receive $700,000. Production Molding Department would receive $100,000, the incremental amount. Diff: 1 Terms: stand-alone costallocation method, incremental costallocation method Objective: 4 AACSB: Analytical skills 133) Give examples of bundled products for each of the following industries: a. Resort hotel b. Bank c. Restaurant d. Computer store e. Gasoline service station/convenience store f. Software manufacturer Answer: a. Hotel room plus meals, free drinks, use of athletic facilities, morning newspaper b. Checking account, safe deposit box, wire transfers, certified checks, travelers checks c. Fixed-price meal includes a beverage, appetizer, entree, and dessert d. Computer, keyboard, monitor, printer, software, 1year contract for the repair and maintenance of the computer e. Gasoline, car wash, coffee f. Two (or more) software products Diff: 2 Terms: bundled product Objective: 6 AACSB: Analytical skills 134) Max's sold as a single package. Managers at Max's are keenly interested in individual product-profitability figures. Information Movie pertaining to its three bundled products and the stand-alone selling prices of its individual products is as follows: Store encounter Stand-Alone Cost Package Packaged Price s revenueSelling Price, allocation New Releases $15 $2.00 $20 New & Older decisions Older Releases $10 $1.50 $17 New & Classics with its $8 $1.25 $25 Classics All three bundled product Required: sales. Here, two a. With selling prices as the weights, allocate the $25 packaged price of "All Three" to the three videos using the standor more alone revenue-allocation method. of the movie b. Allocate the $25 packaged price of "All Three" to the three types of videos using the incremental revenue-allocation videos are method. Assume New Releases is the primary product, followed by Older Releases, and then Classics. Answer: a. New $15 + Older $10 + Classics $8 = $33.00 New $15 / $33 × $25 = $11.36 Old $10 / $33 × $25 = $ 7.58 Classics $8 / $33 × $25 = $ 6.06 Total $25.00 b. Product New Releases Older Releases Classics Total revenue allocated Revenue Allocated $15 $10 $ 0 $25 Revenue Remaining To Be Allocated $25 -15 = $10 $25 - $15 - $10 = none Diff: 2 Terms: bundled product, revenue allocation Objective: 7 AACSB: Analytical skills 135) Software For You are keenly interested in individual product-profitability figures. Information pertaining to its three bundled For You products and the stand-alone selling prices of its individual products is as follows: encounter s revenueStand-Alone Cost Package Packaged Price allocation Selling Price, decisions Word Processing (WP) $125 $18 $220 WP & SS with its Spreadsheet (SS) $150 $20 $280 WP & AS bundled Accounting Software $225 $25 $380 All three product (AS) sales. Here, two Required: or more units of a. Using the stand-alone revenue-allocation method, allocate the $380 packaged price of "All Three" to the three the software products software 1. with selling prices as the weights. are sold 2. with individual product costs as the weights. as a single 3. based on physical units. package. Managers b. Allocate the $380 packaged price of "All Three" to the three software products using the incremental revenueat allocation method. Assume Word Processing is the primary product, followed by Spreadsheet, and then Accounting Software Software. Answer: a1. WP $125 + SS $150 + AS $225 = $500 WP $125 / $500 × $380 = $ 95 SS $150 / $500 × $380 = $114 AS $225 / $500 × $380 = $171 Total $380 a2. WP $18 + SS $20 + AS $25 = Diff: 2 Terms: WP SS AS Total re stand-alone method, incremental method, revenue allocation Objective: 7 AACSB: Analytical skills 136) The Pitt ng would reduce costs and increase corporate profitability. In spite of this, there has been no meaningful increase in Corporati corporate profitability. on has been Previously, Pitt used a single-rate method to allocate data processing costs. A per unit cost for data processing was outsourci computed and compared to the price of the outside supplier. The price of the outside supplier was lower, so the outside bid ng data was accepted. processin g in the Required: belief that such Formulate a possible reason why Pitt's profitability has not shown improvement in terms of the cost allocation method outsourci used. Answer: The single-rate cost allocation method groups fixed and variable costs together within each cost pool. The deficiency of this comparison is that the fixed costs included in the cost pool will continue. Therefore, Pitt may be spending more funds in total than if the work was still performed in-house. Diff: 3 Terms: single-rate costallocation method Objective: 1 AACSB: Analytical skills 137) Van substantial fluctuations in its production costs because of the seasonality of figs. Meter Fig Company Would you recommend an actual or budgeted allocation base? Why? Would you recommend calculating monthly, has seasonal, or annual allocation rates? Why? Answer: The company should use a long-term budget amount for the allocation base. Neither an actual amount nor a budgeted monthly amount will provide the company with reliable allocation amounts because of the variability in the supply of figs. With long-term budgeted usage, the user departments will know their allocated costs in advance and should help them in their planning. Diff: 3 Terms: single-rate costallocation method, dual-rate costallocation method Objective: 1 AACSB: Reflective thinking 138) Jonathan In the past, senior management noticed Jonathan's work and he has received very good annual evaluations for his has management of the store. managed a This year his store has generated steady growth in sales, but earnings have been deteriorating. After examining the monthly downtow performance report generated by the company budgeting department, he noticed that increasing fixed costs is causing the n store in decrease in earnings. a major metropolit Administrative corporate costs, primarily fixed costs, are allocated to individual stores each month based on actual sales an city for for that month. Two of these stores are currently growing at a rapid pace, while four other stores are having operating several difficulties. years. The firm has Required: ten stores in varying From the information presented, what do you think is the cause of Jonathan's reported decrease in earnings? How can this locations. be corrected? Answer: The variations in reporting are probably caused by the growth fluctuations of the other branches. When fixed costs are involved in an allocation process based on actual usage, one unit receiving the allocation can have changes even when it doesn't change itself. This is caused by the other stores causing changes in the allocation base, thereby causing everyone to receive different allocation amounts, even those who don't have changes in their base. Because Jonathan's sales have been increasing, his allocation of corporate fixed costs has also increased. To correct the problem, the corporation should change to using budgeted performance as the allocation base and use a denominator level that reflects expected performance over the long run. An allocation base other than sales may also want to be considered. Diff: 3 Terms: single-rate costallocation method, dual-rate costallocation method Objective: 2 AACSB: Reflective thinking 139) Why do ons use budgeted rates instead of actual rates to allocate the costs of support departments to each other and to user organizati departments and divisions? Explain. Answer: The method of using actual rates based on costs realized during the period imposes a level of uncertainty on the user departments. When allocations are made using budgeted rates, managers of departments to which costs are allocated know with certainty the rates to be used in that budgetary period. Users can determine the amount of service to request. Budgeted rates also help motivate the manager of the support department to improve efficiency. The supplier department bears the risk of unfavorable variances and is aware of factors which may be causing negative variances. In cases where the support department's costs are out of control of the support department manager, the uncontrollable factors can be identified and the supplier department can either be relieved of responsibility for those specific factors or there can be a risk sharing agreement negotiated between the support certainty the rates to be used in that budgetary period. Users can determine the amount of service to request. Budgeted rates also help motivate the manager of the support department to improve efficiency. The supplier department bears the risk of unfavorable variances and is aware of factors which may be causing negative variances. In cases where the support department's costs are out of control of the support department manager, the uncontrollable factors can be identified and the supplier department can either be relieved of responsibility for those specific factors or there can be a risk sharing agreement negotiated between the support department and the user departments. Diff: 2 Terms: actual rates, budgeted rates Objective: 2 AACSB: Reflective thinking 140) Describe which may be used to allocate support costs within organizations containing multiple support departments. Discuss methods advantages and disadvantages of the various methods. Answer: Three methods which are used to allocate costs of support departments are; the direct method, the stepdown method, and the reciprocal method. The direct method allocates support department costs only to the operating departments. An advantage of this approach is simplicity. A disadvantage of the approach is that it does not take into account the extent to which some support departments use the services of other support departments. The resultant permutation of costs will not be distributed to the operating departments accurately because they will not have recognized the mutual services provided among all support departments. The step-down method allocates support department costs to other support departments in a sequential manner that partially recognizes the mutual services provided among all support departments. The method usually departments in order of the highest percentage of its total services to tother support departments. This provides more accuracy than the direct method with a minimum added level of complexity in the process. The reciprocal method allocates support department costs to operating departments by fully recognizing the mutual services provided among all support departments. The method is complicated in that it either requires an iterative series of allocations or a linear programming solution to determine the final amounts to be allocated between the support departments which use each others services. It provides the highest level of accuracy but is complex to implement. Diff: 2 Terms: direct method, stepdown method, reciprocal method Objective: 3 AACSB: Reflective thinking 141) What is a "common cost"? What are two methods that a manager can use to allocate common costs to two or more users? Answer: A common cost is the costs of a cost object that is shared by two or more users. Two ways to allocate common costs would be the stand-alone method and the incremental method. The stand-alone method uses information pertaining to each user of the cost object to determine the cost allocation weights. The incremental method ranks individual users of the cost object and allocates common costs first to the primary user, and then to the other incremental users. Diff: 2 Terms: stand-alone method, incremental method Objective: 4 AACSB: Reflective thinking 142) John drafting the provisions of a cost-plus contract and is concerned with ironing out any possible misunderstandings during the Peters is life of the contract. What advice can you provide to reduce contract disputes over reimbursement amounts based on costs? Answer: Disputes can be reduced by making the cost-allocation rules as explicit as possible and in writing. These rules should include details such as the allowable cost items, the acceptable costallocation bases, and how differences between budgeted and actual costs are to be accounted for. Diff: 2 Terms: allowable costs Objective: 5 AACSB: Reflective thinking 143) Why would businesses want to sell bundled products? What benefits, if any, are there for the consumer? Answer: Businesses seek to sell bundled products as a means of increasing total revenues and spreading fixed costs across a larger dollar amount of revenues. The result is usually an increase in overall corporate profitability. For a company to sell more goods, customers must believe that they are getting value for their money. Receiving additional goods or services for what is likely only a marginal increase in price over the price of the primary product could entice consumers to buy the bundled package rather than forgoing the purchase altogether. While not strictly a bundled product, an automobile provides a good example. Car dealers sell cars that are "loaded with options." The price is less than the basic car with the options added separately. Consumers believe they are getting a benefit even though the car might have more options than they would have purchased. The manufacturer has would be the case without the "bundle." A benefit for the consumer is an extra product for only a marginal increase in price that is probably less than the separate price of the products. Diff: 2 Terms: bundled product Objective: 6 AACSB: Reflective thinking 144) Describe discuss the two methods of allocating revenues of a bundled package to the individual products in that package. Describe and any special problems associated with the method. Answer: Method 1. The stand-alone revenueallocation method allocates bundled revenues using product-specific information on the bundle of products as the weights to allocate the bundled revenues to the individual products. When allocating bundled revenues, the proportion of revenues is allocated on four alternative bases: (1) individual product unit selling prices, (2) individual product unit costs, (3) physical units, or (4) stand-alone product revenues. It is preferable to allocate common revenues based on unit revenues, since this best reflects customers' willingness to pay for the different products. However, if the products are never sold separately, unitselling prices are unavailable, so revenues are allocated based on unit costs (which should be available in the firm's accounting records), or simply by the number of physical units that comprise the bundle. Method 2. The incremental revenue- ranks the individual products in the bundled product according to criteria determined by management. This ranking is then used to allocate the bundled revenues to individual products. One problem is how to determine the ranking. Individual product managers want to ranked first so that as much of the revenue as possible is allocated to their product. This can result in disputes between managers. Diff: 2 Terms: bundled product, revenue allocation Objective: 7 AACSB: Reflective thinking ...
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This note was uploaded on 09/18/2010 for the course ACCT 424 taught by Professor All during the Spring '10 term at DeVry Long Beach.

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