Exam 3 - Practice Problems.pdf

If necessary round your answer to two decimal places

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Department to the production departments? (If necessary, round your answer to two decimal places.) Using the reciprocal method, the rate to be used to allocate the variable cost of the IT Department to the production departments $ per hr 5. (8 points) Assume that an outside supplier has offered to supply T&C with IT services at a fixed cost of $400,000 and a rate of $20.00 per hour. Should T&C accept the offer? If T&C accepts the offer it will be able to eliminate all of the department’s operating costs. (Circle the correct answer and provide supporting calculations) Should T&C accept the offer? Yes No
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Exam 3 – Practice Problems Page 37 SOLUTION: 1. (4 points) If T&C uses the direct method to allocate service department costs, and allocates both fixed and variable costs together using a single rate (i.e. using the single rate method), what is the total amount of service department costs that would be allocated to the Assembly Department? Using the direct method and a single rate, total service department costs allocated to the Assembly Department $ 335,000 IT: 700,000 x 3,500 14,000 = 175,000 HR: 400,000 x 18,000 = 160,000 335,000 2. (4 points) If T&C uses the direct method to allocate service department costs, and allocates fixed and variable costs using a separate rate for each (i.e. using the dual rate method), what is the total fixed overhead cost allocation rate that T&C expects to use to allocate the Abrading Department’s overhead costs? Total fixed overhead cost allocation rate for the $ 48.25 per hr Abrading Department Fixed O’head before allocations Fixed cost allocated from 100,000 IT: 350,000 x = 262,500 HR: 200,000 x = 120,000 Allocation rate for Abrading dept. = 482,500 10,000 hrs = 48.28
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Exam 3 – Practice Problems Page 38 3. (5 points) If T&C uses the step-down method to allocate service department costs, and allocates fixed and variable costs using a separate rate for each (i.e. using the dual rate method), what is the amount of the variable costs for the IT Department that would be allocated to the Assembly Department? Proportion of services to other service dept. IT 3,500/17,500 = 20% HR 15,000/60,000 = 25% ==> Allocate HR first Variable IT costs to be allocated Budgeted 350,000 Allocated from HR 200,000 x 15,000 60,000 = 50,000 400,000 IT cost allocated to Assembly 400,000 x 3,500 = 100,000 (10,500 + 3,500) 4. (5 points) If T&C uses the reciprocal method to allocate service department costs, and allocates fixed and variable costs using a separate rate for each (i.e. using the dual rate method), what is the rate ($ per hr of service) that would be used to allocate the variable costs of the IT Department to the production departments? (If necessary, round your answer to two decimal places.) Using the reciprocal method, the rate to be used to allocate the variable cost of the IT Department to the production departments $ 24.06 per hr Reciprocal cost equations: R IT = 350,000 + (15/60) R HR R HR = 200,000 + (3.5/17) R IT ==> R IT = 400,000 / 0.95 = 421,052.63 Allocation Rate = 421,052.63 = 24.06 17,500
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Exam 3 – Practice Problems Page 39 5. (8 points) Assume that an outside supplier has offered to supply T&C with IT services at a fixed cost of $400,000 and a rate of $20.00 per hour. Should T&C accept the offer? If T&C accepts the offer it will be able to eliminate all of the department’s operating costs.
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