Complete Test Bank Chapter 14 Support Department Costing

CHAPTER 14

SUPPORT DEPARTMENT COSTING

CHAPTER LEARNING OBJECTIVES

Outline the purpose of allocating support department costs.
Demonstrate the three methods of allocating support department cost.
Explain two common ways to allocate common costs and bundled revenues.

Current count is:
Knowledge: 23
Comprehension: 34
Application: 70
Analysis: 1
Evaluation: 0
Synthesis: 0
Total: 128

Number and percentage of questions:

Easy: 30

Medium: 86
Hard: 12

Question types:
Multiple Choice: 101

Short Answer: 6

Brief Exercises: 11

Exercises: 8

Problems: 2

MULTIPLE-CHOICE QUESTIONS

Which of the following terms describes departments within a company that provides the necessary services to produce a product but is not directly involved in the production of the product?

a. revenue departments.

b. support departments.

c. expense departments.

d. costing departments.

Ans: B, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Support departments

a. provide necessary services to the operating units.

b. provide services directly to the customers.

c. provide services directly to the vendors.

d. work directly on the products of the company.

Ans: A, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

An example of support departments includes all of the following except

a. security.

b. maintenance.

c. sales.

d. machining.

Ans: D, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Support departments are also known as

a. cost departments.

b. an operating unit.

c. service departments.

d. indirect departments.

Ans: C, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Support departments costs are related to production

a. as part of both direct labor and direct material costs.

b. as part of direct labor costs.

c. as part of direct material costs.

d. indirectly.

Ans: D, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

The highest cost that relates to support departments costs is

a. personnel.

b. legal.

c. professional fees.

d. accounting.

Ans: A, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

All of the following are types of work completed in a support department except

a. janitorial services for the production facility.

b. maintenance repairs on production machines.

c. security services for the production facility.

d. production work to produce the product.

Ans: D, LO 1, Bloom: C, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Tasha Burdett, CEO of Burdett Inc. believes that support department costs are facility costs and should not be allocated to the products produced. Which of the following best explains why Tasha is incorrect?

a. Product costs may be inaccurate because direct material and direct labor are not correctly accounted for.

b. Product costs may be inaccurate because support department services may be consumed more heavily by one product than another.

c. Product costs may be inaccurate because administrative costs play a key role in producing the products.

d. Product costs may be inaccurate because operating units do not depend on support services to produce the products.

Ans: B, LO 1, Bloom: C, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Which of the following statements explains why it is challenging to allocate support department costs, like maintenance work, to products?

a. The costs cannot be adequately known or calculated.

b. The support activities are hard to define.

c. The appropriate allocation base can be difficult to determine.

d. Total costs per department are not accurate and may result in undercharging the customer.

Ans: C, LO 1, Bloom: C, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

What type of costs would support department costs be classified as?

a. indirect costs.

b. direct costs.

c. personnel costs.

d. office supply costs.

Ans: A, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

The best way to allocate support department costs is

a. averaging.

b. based on square footage.

c. based on the number of personnel.

d. based on the support department and the most logical allocation base for that department.

Ans: D, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Support department costs are applied to product costs as

a. variable cost of goods sold.

b. overhead.

c. fixed manufacturing costs.

d. fixed selling and administrative costs.

Ans: B, LO 1, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Service department costs should be allocated to a user department because

a. they consume costs of the operating unit.

b. a user department uses the services of a service department.

c. they measure plant capacity.

d. they are the final costs of the product.

Ans: B, LO 1, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Which of the following allocation bases would be appropriate to allocate the costs of the company cafeteria?

a. Square footage of the cafeteria.

b. The number of hours the facility has used.

c. The number of meals that are served.

d. The number of personnel in the organization.

Ans: D, LO 1, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Which of the following allocation bases would be appropriate to allocate the costs of the housekeeping department?

a. Square footage of the facility.

b. Machine hours.

c. Direct labor hours.

d. The number of employees.

Ans: A, LO 1, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Which of the following allocation bases would be appropriate to allocate the costs of the maintenance department?

a. Square footage of the facility.

b. Machine hours.

c. Direct labor hours.

d. The number of employees.

Ans: B, LO 1, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Which of the following department(s) would most likely use machine hours to allocate its support costs?

a. maintenance.

b. personnel.

c. purchasing.

d. maintenance and personnel.

Ans: A, LO 1, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Which of the following department(s) would most likely use the number of employees to allocate its support costs?

a. maintenance.

b. personnel.

c. purchasing.

d. accounting.

Ans: B, LO 1, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Which of the following reasons for allocating service department costs to user departments would not be applicable?

a. Provide the best possible incentives for each service level.

b. Accurately calculate the profitability of each operating unit.

c. Evaluate the performance of managers.

d. Correctly calculate the units’ profit contribution to the company.

Ans: A, LO 1, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Support department costs are

a. rarely found in a manufacturing organization.

b. allocated by the user department to the units produced.

c. treated as period costs.

d. expensed as incurred.

Ans: B, LO 1, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Which support department costs would most likely allocate its costs based on square footage?

a. Accounting.

b. Maintenance.

c. Cafeteria.

d. Custodial.

Ans: D, LO 1, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

All of the following would be considered a support department in a manufacturing company except

a. design.

b. assembly.

c. human resources.

d. information technology.

Ans: B, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

All the following would be adequate criteria for selecting an allocation base for support departments except

a. the sales dollars generated during the period.

b. the extent of facilities provided.

c. the ease of allocating the costs.

d. the direct benefits from the service provided.

Ans: A, LO 1, Bloom: C, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Determining the basis used to allocate support department costs follows which guideline?

a. Revenue generation.

b. Profit maximization.

c. Cause and effect.

d. Goal comparison.

Ans: C, LO 1, Bloom: K, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

A local community college has more than 15 different departments. The testing department assists instructors in grading exams. TRIO attempts to teach students valuable skills of innovation on surviving college. How would these two departments be classified?

Testing TRIO

a. service service

b. user service

c. service user

d. user user

Ans: B, LO 1, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Allocating service department costs provides a service firm a basis for evaluating the

a. value of its services.

b. costs and profitability of its services.

c. manufacturing costs for the company.

d. profitability of its customers.

Ans: B, LO 1, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

The key implementation issue for cost allocation is the

a. complexity of the equation.

b. time-intensive calculations.

c. changes in financial reporting.

d. choice of the more accurate allocation method.

Ans: D, LO 1, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

The accountant of XYZ Company allocated support department costs between its two divisions. The information for each division is as follows:

Division A Division B

Sales $200,000 $120,000

Cost of Goods Sold 80,000 80,000

Allocated support costs $15,000 $10,000

What is the gross margin for Division A?

a. $200,000.

b. $120,000.

c. $105,000.

d. $15,000.

Ans: B, LO 1, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $200,000 - $80,000 = $120,000

Div A sales – Div A cogs

The accountant of XYZ Company allocated support department costs between its two divisions. The information for each division is as follows:

Division A Division B

Sales $200,000 $120,000

Cost of Goods Sold 80,000 80,000

Allocated support costs $15,000 $10,000

What is the gross margin for Division B?

a. $120,000.

b. $40,000.

c. $30,000.

d. $10,000.

Ans: B, LO 1, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $120,000 - $80,000 = $40,000

Div B sales – Div B cogs

The accountant of XYZ Company allocated support department costs between its two divisions. The information for each division is as follows:

Division A Division B

Sales $200,000 $120,000

Cost of Goods Sold 80,000 80,000

Allocated support costs $15,000 $10,000

What is the operating income for Division A?

a. $200,000.

b. $120,000.

c. $105,000.

d. $15,000.

Ans: C, LO 1, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $200,000 - $80,000 - $15,000 = $105,000

Div A sales – Div A cogs – Div A sup costs

The accountant of XYZ Company allocated support department costs between its two divisions. The information for each division is as follows:

Division A Division B

Sales $200,000 $120,000

Cost of Goods Sold 80,000 80,000

Allocated support costs $15,000 $10,000

What is the operating income for Division B?

a. $120,000.

b. $40,000.

c. $30,000.

d. $10,000.

Ans: C, LO 1, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $120,000 - $80,000 - $10,000 = $30,000

Div B sales – Div B cogs – Div B sup costs

CCC Inc. operates two separate divisions. The admissions department produces revenues of $50,000 per year with a cost of service of $12,000. The company also incurs the following centralized operating costs:

Human Resources $5,000

Rent 2,500

Accounting 1,000

Utilities 1,000

All support costs are allocated between the two divisions. Based on the accountant’s calculation, the admission department’s share of support costs is $4,000. How much will CCC report for a gross margin and operating income for the admissions department?

a. $38,000, $34,000.

b. $38,000, $24,500.

c. $50,000, $34,000.

d. $50,000, $24,500.

Ans: A, LO 1, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $50,000 - $12,000 = $38,000

$38,000 - $4,000 = $34,000

Rev – cost = gr margin

Gr margin – sup cost = op inc.

All of the following methods are acceptable allocation methods except the

a. reciprocal method.

b. direct method.

c. step method.

d. average method.

Ans: D, LO 2, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Which method of allocating support department costs is completed by taking the service flows to production departments only and determining each production department’s share of that service?

a. reciprocal method.

b. direct method.

c. step method.

d. average method.

Ans: B, LO 2, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Which method of allocating support department costs is easiest but least accurate?

a. reciprocal method.

b. direct method.

c. step method.

d. average method.

Ans: B, LO 2, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Which method of allocating support department costs is most accurate but also more complex?

a. reciprocal method.

b. direct method.

c. step method.

d. average method.

Ans: A, LO 2, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Which method of allocating support department costs does not provide data for the support departments to monitor each other’s costs?

a. reciprocal method.

b. direct method.

c. step method.

d. average method.

Ans: B, LO 2, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

If a company uses the direct method of allocating support department costs to production departments, which of the following statements is true?

a. The direct method is more complex than the step method.

b. The direct method only allocates some of the support department costs directly to production and is more accurate than the reciprocal method.

c. The direct method allocates all the support department costs directly to the production departments and is the simplest method.

d. The direct method requires that the same allocation method be used for each support department.

Ans: C, LO 2, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Dickson Company has two production departments and two support departments. Each department occupies the following square footage:

Housekeeping services 1,500

Administration 2,500

Accounting Department - Producing 5,000

Tax Department - Producing 5,000

Housekeeping department costs are allocated on the basis of the square footage of space. If the budget for housekeeping costs is $45,000, what amount would be allocated to Administration using the direct method to allocate costs?

a. $0.

b. $4,821.

c. $8,036.

d. $16,875.

Ans: A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $0 – using the direct method, no allocation between service departments occur

Dickson Company has two production departments and two support departments. Each department occupies the following square footage:

Housekeeping services 1,500

Administration 2,500

Accounting Department - Producing 5,000

Tax Department - Producing 5,000

Housekeeping department costs are allocated on the basis of the square footage of space. If the budget for housekeeping costs is $45,000, what amount would be allocated to the accounting department using the direct method?

a. $0.

b. $16,071.

c. $22,500.

d. $45,000.

Ans: C, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: 5,000 + 5,000 = 10,000

5,000 ÷ 10,000 = 50% x $45,000 = $22,500

Acct sq ft + tax sq ft = total prod sq ft

Acct Sq ft ÷ total prod sq ft = percent alloc x housek costs = alloc housek costs

Expo manufacturing has two production departments and two support departments. The number of employees for each department is as follows:

Human resource 5

Accounting 10

Machining - Producing 520

Assembly - Producing 220

Accounting department costs are allocated on the basis of the number of employees. If the budget for accounting costs is $98,000, what amount would be allocated to Machining using the direct method?

a. $0.

b. $67,497.

c. $67,947.

d. $68,865.

Ans: D, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: 520 + 220 = 740

520 ÷ 740 x $98,000 = $68,865

Mach empl + Assm emply = total empl

Mach empl ÷ total empl x acct costs = alloc costs

Using the direct method, Natasha allocates Custodial Department costs based on square footage serviced and budgets $25,000 for the coming period. She allocates Accounting Department costs based on the number of employees served and is budgeting $105,000 for the next period. She shows the following information about the two service departments and two production departments.

Number of

Square Feet Employees

Custodial Department 250 25

Accounting Department 5,000 5

Machining - Producing 8,000 120

Assembly - Producing 4,000 40

The total amount of costs allocated to Machining from the Custodial Department and Accounting Department is

a. $77,910.

b. $79,873.

c. $87,413.

d. $95,417.

Ans: D, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: 8,000 + 4,000 = 12,000

8,000 ÷ 12,000 x $25,000 = $16,667

120 + 40 = 160

120 ÷ 160 x $105,000 = $78,750

$78,750 + $16,667 = $95,417

Mach sq ft + Assm sq ft = total sq ft

Mach sq ft ÷ total sq ft x cust costs = cust alloc costs

Mach empl + Assm emply = total empl

Mach empl ÷ total empl x acct costs = acct alloc costs

Cust alloc costs + acct alloc costs = total alloc costs

Using the direct method, Natasha allocates Custodial Department costs based on square footage serviced and budgets $25,000 for the coming period. She allocates Accounting Department costs based on the number of employees served and is budgeting $105,000 for the next period. She shows the following information about the two service departments and two production departments.

Number of

Square Feet Employees

Custodial Department 250 25

Accounting Department 5,000 5

Machining - Producing 8,000 120

Assembly - Producing 4,000 40

The total amount of costs allocated to Assembly from the Custodial Department and Accounting Department is

a. $27,902.

b. $28,585.

c. $34,583.

d. $37,985.

Ans: C, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: 8,000 + 4,000 = 12,000

4,000 ÷ 12,000 x $25,000 = $8,333

120 + 40 = 160

40 ÷ 160 x $105,000 = $26,250

$8,333 + $26,250 = $34,583

Mach sq ft + Assm sq ft = total sq ft

Assm sq ft ÷ total sq ft x cust costs = cust alloc costs

Mach empl + Assm emply = total empl

Assm empl ÷ total empl x acct costs = acct alloc costs

Cust alloc costs + acct alloc costs = total alloc costs

Spirits and More operates two departments, Cutting and Fabrication. Two service departments, maintenance and purchasing, are also included within the company. The operating costs and distribution of each service department’s efforts to the other departments is as follows:

Operating

Maintenance Purchasing Costs

Maintenance 0% 25% $87,000

Purchasing 35% 0% 16,000

Cutting 15% 60% 80,000

Fabrication 50% 15% 56,000

Using the direct method of allocating support costs, what is the total cost accumulated in the cutting department?

a. $32,877.

b. $80,000.

c. $85,600.

d. $112,877.

Ans: D, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: 15% + 50% = 65%

15% ÷ 65% x $ $87,000 = $20,077

60% + 15% = 75%

60% ÷ 75% x $16,000 = $12,800

$20,077 + $12,800 + $80,000 = $112,877

Maint Cut % + Maint Fab % = total maint %

Maint cut % ÷ total maint % x maint costs = maint alloc costs

Pur cut % + Pur fab % = purch alloc costs

Pur cut % ÷ purch alloc costs x pur costs = purch alloc costs

maint alloc costs + purch alloc costs + cut op costs = total cut costs

Spirits and More operates two departments, Cutting and Fabrication. Two service departments, maintenance and purchasing, are also included within the company. The operating costs and distribution of each service department’s efforts to the other departments is as follows:

Operating

Maintenance Purchasing Costs

Maintenance 0% 25% $87,000

Purchasing 35% 0% 16,000

Cutting 15% 60% 80,000

Fabrication 50% 15% 56,000

Using the direct method of allocating support costs, what is the total cost accumulated in the fabrication department?

a. $56,000.

b. $70,123.

c. $77,750.

d. $126,123.

Ans: D, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: 15% + 50% = 65%

50% ÷ 65% x $ $87,000 = $66,923

60% + 15% = 75%

15% ÷ 75% x $16,000 = $3,200

$66,923 + $3,200 + $56,000 = $126,123

Maint Cut % + Maint Fab % = total maint %

Maint fab % ÷ total maint % x maint costs = maint alloc costs

Pur cut % + Pur fab % = purch alloc costs

Pur fab % ÷ purch alloc costs x pur costs = purch alloc costs

maint alloc costs + purch alloc costs + fab op costs = total fab costs

If a company operates two producing departments and they are serviced by the same three support departments, which support departments costs should be allocated first when using the step method?

a. The support department that provides the most service to other support departments.

b. The support department with the least amount of cost.

c. The support department that provides the most service to the user departments.

d. The service department that provides the least service to other service departments.

Ans: A, LO 2, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

When using the step method to allocate support department costs, what is considered a weakness in the method?

a. The order of support department allocation must be determined.

b. All intradepartmental supports are ignored.

c. All interdepartmental supports are ignored.

d. Computations are more complex than the reciprocal method.

Ans: A, LO 2, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

What is the first step in allocating support costs using the step method?

a. Allocate costs from the highest-ranked support department to the other support departments and operating units.

b. Rank support departments by the service that provides the most support to other support departments.

c. Rank support departments by the service that provides the most support to the operating units.

d. Allocate costs from the highest-ranked support department to the other support departments.

Ans: B, LO 2, Bloom: C, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

What is the second step in allocating support costs using the step method?

a. Allocate costs from the highest-ranked support department to the other support departments and operating units.

b. Rank support departments by the service that provides the most support to other support departments.

c. Rank support departments by the service that provides the most support to the operating units

d. Allocate costs from the highest-ranked support department to the other support departments.

Ans: A, LO 2, Bloom: C, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

When using the step method to allocate support department costs, which of the following statements is true?

a. The step method is also called the step-up method.

b. The step method is more accurate than the direct method but less accurate than the reciprocal method.

c. The step method requires the same allocation base to be used for each support department.

d. The step method captures some, but not all, inter-support department services by allocating support department costs to other support departments and production departments.

Ans: D, LO 2, Bloom: C, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

When determining the sequence of support, using the step method to allocate support department costs, all of the following statements are true except:

a. Departments with more employees are allocated earlier.

b. Departments with more accurate allocation bases are allocated earlier.

c. Departments that serve a larger number of support departments are allocated earlier.

d. Departments that have a higher cost are allocated earlier.

Ans: A, LO 2, Bloom: C, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Which of the following best explains the major difference between the direct method and step method?

a. Under the step method, the total support department costs to be allocated will also include any costs that were allocated to that support department from other support departments.

b. Under the direct method, the total support department costs to be allocated will also include any costs that were allocated to that support department from other support departments.

c. Under the step method, the total support department costs to be allocated will never include any costs that were allocated to that support department from other support departments.

d. Under the step method, every support department receives costs allocated from every other support department.

Ans: A, LO 2, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Dickson Company has two production departments and two support departments. Each department occupies the following square footage:

Housekeeping Services 1,500

Administration 2,500

Accounting Department - Producing 5,000

Tax Department - Producing 5,000

a. $0.

b. $4,821.

c. $6,750.

d. $16,875.

Ans: A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $0 – because admin provides more support (based on % of total sq ft) than housekeeping, costs from housekeeping are not allocated up.

Dickson Company has two production departments and two support departments. Each department occupies the following square footage:

Housekeeping services 1,500

Administration 2,500

Accounting Department - Producing 5,000

Tax Department - Producing 5,000

Support department costs are allocated on the basis of the square footage of space. If the budget for administration costs is $67,000 and housekeeping costs are $45,000, what amount would be allocated to housekeeping (from administration) using the step method to allocate costs?

a. $0.

b. $7,179.

c. $8,739.

d. $67,000.

Ans: A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: 1,500 + 5,000 + 5,000 = 11,500

1,500 ÷ 11,500 x $67,000 = $8,739

Housek sq ft + acct sq ft + tax sq ft = total sq ft

Housek sq ft ÷ total sq ft x admin costs = alloc costs

Dickson Company has two production departments and two support departments. Each department occupies the following square footage:

Housekeeping services 1,500

Administration 2,500

Accounting Department - Producing 5,000

Tax Department - Producing 5,000

Support department costs are allocated on the basis of the square footage of space. If the administration costs are $67,000 and housekeeping costs are $45,000, what amount would be allocated to the accounting department if the company uses the step method?

a. $26,870.

b. $29,130.

c. $53,739.

d. $56,000.

Ans: D, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: 1,500 + 5,000 + 5,000 = 11,500

1,500 ÷ 11,500 x $67,000 = $8,739

5,000 ÷ 11,500 x $67,000 = $29,130

$45,000 + $8,739 = $53,739

5,000 + 5,000 = 10,000

5,000 ÷ 10,000 x $53,739 = $26,870

$26,870 + $29,130 = $56,000

Housek sq ft + acct sq ft + tax sq ft = total sq ft

Housek sq ft ÷ total sq ft x admin costs = alloc costs admin to housek

acct sq ft ÷ total sq ft x admin costs = alloc costs admin to acct

housek costs + alloc costs admin to housek = total housek costs

acct sq ft + tax sq ft = total sq ft

acct sq ft ÷ total sq ft x housek costs = alloc costs housek to acct

alloc costs admin to acct + alloc costs housek to acct = total acct costs

Expo manufacturing has two production departments and two support departments. The number of employees for each department is as follows:

Human Resources 5

Accounting 10

Machining - Producing 520

Assembly - Producing 220

Human Resources shows a budget of $21,000 and accounting, $98,000, for the coming year. Support department costs are allocated on the basis of the number of employees. What amount would be allocated to accounting using the step method?

a. $0.

b. $278.

c. $14,000.

d. $21,000.

Ans: A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $0 - because accounting provides more support (based on % of total employees) than hr, costs from hr are not allocated up.

Expo manufacturing has two production departments and two support departments. The number of employees for each department is as follows:

Human Resources 5

Accounting 10

Machining - Producing 520

Assembly - Producing 220

a. $0.

b. $649.

c. $658.

d. $98,000.

Ans: C, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: 5 + 520 + 220 = 745

5 ÷ 745 x $98,000 = $658

Hr # of empl + mach # of empl + assm # of empl = total # of empl

Hr # of empl ÷ total # of empl x acct costs = alloc costs

Expo manufacturing has two production departments and two support departments. The number of employees for each department is as follows:

Human Resources 5

Accounting 10

Machining - Producing 520

Assembly - Producing 220

Human Resources shows a budget of $21,000 and accounting, $98,000, for the coming year. Support department costs are allocated on the basis of the number of employees. What amount of human resource costs would be allocated to machining, using the step method?

a. $14,757.

b. $14,917.

c. $15,219.

d. $21,000.

Ans: C, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: 5 + 520 + 220 = 745

5 ÷ 745 x $98,000 = $658

$21,000 + $658 = $21,658

520 + 220 = 740

520 ÷ 740 x $21,658 = $15,219

Hr # of empl + mach # of empl + assm # of empl = total # of empl

Hr # of empl ÷ total # of empl x acct costs = hr alloc costs

Hr costs + hr alloc costs = total hr costs to alloc

mach # of empl + assm # of empl = total # of empl

mach # of empl ÷ total # of empl x hr costs = mach alloc cost from hr

Expo manufacturing has two production departments and two support departments. The number of employees for each department is as follows:

Human Resources 5

Accounting 10

Machining - Producing 520

Assembly - Producing 220

Human Resources shows a budget of $21,000 and accounting, $98,000, for the coming year. Support department costs are allocated on the basis of the number of employees. What amount of human resource costs would be allocated to assembly, using the step method?

a. $6,243.

b. $6,311.

c. $6,439.

d. $21,000.

Ans: C, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: 5 + 520 + 220 = 745

5 ÷ 745 x $98,000 = $658

$21,000 + $658 = $21,658

520 + 220 = 740

220 ÷ 740 x $21,658 = $6,439

Hr # of empl + mach # of empl + assm # of empl = total # of empl

Hr # of empl ÷ total # of empl x acct costs = hr alloc costs

Hr costs + hr alloc costs = total hr costs to alloc

mach # of empl + assm # of empl = total # of emplassm alloc cost from hr

Expo manufacturing has two production departments and two support departments. The number of employees for each department is as follows:

Human Resources 5

Accounting 10

Machining - Producing 520

Assembly - Producing 220

Human Resources shows a budget of $21,000 and accounting, $98,000, for the coming year. Support department costs are allocated on the basis of the number of employees. How much in total support costs would be allocated to machining, using the step method?

a. $82,413.

b. $83,622.

c. $68,403.

d. $119,000.

Ans: B, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: 5 + 520 + 220 = 745

5 ÷ 745 x $98,000 = $658

$21,000 + $658 = $21,658

520 ÷ 745 x $98,000 = $68,403

520 + 220 = 740

520 ÷ 740 x $21,658 = $15,219

$68,403 + $15,219 = $83,622

Hr # of empl + mach # of empl + assm # of empl = total # of empl

Hr # of empl ÷ total # of empl x acct costs = hr alloc costs

Hr costs + hr alloc costs = total hr costs to alloc

mach # of empl + assm # of empl = total # of prod empl

mach # of empl ÷ total # of prod empl x acct costs = acct cost alloc to maint

mach # of empl ÷ total # of empl x hr costs = mach alloc cost from hr

acct cost alloc to maint + mach alloc cost from hr = total mach sup costs

Expo manufacturing has two production departments and two support departments. The number of employees for each department is as follows:

Human Resources 5

Accounting 10

Machining - Producing 520

Assembly - Producing 220

a. $34,867.

b. $35,378.

c. $28,940.

d. $119,000.

Ans: B, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: 5 + 520 + 220 = 745

5 ÷ 745 x $98,000 = $658

$21,000 + $658 = $21,658

220 ÷ 745 x $98,000 = $28,940

220 + 520 = 740

220 ÷ 740 x $21,658 = $6,439

$28,940 + $6,439 = $35,378

Hr # of empl + mach # of empl + assm # of empl = total # of empl

Hr # of empl ÷ total # of empl x acct costs = hr alloc costs

Hr costs + hr alloc costs = total hr costs to alloc

mach # of empl + assm # of empl = total # of prod empl

assm # of empl ÷ total # of prod empl x acct costs = acct cost alloc to assm

assm # of empl ÷ total # of empl x hr costs = assm alloc cost from hr

acct cost alloc to assm + assm alloc cost from hr = total assm sup costs

Using the step method, Natasha allocates Custodial Department costs based on square footage serviced and budgets $25,000 for the coming period. She allocates Accounting Department costs based on the number of employees served and is budgeting $105,000 for the next period. She shows the following information about the two service departments and two production departments.

Number of

Square Feet Employees

Custodial Department 250 25

Accounting Department 5,000 5

Machining - Producing 8,000 120

Assembly - Producing 4,000 40

Assuming Natasha allocates the accounting costs first, how much support costs would be allocated to the Custodial Department?

a. $2,188.

b. $14,189.

c. $27,188.

d. $39,189.

Ans: B, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: 25 + 120 + 40 = 185

25 ÷ 185 x $105,000 = $14,189

Cust # of empl + mach # of empl + assm # of empl = total # of empl

Cust # of empl ÷ total # of empl = acct cost alloc to cust

Using the step method, Natasha allocates Custodial Department costs based on square footage serviced and budgets $25,000 for the coming period. She allocates Accounting Department costs based on the number of employees served and is budgeting $105,000 for the next period. She shows the following information about the two service departments and two production departments.

Number of

Square Feet Employees

Custodial Department 250 25

Accounting Department 5,000 5

Machining - Producing 8,000 120

Assembly - Producing 4,000 40

Assuming Natasha allocates the accounting costs first, how much in support costs would be allocated to machining?

a. $68,108.

b. $70,000.

c. $87,635.

d. $94,234.

Ans: D, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: 25 + 120 + 40 = 185

25 ÷ 185 x $105,000 = $14,189

120 ÷ 185 x $105,000 = $68,108

$14,189 + $25,000 = $39,189

8,000 + 4,000 = 12,000

8,000 ÷ 12,000 x $39,189 = $26,126

$26,126 + $68,108 = $94,234

Cust # of empl + mach # of empl + assm # of empl = total # of empl

Cust # of empl ÷ total # of empl = acct cost alloc to cust

mach # of empl ÷ total # of empl = acct cost alloc to mach

acct cost alloc to cust + cust costs = cust costs to alloc

Mach sq ft + assm sq ft = total sq ft

Mach sq ft ÷ total sq ft x cust costs to alloc = cust costs alloc to mach

cust costs alloc to mach + acct cost alloc to mach = total sup costs to mach

Using the step method, Natasha allocates Custodial Department costs based on square footage serviced and budgets $25,000 for the coming period. She allocates Accounting Department costs based on the number of employees served and is budgeting $105,000 for the next period. She shows the following information about the two service departments and two production departments.

Number of

Square Feet Employees

Custodial Department 250 25

Accounting Department 5,000 5

Machining - Producing 8,000 120

Assembly - Producing 4,000 40

Assuming Natasha allocates the accounting costs first, how much in support costs would be allocated to assembly?

a. $22,703.

b. $35,000.

c. $35,766.

d. $40,878.

Ans: C, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: 25 + 120 + 40 = 185

25 ÷ 185 x $105,000 = $14,189

40 ÷ 185 x $105,000 = $22,703

$14,189 + $25,000 = $39,189

8,000 + 4,000 = 12,000

4,000 ÷ 12,000 x $39,189 = $13,063

$13,063 + $22,703 = $35,766

Cust # of empl + mach # of empl + assm # of empl = total # of empl

Cust # of empl ÷ total # of empl = acct cost alloc to cust

assm # of empl ÷ total # of empl = acct cost alloc to assm

acct cost alloc to cust + cust costs = cust costs to alloc

Mach sq ft + assm sq ft = total sq ft

assm sq ft ÷ total sq ft x cust costs to alloc = cust costs alloc to assm

cust costs alloc to assm + acct cost alloc to mach = total sup costs to assm

Which of the methods used to allocate support costs recognizes the services that support departments provide to each other?

a. Direct method.

b. Step method.

c. Reciprocal method.

d. All three methods.

Ans: C, LO 2, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

When using the reciprocal method, which function in excel can assist in solving the allocation?

a. Goal Seek.

b. Solver.

c. Iterations.

d. Regression.

Ans: C, LO 2, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

When allocating support department costs, the reciprocal method is preferred over the step method because it considers all reciprocal flows between

a. support departments.

b. producing departments.

c. user departments.

d. competing departments.

Ans: A, LO 2, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Which method is considered the more accurate method in allocating costs because it first recognizes interdepartmental support services?

a. Direct method.

b. Step method.

c. Reciprocal method.

d. All three methods.

Ans: C, LO 2, Bloom: C, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Which of the following statements best explains the significant difference between the step method and the reciprocal method?

a. Under the reciprocal method, some but not all inter-support-department services are allocated to support departments.

b. Under the reciprocal method, all inter-support-department services are allocated to support departments.

c. The reciprocal method is less accurate than the step method.

d. The reciprocal method is easier to implement than the step method.

Ans: B, LO 2, Bloom: C, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

When using the reciprocal method to allocate support costs, which of the following equations represents the algebraic expression for the total costs of a Custodial Department (C) that includes not only $120,000 of direct costs but also 15% of the Maintenance Departments (M) cost?

a. C = $120,000 + (.15 ÷ M).

b. C = ($120,000 x .15) + M.

c. C = $120,000 – (.15 x M).

d. C = $120,000 + (.15 x M).

Ans: D, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

When using the reciprocal method to allocate support costs, which of the following equations represents the two algebraic expressions needed for the total costs of a Custodial Department (C) that includes not only $120,000 of direct costs but also 15% of the Maintenance Departments (M) cost and the Maintenance Department that consists of $10,000 of direct costs and $40% of the Custodial Department?

a. C = $120,000 + (.15 ÷ M) and M = $10,000 + (.40 ÷ C).

b. C = ($120,000 x .15) + M and M = ($10,000 x .40) + C.

c. C = $120,000 – (.15 x M) and M = $10,000 – (.40 x C).

d. C = $120,000 + (.15 x M) and M = $10,000 + (.40 x C).

Ans: D, LO 2, Bloom: AP, Difficulty: Hard, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Xaric Industries operates two support departments, Personnel and Accounting, and two producing departments, Fabrication and Assembly. Information on the support percentages and cost for each department is as follows:

Operating

Personnel Accounting Costs

Personnel 0% 6% $15,000

Accounting 10% 0% 8,000

Fabrication 35% 50% 105,000

Assembly 55% 44% 97,500

Using the reciprocal method of allocating support costs, what is the total cost allocated from the Personnel Department?

a. $15,573.

b. $8,000.

c. $9,500.

d. $15,000.

Ans: A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: ($15,000 + (.06 x $8,000)) ÷ (1-(.06 * .10)) = $15,573

Per Op Costs + (Per % of acct x Acct op costs) ÷ (1 – (per % of Acct x Acct % of per)) = cost from per

Xaric Industries operates two support departments, Personnel and Accounting, and two producing departments, Fabrication and Assembly. Information on the support percentages and cost for each department is as follows:

Operating

Personnel Accounting Costs

Personnel 0% 6% $15,000

Accounting 10% 0% 8,000

Fabrication 35% 50% 105,000

Assembly 55% 44% 97,500

Using the reciprocal method of allocating support costs, what is the total cost allocated from the Accounting Department?

a. $15,573.

b. $8,000.

c. $9,500.

d. $9,557.

Ans: D, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: ($8,000 + (.10 x $15,000)) ÷ (1-(.06 * .10)) = $9,557

acct Op Costs + (acct % of per x per op costs) ÷ (1 – (per % of Acct x Acct % of per)) = cost from acct

Xaric Industries operates two support departments, Personnel and Accounting, and two producing departments, Fabrication and Assembly. Information on the support percentages and cost for each department is as follows:

Operating

Personnel Accounting Costs

Personnel 0% 6% $15,000

Accounting 10% 0% 8,000

Fabrication 35% 50% 105,000

Assembly 55% 44% 97,500

Using the reciprocal method of allocating support costs, what is the total cost allocated to the Fabrication Department from the two support departments?

a. $10,300.

b. $9,943.

c. $9,250.

d. $10,229.

Ans: D, LO 2, Bloom: AP, Difficulty: Hard, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: ($15,000 + (.06 x $8,000)) ÷ (1-(.06 * .10)) = $15,573

($8,000 + (.10 x $15,000)) ÷ (1-(.06 * .10)) = $9,557

$15,573 x 35% = $5,451

$9,557 x 50% = $4,205

$5,451 + $4,779 = $10,229

Per Op Costs + (Per % of acct x Acct op costs) ÷ (1 – (per % of Acct x Acct % of per)) = cost from per

acct Op Costs + (acct % of per x per op costs) ÷ (1 – (per % of Acct x Acct % of per)) = cost from acct

costs from per x fab-per % = cost from per to fab

costs from acct x fab-acct% =cost from acct to fab

cost from per to fab + cost from acct to fab = total cost alloc to fab

Xaric Industries operates two support departments, Personnel and Accounting, and two producing departments, Fabrication and Assembly. Information on the support percentages and cost for each department is as follows:

Operating

Personnel Accounting Costs

Personnel 0% 6% $15,000

Accounting 10% 0% 8,000

Fabrication 35% 50% 105,000

Assembly 55% 44% 97,500

Using the reciprocal method of allocating support costs, what is the total cost allocated to the Assembly Department from the two support departments?

a. $11,000.

b. $12,859.

c. $12,771.

d. $11,770.

Ans: C, LO 2, Bloom: AP, Difficulty: Hard, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: ($15,000 + (.06 x $8,000)) ÷ (1-(.06 * .10)) = $15,573

($8,000 + (.10 x $15,000)) ÷ (1-(.06 * .10)) = $9,557

$15,573 x 55% = $8,565

$9,557 x 44% = $4,205

$8,565 + $4,205 = $12,771

Per Op Costs + (Per % of acct x Acct op costs) ÷ (1 – (per % of Acct x Acct % of per)) = cost from per

acct Op Costs + (acct % of per x per op costs) ÷ (1 – (per % of Acct x Acct % of per)) = cost from acct

costs from per x assm-per % = cost from per to assm

costs from acct x assm-acct% =cost from acct to assm

cost from per to assm + cost from acct to assm = total cost alloc to assm

Grey’s Medical operates three support departments and two operating units, Surgery and ER. The support departments are allocated based on the hours used. The cost of operating the accounting (acct), administration (admin), and human resources (HR) departments is $260,000, $150,000, and $60,000, respectively. Information on the hours used are as follows:

Acct Admin HR Surgery ER

Hours in Acct 20 48 360 220

Hours in Admin 16 8 120 80

Hours in HR 8 4 65 130

What amount of costs would be allocated from the accounting department to the other support departments (admin and HR) using the reciprocal method to allocate costs?

a. $0.

b. $27,284.

c. $28,620.

d. $28,833.

Ans: D, LO 2, Bloom: AP, Difficulty: Hard, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: 20 + 48 + 360 + 220 = 648

16 + 8 + 120 + 80 = 224

8 + 4 + 65 + 130 = 207

20 ÷ 648 = 3%

48 ÷ 648 = 7%

16 ÷ 224 = 7%

8 ÷ 224 = 4%

8 ÷ 207 = 4%

4 ÷ 207 = 2%

Hrs in acct admin + hrs in acct hr + hrs in acct surg + hrs in acct ER = Total hrs in acct

Hrs in admin acct + hrs in admin hr + hrs in admin surg + hrs in admin ER = Total hrs in admin

Hrs in hr acct + hrs in hr admin + hrs in hr surg + hrs in hr ER = Total hrs in hr

Hrs in acct admin ÷ Total hrs in acct = % of hrs in acct admin

Hrs in acct hr ÷ Total hrs in acct = % of hrs in acct hr

Hrs in admin acct ÷ Total hrs in admin = % of hrs in admin acct

Hrs in admin hr ÷ Total hrs in admin = % of hrs in admin hr

Hrs in hr acct ÷ Total hrs in hr = % of hrs in hr acct

Hrs in hr admin ÷ Total hrs in hr = % of hrs in hr admin

Use excel with iterations on for remaining calculations

Grey’s Medical operates three support departments and two operating units, Surgery and ER. The support departments are allocated based on the hours used. The cost of operating the accounting (acct), administration (admin), and human resources (HR) departments is $260,000, $150,000, and $60,000, respectively. Information on the hours used are as follows:

Acct Admin HR Surgery ER

Hours in Acct 20 48 360 220

Hours in Admin 16 8 120 80

Hours in HR 8 4 65 130

What amount of costs would be allocated from the administrative department to the other support departments (Acct and HR) using the reciprocal method to allocate costs?

a. $0.

b. $15,741.

c. $16,511.

d. $17,158.

Ans: D, LO 2, Bloom: AP, Difficulty: Hard, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: 20 + 48 + 360 + 220 = 648

16 + 8 + 120 + 80 = 224

8 + 4 + 65 + 130 = 207

20 ÷ 648 = 3%

48 ÷ 648 = 7%

16 ÷ 224 = 7%

8 ÷ 224 = 4%

8 ÷ 207 = 4%

4 ÷ 207 = 2%

Hrs in acct admin + hrs in acct hr + hrs in acct surg + hrs in acct ER = Total hrs in acct

Hrs in admin acct + hrs in admin hr + hrs in admin surg + hrs in admin ER = Total hrs in admin

Hrs in hr acct + hrs in hr admin + hrs in hr surg + hrs in hr ER = Total hrs in hr

Hrs in acct admin ÷ Total hrs in acct = % of hrs in acct admin

Hrs in acct hr ÷ Total hrs in acct = % of hrs in acct hr

Hrs in admin acct ÷ Total hrs in admin = % of hrs in admin acct

Hrs in admin hr ÷ Total hrs in admin = % of hrs in admin hr

Hrs in hr acct ÷ Total hrs in hr = % of hrs in hr acct

Hrs in hr admin ÷ Total hrs in hr = % of hrs in hr admin

Use excel with iterations on for remaining calculations

Grey’s Medical operates three support departments and two operating units, Surgery and ER. The support departments are allocated based on the hours used. The cost of operating the accounting (acct), administration (admin), and human resources (HR) departments is $260,000, $150,000, and $60,000, respectively. Information on the hours used are as follows:

Acct Admin HR Surgery ER

Hours in Acct 20 48 360 220

Hours in Admin 16 8 120 80

Hours in HR 8 4 65 130

What amount of costs would be allocated from the HR department to the other support departments (Acct and Admin) using the reciprocal method to allocate costs?

a. $0.

b. $4,990.

c. $6,296.

d. $6,605.

Ans: B, LO 2, Bloom: AP, Difficulty: Hard, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: 20 + 48 + 360 + 220 = 648

16 + 8 + 120 + 80 = 224

8 + 4 + 65 + 130 = 207

20 ÷ 648 = 3%

48 ÷ 648 = 7%

16 ÷ 224 = 7%

8 ÷ 224 = 4%

8 ÷ 207 = 4%

4 ÷ 207 = 2%

Hrs in acct admin + hrs in acct hr + hrs in acct surg + hrs in acct ER = Total hrs in acct

Hrs in admin acct + hrs in admin hr + hrs in admin surg + hrs in admin ER = Total hrs in admin

Hrs in hr acct + hrs in hr admin + hrs in hr surg + hrs in hr ER = Total hrs in hr

Hrs in acct admin ÷ Total hrs in acct = % of hrs in acct admin

Hrs in acct hr ÷ Total hrs in acct = % of hrs in acct hr

Hrs in admin acct ÷ Total hrs in admin = % of hrs in admin acct

Hrs in admin hr ÷ Total hrs in admin = % of hrs in admin hr

Hrs in hr acct ÷ Total hrs in hr = % of hrs in hr acct

Hrs in hr admin ÷ Total hrs in hr = % of hrs in hr admin

Use excel with iterations on for remaining calculations

Grey’s Medical operates three support departments and two operating units, Surgery and ER. The support departments are allocated based on the hours used. The cost of operating the accounting (acct), administration (admin), and human resources (HR) departments is $260,000, $150,000, and $60,000, respectively. Information on the hours used are as follows:

Acct Admin HR Surgery ER

Hours in Acct 20 48 360 220

Hours in Admin 16 8 120 80

Hours in HR 8 4 65 130

What are the total costs allocated from the accounting department to the operating units?

a. $0.

b. $265,789.

c. $274,765.

d. $276,511.

Ans: C, LO 2, Bloom: AP, Difficulty: Hard, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: 20 + 48 + 360 + 220 = 648

16 + 8 + 120 + 80 = 224

8 + 4 + 65 + 130 = 207

20 ÷ 648 = 3%

48 ÷ 648 = 7%

16 ÷ 224 = 7%

8 ÷ 224 = 4%

8 ÷ 207 = 4%

4 ÷ 207 = 2%

Hrs in acct admin + hrs in acct hr + hrs in acct surg + hrs in acct ER = Total hrs in acct

Hrs in admin acct + hrs in admin hr + hrs in admin surg + hrs in admin ER = Total hrs in admin

Hrs in hr acct + hrs in hr admin + hrs in hr surg + hrs in hr ER = Total hrs in hr

Hrs in acct admin ÷ Total hrs in acct = % of hrs in acct admin

Hrs in acct hr ÷ Total hrs in acct = % of hrs in acct hr

Hrs in admin acct ÷ Total hrs in admin = % of hrs in admin acct

Hrs in admin hr ÷ Total hrs in admin = % of hrs in admin hr

Hrs in hr acct ÷ Total hrs in hr = % of hrs in hr acct

Hrs in hr admin ÷ Total hrs in hr = % of hrs in hr admin

Use excel with iterations on for remaining calculations

Grey’s Medical operates three support departments and two operating units, Surgery and ER. The support departments are allocated based on the hours used. The cost of operating the accounting (acct), administration (admin), and human resources (HR) departments is $260,000, $150,000, and $60,000, respectively. Information on the hours used are as follows:

Acct Admin HR Surgery ER

Hours in Acct 20 48 360 220

Hours in Admin 16 8 120 80

Hours in HR 8 4 65 130

What are the total costs allocated from the administrative department to the operating units?

a. $0.

b. $160,144.

c. $160,168.

d. $170,890.

Ans: B, LO 2, Bloom: AP, Difficulty: Hard, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: 20 + 48 + 360 + 220 = 648

16 + 8 + 120 + 80 = 224

8 + 4 + 65 + 130 = 207

20 ÷ 648 = 3%

48 ÷ 648 = 7%

16 ÷ 224 = 7%

8 ÷ 224 = 4%

8 ÷ 207 = 4%

4 ÷ 207 = 2%

Hrs in acct admin + hrs in acct hr + hrs in acct surg + hrs in acct ER = Total hrs in acct

Hrs in admin acct + hrs in admin hr + hrs in admin surg + hrs in admin ER = Total hrs in admin

Hrs in hr acct + hrs in hr admin + hrs in hr surg + hrs in hr ER = Total hrs in hr

Hrs in acct admin ÷ Total hrs in acct = % of hrs in acct admin

Hrs in acct hr ÷ Total hrs in acct = % of hrs in acct hr

Hrs in admin acct ÷ Total hrs in admin = % of hrs in admin acct

Hrs in admin hr ÷ Total hrs in admin = % of hrs in admin hr

Hrs in hr acct ÷ Total hrs in hr = % of hrs in hr acct

Hrs in hr admin ÷ Total hrs in hr = % of hrs in hr admin

Use excel with iterations on for remaining calculations

Grey’s Medical operates three support departments and two operating units, Surgery and ER. The support departments are allocated based on the hours used. The cost of operating the accounting (acct), administration (admin), and human resources (HR) departments is $260,000, $150,000, and $60,000, respectively. Information on the hours used are as follows:

Acct Admin HR Surgery ER

Hours in Acct 20 48 360 220

Hours in Admin 16 8 120 80

Hours in HR 8 4 65 130

What are the total costs allocated from the HR department to the operating units?

a. $0.

b. 78,164.

c. $81,402.

d. $86,072.

Ans: D, LO 2, Bloom: AP, Difficulty: Hard, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: 20 + 48 + 360 + 220 = 648

16 + 8 + 120 + 80 = 224

8 + 4 + 65 + 130 = 207

20 ÷ 648 = 3%

48 ÷ 648 = 7%

16 ÷ 224 = 7%

8 ÷ 224 = 4%

8 ÷ 207 = 4%

4 ÷ 207 = 2%

Hrs in acct admin + hrs in acct hr + hrs in acct surg + hrs in acct ER = Total hrs in acct

Hrs in admin acct + hrs in admin hr + hrs in admin surg + hrs in admin ER = Total hrs in admin

Hrs in hr acct + hrs in hr admin + hrs in hr surg + hrs in hr ER = Total hrs in hr

Hrs in acct admin ÷ Total hrs in acct = % of hrs in acct admin

Hrs in acct hr ÷ Total hrs in acct = % of hrs in acct hr

Hrs in admin acct ÷ Total hrs in admin = % of hrs in admin acct

Hrs in admin hr ÷ Total hrs in admin = % of hrs in admin hr

Hrs in hr acct ÷ Total hrs in hr = % of hrs in hr acct

Hrs in hr admin ÷ Total hrs in hr = % of hrs in hr admin

Use excel with iterations on for remaining calculations

Grey’s Medical operates three support departments and two operating units, Surgery and ER. The support departments are allocated based on the hours used. The cost of operating the accounting (acct), administration (admin), and human resources (HR) departments is $260,000, $150,000, and $60,000, respectively. Information on the hours used are as follows:

Acct Admin HR Surgery ER

Hours in Acct 20 48 360 220

Hours in Admin 16 8 120 80

Hours in HR 8 4 65 130

What are the total costs allocated to the surgery department from the supporting departments?

a. $0.

b. $243,642.

c. $265,466.

d. $267,642.

Ans: C, LO 2, Bloom: AP, Difficulty: Hard, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: 20 + 48 + 360 + 220 = 648

16 + 8 + 120 + 80 = 224

8 + 4 + 65 + 130 = 207

20 ÷ 648 = 3%

48 ÷ 648 = 7%

16 ÷ 224 = 7%

8 ÷ 224 = 4%

8 ÷ 207 = 4%

4 ÷ 207 = 2%

Hrs in acct admin + hrs in acct hr + hrs in acct surg + hrs in acct ER = Total hrs in acct

Hrs in admin acct + hrs in admin hr + hrs in admin surg + hrs in admin ER = Total hrs in admin

Hrs in hr acct + hrs in hr admin + hrs in hr surg + hrs in hr ER = Total hrs in hr

Hrs in acct admin ÷ Total hrs in acct = % of hrs in acct admin

Hrs in acct hr ÷ Total hrs in acct = % of hrs in acct hr

Hrs in admin acct ÷ Total hrs in admin = % of hrs in admin acct

Hrs in admin hr ÷ Total hrs in admin = % of hrs in admin hr

Hrs in hr acct ÷ Total hrs in hr = % of hrs in hr acct

Hrs in hr admin ÷ Total hrs in hr = % of hrs in hr admin

Use excel with iterations on for remaining calculations

Grey’s Medical operates three support departments and two operating units, Surgery and ER. The support departments are allocated based on the hours used. The cost of operating the accounting (acct), administration (admin), and human resources (HR) departments is $260,000, $150,000, and $60,000, respectively. Information on the hours used are as follows:

Acct Admin HR Surgery ER

Hours in Acct 20 48 360 220

Hours in Admin 16 8 120 80

Hours in HR 8 4 65 130

What are the total costs allocated to the ER department from the supporting departments?

a. $0.

b. $179,524.

c. $192,466.

d. $204,534.

Ans: D, LO 2, Bloom: AP, Difficulty: Hard, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: 20 + 48 + 360 + 220 = 648

16 + 8 + 120 + 80 = 224

8 + 4 + 65 + 130 = 207

20 ÷ 648 = 3%

48 ÷ 648 = 7%

16 ÷ 224 = 7%

8 ÷ 224 = 4%

8 ÷ 207 = 4%

4 ÷ 207 = 2%

Hrs in acct admin + hrs in acct hr + hrs in acct surg + hrs in acct ER = Total hrs in acct

Hrs in admin acct + hrs in admin hr + hrs in admin surg + hrs in admin ER = Total hrs in admin

Hrs in hr acct + hrs in hr admin + hrs in hr surg + hrs in hr ER = Total hrs in hr

Hrs in acct admin ÷ Total hrs in acct = % of hrs in acct admin

Hrs in acct hr ÷ Total hrs in acct = % of hrs in acct hr

Hrs in admin acct ÷ Total hrs in admin = % of hrs in admin acct

Hrs in admin hr ÷ Total hrs in admin = % of hrs in admin hr

Hrs in hr acct ÷ Total hrs in hr = % of hrs in hr acct

Hrs in hr admin ÷ Total hrs in hr = % of hrs in hr admin

Use excel with iterations on for remaining calculations

A common cost occurs when

a. different resources are used to produce one business unit.

b. a resource is used by two or more companies.

c. only one product or service is benefited.

d. the same resource is used for two or more business units.

Ans: D, LO 3, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

All of the following would be considered common costs except

a. a pool in a hotel.

b. utilities in a college dorm.

c. advertising expenses shared between two business units in the same city.

d. direct materials for a manufacturing company.

Ans: D, LO 3, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Which methods are acceptable ways to allocate common costs?

a. stand-alone cost allocation method.

b. stand-alone cost allocation method and incremental cost allocation method.

c. incremental cost allocation method.

d. stand-alone cost allocation method and direct costing allocation method.

Ans: B, LO 3, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

When allocating common costs, which method allocates the cost based on the percentage paid?

a. stand-alone cost allocation method.

b. step cost allocation method.

c. incremental cost allocation method.

d. direct costing allocation method.

Ans: A, LO 3, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

When allocating common costs, which method ranks the users of the cost to determine who is most responsible?

a. stand-alone cost allocation method.

b. none of the listed methods is correct.

c. incremental cost allocation method.

d. direct costing allocation method.

Ans: C, LO 3, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

When allocating common costs, which method allocates costs equally to all users?

a. stand-alone cost allocation method.

b. none of the listed methods is correct.

c. incremental cost allocation method.

d. direct costing allocation method.

Ans: B, LO 3, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Guadalupe and Jose share an apartment. Both have separate cell phone plans. The costs are $65 and $85, respectively. They would like to save money and combine it into one plan that costs $120. Using the stand-alone cost allocation, how much of the cost should be allocated to each?

Guadalupe Jose

a. $60 $60

b. $52 $68

c. $65 $55

d. $35 $85

Ans: B, LO 3, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $65 + $85 = $150

$65 ÷ $150 x $120 = $52

$85 ÷ $150 x $120 = $68

Guad cost + Jose cost = total cost

Guad ÷ total cost x com cost = Guad share

Jose ÷ total cost x com cost = Jose share

Guadalupe and Jose share an apartment. Both have separate cell phone plans. The costs are $65 and $85, respectively. They would like to save money and combine it into one plan that costs $120. Using the incremental cost allocation, how much of the cost should be allocated to each?

Guadalupe Jose

a. $60 $60

b. $52 $68

c. $65 $55

d. $35 $85

Ans: D, LO 3, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $120 - $85 = $35

Com cost – Jose cost (higher ranked) = guad cost

Just for Kix dance studio has decided they need extra space to hold their classes but do not need the facility full-time. They found the ideal location, and a local photographer has decided they would go in and share the cost of the facility. The cost of the facility is $2,000 per month. Both the dance studio and photographer rent a similar space. The photographer pays $1,200 per month, and the dance studio pays $1,800 per month. Using the stand-alone cost allocation, how much of the cost should be allocated to each?

Dance Studio Photographer

a. $1,200 $800

b. $1,000 $1,000

c. $1,800 $200

d. $800 $1,200

Ans: A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $1,800 + $1,200 = $3,000

$1,800 ÷ $2,000 x $3,000 = $1,200

$1,200 ÷ $2,000 x $3,000 = $800

Dance cost + Photo cost = total cost

Dance ÷ total cost x com cost = Dance share

Photo ÷ total cost x com cost = Photo share

Just for Kix dance studio has decided they need extra space to hold their classes but do not need the facility full-time. They found the ideal location, and a local photographer has decided they would go in and share the cost of the facility. The cost of the facility is $2,000 per month. Both the dance studio and photographer rent a similar space. The photographer pays $1,200 per month, and the dance studio pays $1,800 per month. Using the incremental cost allocation, how much of the cost should be allocated to each?

Dance Studio Photographer

a. $1,200 $800

b. $1,000 $1,000

c. $1,800 $200

d. $800 $1,200

Ans: C, LO 3, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $2,000 - $1,800 = $200

Com costs – dance cost (higher ranked) = photo cost

Currently, Fire Station 51 and Fire Station 81 operate separate EMS trucks. Station 51 has operating costs of $46,000 per year. Station 81 reports operating cost of $42,000 per year. Station 51 utilizes its truck about 65% of the time, and Station 81 has an operating efficiency of about 40%. The fire stations are trying to determine the benefits of only operating one EMS truck that they will share. Based on the extended needs, the newer EMS truck will cost $80,000. How much of the new EMS truck should be allocated to each fire station using the stand-alone cost allocation?

Station 51 Station 81

a. $44,000 $44,000

b. $41,818 $38,182

c. $38,182 $41,818

d. $46,000 $34,000

Ans: B, LO 3, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $46,000 + $42,000 = $88,000

$46,000 ÷ $88,000 x $80,000 = $41,818

$42,000 ÷ $88,000 x $80,000 = $38,182

station 51 cost + station 81 cost = total cost

station 51÷ total cost x com cost = station 51 share

station 81 ÷ total cost x com cost = station 81 share

Currently, Fire Station 51 and Fire Station 81 operate separate EMS trucks. Station 51 has operating costs of $46,000 per year. Station 81 reports operating cost of $42,000 per year. Station 51 utilizes its truck about 65% of the time, and Station 81 has an operating efficiency of about 40%. The fire stations are trying to determine the benefits of only operating one EMS truck that they will share. Based on the extended needs, the newer EMS truck will cost $80,000. Using the incremental cost allocation, how much of the new EMS truck should be allocated to each fire station?

Station 51 Station 81

a. $44,000 $44,000

b. $41,818 $31,182

c. $34,000 $46,000

d. $46,000 $34,000

Ans: D, LO 3, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $80,000 - $46,000 = $34,000

Com costs – station 51 cost (higher ranked) = station 81 cost

The sale of bundled products/services consist of

a. grouping several products together with like attributes. i.e. two bottles of pop or buy one get one free option on shoes

b. grouping several products together that share one common cost.

c. grouping several products together that share one transaction price.

d. grouping several products together that are used for the same purpose. i.e. cleaning supplies or building materials

Ans: C, LO 3, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

All the following are true regarding the sale of bundled products/services except

a. Bundled services consist of grouping several services together for one price.

b. They can only be allocated using the stand-alone or incremental methods.

c. There are several ways to allocate the transaction price of the sale of bundled products.

d. The transaction price of bundled services must be allocated amongst the component parts.

Ans: B, LO 3, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Burger Queen offers a lunch meal deal for its customers. The customer will get a burger, fry, soft drink, and ice cream for $5. If the customer were to buy each item individually, the cost would be broken down as follows:

Burger $2.50

Fry $1.25

Soft Drink $1.00

Ice Cream $1.50

Using the stand-alone cost allocation, how must of the transaction price should be allocated to the burger? (do not round intermediary calculations)

a. $2.00

b. $2.50

c. $2.10

d. $2.40

Ans: A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $2.50 + $1.25 + $1 + $1.50 = $6.25

$2.50 ÷ $6.25 x $5.00 = $2.00

Burger cost + fry cost + drink cost + ice cost = total cost

Burger cost ÷ total cost x trans price = burger alloc price

Burger Queen offers a lunch meal deal for its customers. The customer will get a burger, fry, soft drink, and ice cream for $5. If the customer were to buy each item individually, the cost would be broken down as follows:

Burger $2.50

Fry $1.25

Soft Drink $1.00

Ice Cream $1.50

Using the incremental cost allocation, how must of the transaction price should be allocated to the burger? (do not round intermediary calculations)

a. $2.08.

b. $2.50.

c. $2.10.

d. $2.48.

Ans: B, LO 3, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $2.50 (higher ranked so 100% of price)

Burger Queen offers a lunch meal deal for its customers. The customer will get a burger, fry, soft drink, and ice cream for $5. If the customer were to buy each item individually, the cost would be broken down as follows:

Burger $2.50

Fry $1.25

Soft Drink $1.00

Ice Cream $1.50

Using the stand-alone cost allocation, how must of the transaction price should be allocated to the fry, soft drink, and ice cream? (do not round intermediary calculations)

a. $1.25 $1.00 $1.50

b. $1.00 zero $1.50

c. $1.00 $0.80 $1.20

d. $0.50 zero $1.50

Ans: C, LO 3, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $2.50 + $1.25 + $1 + $1.50 = $6.25

$1.25 ÷ $6.25 x $5.00 = $1

$1 ÷ $6.25 x $5.00 = $.80

$1.50 ÷ $6.25 x $5.00 = $1.20

Burger cost + fry cost + drink cost + ice cost = total cost

Fry ÷ total cost x trans price = fry alloc price

Drink ÷ total cost x trans price = drink alloc price

Ice cream ÷ total cost x trans price = ice cream alloc price

Burger Queen offers a lunch meal deal for its customers. The customer will get a burger, fry, soft drink, and ice cream for $5. If the customer were to buy each item individually, the cost would be broken down as follows:

Burger $2.50

Fry $1.25

Soft Drink $1.00

Ice Cream $1.50

Using the incremental cost allocation, how must of the transaction price should be allocated to the fry, soft drink, and ice cream? (do not round intermediary calculations)

a. $1.25 $1.00 $1.50

b. $1.00 zero $1.50

c. $1.00 $0.80 $1.20

d. $0.50 zero $1.50

Ans: B, LO 3, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: Burger, highest ranked, $2.50

Second ranked Ice cream $1.50

Third ranked, fry $5 - $2.50 - $1.50 = $1.00

Last, Drink, $0 ($5 - $2.50 - $1.50 - $1.00)

SHORT ANSWER

102. The following are typical support departments found within companies:

Cafeteria

Personnel

Maintenance

Purchasing

Accounting

For each of the support departments above, indicate one base that could be used to allocate costs.

Ans: N/A, LO 1, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement IMA: Cost Management.

Answer:

Cafeteria: Number of employees in each department

Number of employees in each department that use the cafeteria

Personnel Number of employees

Number of new hires

Number of layoffs/fired employees

Direct labor hours

Direct labor cost

Maintenance Number of machine hours

Maintenance hours

Number of repair orders

Purchasing Cost of orders

Number of orders placed

Accounting Number of personnel

Hours worked for each department

Number of transactions.

103. Describe the differences between a support department and an operating unit. Provide three examples of each.

Ans: N/A, LO 1, Bloom: AN, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement IMA: Cost Management.

Answer:

Support departments provide essential support services for the operating units. However, they don’t earn revenue. Instead, these departments are indirectly connected with an organization’s services or products. Examples: Maintenance, Grounds, Engineering, Housekeeping, Human Resource, Accounting, Advertising, Design, and Personnel.

Operating Units are directly responsible for creating the products or services sold to customers. Examples: Fabrication, Cutting, Mixing, Grinding, Assembly, Finishing, and Cooking.

104. There are three methods to allocate support departments’ costs. Name the three methods and describe the differences between the methods.

Ans: N/A, LO 2, Bloom: C, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement IMA: Cost Management.

Answer:

Direct Method - allocates support department costs only to producing departments; no consideration is made of the interaction of the support departments. It is the simplest and most straightforward method. However, the degree of interaction between support departments may affect the results using this method.

Step Method - interaction among the support departments is recognized. Cost allocations are performed in a step-down manner, following a predetermined ranking procedure. First, the highest-ranking support department is allocated to all the remaining support departments and production departments. Then the following highest-ranking support department is allocated to all the remaining departments. This continues until all support departments have been allocated. This method does not fully recognize support department interaction.

Reciprocal Method - recognizes all support department interactions. The usage of one support department by another is used to determine the total cost of each support department. The reciprocal method may theoretically be the most accurate. Still, if results do not differ significantly from the results achieved using other methods, it may not be worth the extra cost and effort.

105. Describe the process to allocate support department costs using the step method.

Ans: N/A, LO 2, Bloom: K, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement IMA: Cost Management.

Answer:

First, rank the support departments using whatever measure the company allocates its support costs. Some examples would include: most services provided to other support departments and operating units or the highest costs to run the support department.

Second, Allocate costs from the highest-ranked support department to the other support departments and operating units.

Third, “step down” to the next-in-line support department, which will have a new, higher cost. Then, allocate those costs to any remaining support departments and operating units. As a note, costs will not be allocated back to the highest-ranked support department.

Finally, continue stepping down to the next-in-line support department until all support departments have assigned their costs to operating units.

106. Explain the two ways to allocate common costs.

Ans: N/A, LO 3, Bloom: K, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement IMA: Cost Management.

Answer:

Stand-alone cost allocation method – identifies the cost each entity would have to pay if it bore the cost alone. Then common costs are allocated based on the percentage each party would have paid had the common costs not been shared. Common costs are shared proportionally based on use.

Incremental cost allocation method – identifies and ranks the users of a cost to determine who is most responsible for its incurrence. This method assigns the stand-alone cost to the user who is most responsible for the cost, and any additional amount is assigned to the next user until all costs have been assigned.

107. Name the FASB standard that outlines ways to allocate the transaction price of a bundled sale and name two of the methods that can be used, and explain the only circumstances they would be used.

Ans: N/A, LO 3, Bloom: C, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement IMA: Cost Management.

Answer:

FASB ASC 606-10-65-1

The same methods that apply to allocating common costs can also be used to allocate the transaction price of a bundled sale. However, these two methods should only be used for internal decision-making purposes and/or there isn’t anyone available to interpret and implement the FASB standard.

BRIEF EXERCISES

108. For each of the support department costs listed below, name an appropriate cost allocation base:

Building rental cost
Payroll department salaries
Company cafeteria cost
Human resources department
Accounting department
Computer equipment depreciation
Insurance costs on computer equipment
Depreciation on a company airplane
Factory manager
Cost to clean company uniforms
Costs of a corporate daycare facility
Equipment maintenance
Cost of corporate workout facility
Building insurance
Cost of a delivery truck for a moving company

Ans: N/A, LO 1, Bloom: C, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, IMA: Cost Management.

Answer:

Square footage; space occupied
Number of employees
Number of meals served
Number of employees
Number of documents
Hours of use
Hours of use
Hours of use; miles traveled
Number of employees
Number of uniforms; the weight of laundry processed
Number of employees
Number of machines; hours of use
Number of employees
Square footage; space occupied
Miles driven

109. Hamilton Communication is determining how to allocate costs to its carpet and tile divisions. The company also has two support departments that assist the divisions. The Maintenance department has costs of $60,000 and spends approximately 65% of its time with the carpet division. The Personnel department has costs of $35,000 ad spends approximately 55% of its time with the tile division. If the carpet and tile division incur costs of $180,000 and $360,000, respectively, what are the total costs for each division if the company uses the direct cost method to allocate common costs? (Do not round intermediary calculations, round your final answer to the nearest whole dollar)

Ans: N/A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, IMA: Cost Management.

Answer:

Carpet Division $234,750

Tile Division $400,250

Solution:

Carpet = $180,000 + 65% x $60,000 + 45% x $35,000 = $234,750

Tile = $360,000 + 35% x $60,000 + 55% x $35,000 = $400,250

110. Credit Management Solutions provides two types of credit reports: Individual and Business. They vary based on the amount of background information and data collection required. The Business reports use more skilled personnel because of the additional information that needs to be verified. Total support services costs to be allocated are $960,000. The following information is also provided:

Allocation base Individual Business

Data purchased $25,000 $100,000

Interview hours 2,000 12,000

Number of reports 26,000 2,000

For each potential allocation base, determine the support department cost allocated to each type of report using the direct method. (Do not round intermediary calculations, round your final answer to the nearest whole dollar)

Ans: N/A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, IMA: Cost Management.

Answer:

Data Purchased

Individual $192,000

Business $768,000

Interview Hours

Individual $137,143

Business $822,857

Number of Reports

Individual $891,429

Business $68,571

Solution:

Total Data Purchased = $25,000 + $100,000 = $125,000

Individual $25,000 ÷ $125,000 x $960,000 = $192,000

Business $100,000 ÷ $125,000 x $960,000 = $768,000

Total Interview Hours = 2,000 + 12,000 = 14,000

Individual 2,000 ÷ 14,000 x $960,000 = $137,143

Business 12,000 ÷ 14,000 x $960,000 = $822,857

Total Number of Reports = 26,000 + 2,000 = 28,000

Individual 26,000 ÷ 28,000 x $960,000 = $891,429

Business 2,000 ÷ 28,000 x $960,000 = $68,571

111. Sloane Memorial operates two support departments and two operating units. Information on the operations is as follows:

Square Pounds of

Support Departments Costs Feet Laundry

Laundry $60,000 500 1,200

Housekeeping 40,000 250 12,000

Operating Unit

Surgery 250,000 1,000 52,000

ICU 600,000 2,000 26,000

Housekeeping is based on the number of square footage, and laundry is allocated based on the pounds of laundry. Using the step method, allocate the support department costs to the operating units if laundry is ranked first. (Do not round intermediary calculations, round your final answer to the nearest whole dollar)

Ans: N/A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, IMA: Cost Management.

Answer:

Surgery - $50,667

ICU - $49,333

Solution:

Total pounds of laundry = 12,000 + 52,000 + 26,000 = 90,000

Note – laundry pounds are excluded in the calculation since it’s allocated first

Total square feet = 1,000 + 2,000 = 3,000

Note – costs are not allocated up, so only the square feet of the operating unit are included

	Laundry	Housekeeping	Surgery	ICU
	60,000	40,000
Laundry (a)	(60,000)	8,000	34,667	17,333
Housekeeping (b)	-	(48,000)	16,000	32,000
	-	-	50,667	49,333

a 12,000 ÷ 90,000 x $60,000 = $8,000

52,000 ÷ 90,000 x $60,000 = $34,667

26,000 ÷ 90,000 x $60,000 = $17,333

b $40,000 + $8,000 = $48,000

1,000 ÷ 3,000 x $48,000 = $16,000

2,000 ÷ 3,000 x $48,000 = $32,000

112. Bennet Company has three support departments and two operating units. Information on the departments is as follows

Percentage of Use

Support Departments Costs Maint Acct HR Cutting Assembly

Maintenance $320,000 15% 65% 20%

Accounting 600,000 10% 10% 45% 35% Human Resources 210,000 70% 30%

Operating Unit

Cutting 620,000

Assembly 480.000

Using the step method, allocate the support department costs to the operating units. (Do not round intermediary calculations, round your final answer to the nearest whole dollar)

Ans: N/A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Cost Management.

Answer:

Cutting $749,208

Assembly $385,518

Solution:

	Maint	Acct	HR	Cutting	Assembly
Cost	320,000	600,000	210,000
Maint (b)	(380,000)		57,000	247,000	76,000
Acct (a)	60,000	(600,000)	60,000	270,000	210,000
HR (c)	-	-	(327,000)	228,900	98,100
	-	-	-	745,900	384,100

a 600,000 x 10% = 60,000

600,000 x 45% = 270,000

600,000 x 35% = 210,000

b 320,000 + 60,000 = 380,000

380,000 x 15% = 57,000

380,000 x 65% = 247,000

380,000 x 20% = 76,000

c 210,000 + 57,000 + 60,000 = $327,000

327,000 x 70% = 228,900

327,000 x 30% = 98,100

113. Vincik Computer Concepts has three operational units and two support units. Information on the departments is as follows

Support Departments Costs Hours Used Sq Feet

Facilities $20,000 400

Information Systems 75,000 100,000

Operating Unit

Consulting 90,000 600 200,000

Software 65,000 300 400,000

Training 110,000 3,000 600,000

Dean Moore, in the accounting department, has been asked to determine the total cost of each operating unit. The information systems department allocates costs based on the hours used. At the same time, facilities allocate costs based on the square footage. The company currently uses the reciprocal method to allocate support department costs. (Do not round intermediary calculations, round your final answer to the nearest whole dollar)

Ans: N/A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Cost Management.

Answer:

Consulting $104,937

Software $78,739

Training $176,324

Solution:

Tota Hours = 400 + 600 + 300 + 3,000 = 4,300

Total Square Feet = 100,000 + 200,000 + 400,000 + 600,000 = 1,300,000

Percentages were calculated by taking the hours/square feet per department divided by the total hours/ Square feet. (e.g.: 400 ÷ 4,300)

114. Fauscett Industries has two support departments – industry support and facilities management, and two operating units – cutting and shipping. The costs and distribution of each support department efforts to the other departments are as follows

Operating

Support Facilities Costs

Support 0% 15% $200,000

Facilities 35% 0% 450,000

Cutting 20% 40% 980,000

Shipping 45% 45% 225,000

Allocate the support department costs to the operating units using the reciprocal method. (Do not round intermediary calculations, round your final answer to the nearest whole dollar)

Ans: N/A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Cost Management.

Answer:

Cutting $275,989

Shipping $374,011

Solution:

115. As a sole proprietor, you constructed another small building for a home office on your property. Your lot is 80 ft x 80 ft, and the new building takes up 20 ft x 20 ft of the lot. Your property taxes were $2,800 prior to the construction of the building. This year, property taxes went up to $3,600 to account for the addition. You’d like to allocate your property taxes so the business portion can be deducted on your annual tax return.

Using the stand-alone method to allocate the common costs, what is your personal share and what amount can be deducted on your annual tax return as a business expense? (Do not round intermediary calculations, round your final answer to the nearest whole dollar)

Ans: N/A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Cost Management.

Answer:

Personal $3,375

Business $225

Solution:

Total lot square feet = 80 x 80 = 6,400 square feet

Building square feet = 20 x 20 = 400 square feet

Personal square feet = 6,400 – 400 = 6,000

Personal = 6,000 ÷ 6,400 x 3,600 = $3,375

Business = 400 ÷ 6,400 x 3,600 = $225

116. As a sole proprietor, you constructed another small building on your property to use as a home office. Your lot is 80 ft x 80 ft, and the new building takes up 20 ft x 20 ft of the lot. Your property taxes were $2,800 prior to the construction of the building. This year, property taxes went up to $3,600 to account for the addition. You’d like to allocate your property taxes so the business portion can be deducted on your annual tax return.

Using the incremental method to allocate the common costs, what is your personal share and what amount can be deducted on your annual tax return as a business expense? (Do not round intermediary calculations, round your final answer to the nearest whole dollar)

Ans: N/A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Cost Management.

Answer:

Personal $2,800

Business $800

Solution:

Personal = $2,800, previous property tax premium for lot and dwelling

Business = $3,600 - $2,800 = $800, new property taxes less previous property taxes

117. Hruska Tax Consulting provides several services. A married couple can get their tax return prepared for $220. A child’s tax return, under the age of 18, is prepared for $50. To have the tax returns e-filed will cost an additional $40 per tax return. Hruska provides a bundle to its clients. The parents can get their tax return prepared, with one child and two e-file fees for $300.

Use the stand-alone method to allocate the transaction price to the separate services. (Do not round intermediary calculations, round your final answer to the nearest whole dollar)

Ans: N/A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Cost Management.

Answer:

Parent’s Return = $189

Child’s Return = $43

E-file Fees = $34 each (or times two $68)

Solution:

Total separate costs = $220 + $50 + $40 + $40 = $350

Parent’s Return = $220 ÷ $350 x $300 = $189

Child’s Return = $50 ÷ $350 x $300 = $43

Efile Fees =$40 ÷ $350 x $300 = $34 each

118. Hruska Tax Consulting provides several services. A married couple can get their tax return prepared for $220. A child’s tax return under the age of 18 is prepared for $50. To have the tax returns e-filed will cost an additional $40 per tax return. Hruska provides a bundle to its clients. The parents can get their tax return prepared, with one child and two e-file fees for $300.

Use the incremental method to allocate the transaction price to the separate services. (Do not round intermediary calculations, round your final answer to the nearest whole dollar)

Ans: N/A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Cost Management.

Answer:

Parent’s Return = $220

Child’s Return = $50

Total E-file Fees = $30

Solution:

Parent’s Return = $220, highest ranked cost

Child’s Return = $50, second highest rank cost

Total E-file Fees = $30 ($300 - $220 - $50)

EXERCISES

119. Raspberries R Us has two operating units (Jam and Jelly) and two support departments (HR and Accounting). The estimated operating costs and percentages of services used by these departments are as follows:

Operating

HR Accounting Costs

HR 0% 10% $9,000

Accounting 10% 0% 13,500

Jam 60% 40% 40,000

Jelly 30% 50% 35,000

Instructions

a. Allocate the support department costs to the operating units using the direct method of allocating costs.

b. Allocate the support department costs to the operating units using the step method of allocating costs. The departments are ranked based on the highest costs.

c. Which of the two methods would you recommend for Raspberries R Us and why?

Ans: N/A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Cost Management.

Answer:

a. Jam = $12,000

Jelly = $10,500

b. Jam = $12,300

Jelly = $10,200

c. Direct Method - While the step method is more accurate than the direct method, the difference in costs between the two methods is minimal.

Solution:

a. HR total = .6 + .3 = .9

Acct Total = .4 + .5 = .9

Jam = ((.6 ÷ .9) x $9,000) + ((.4 ÷ .9) x $13,500) = $12,000

Jelly = ((.3 ÷ .9) x $9,000 )+ ((.5 ÷ .9) x $13,500) = $10,500

	HR	ACCT	Jam	Jelly
Cost	9,000	13,500
HR (**)	(10,350)		6,900	3,450
Acct (*)	1,350	(13,500)	5,400	6,750
	-	-	12,300	10,200

* $13,500 * 10% = 1,350

$13,500 x 40% = $5,400

$13,500 x 50% = $6,750

** $9,000 + $1,350 = $10,350

.6 ÷ .9 x $10,350 = $6,900

.3 ÷ 9 x $10,350 = $3,450

120. Eagle Distributing has three operating units and three support departments. Clint, the company manager, is trying to analyze the profitability of the three operating units. Clint has narrowed it down to using the step method of allocating costs. First, however, he is trying to figure out the best way to rank the support departments. Information for the company follows:

Support Departments Operating Units

Billing Acct IT Shipping Packing Receiving

Cost $25,000 $80,000 $65,000 $630,000 $920,000 $360,000

Billable hours 2,600 1,600 6,000

# of employees 5 3 2 20 16 5

IT hours used 250 120 120 600 900 200

Instructions

a. Allocate the support department costs to the operating units using the step method of allocating costs if the departments are ranked based on the highest costs.

b. Allocate the support department costs to the operating units using the step method of allocating costs if the support departments are ranked based on the percentage of services they provide to other support departments

c. Revenue earned by the shipping, packing, and receiving operating units was $960,000, $1,300,000, and $620,000, respectively. Compute the gross margin, operating income, gross margin percentage, and profit margin percentage using the information calculated in parts (a) and (b). (round your percentages to the nearest whole percent)

Ans: N/A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Cost Management.

Answer:

a. Shipping $65,089

Packing $64,808

Receiving $40,103

b. Shipping $65,956

Packing $63,979

Receiving $40,065

c. part a

Gross Profit Gross Profit

Margin Margin Margin % Margin %

Shipping $330,000 $264,911 34% 28%

Packing $380,000 $315,192 29% 24%

Receiving $260,000 $219,897 42% 35%

part b

Gross Profit Gross Profit

Margin Margin Margin % Margin %

Shipping $330,000 $264,044 34% 28%

Packing $380,000 $316,021 29% 24%

Receiving $260,000 $219,935 42% 35%

Solution:

a. Ranked by highest cost – Accounting, IT, Billing

Total # of employees = 5 + 2 + 20 + 16 + 5 = 48 (not including acct department)

Total IT hours = 250 + 600 + 900 + 200 = 1,950 (not including IT or Acct)

Total billable hours = 2,600 + 1,600 + 6,000 = 10,200

	Billing	Acct	IT	Shipping	Packing	Receiving
Cost	$25,000	$80,000	$65,000
Billing (3)	(42,094)			10,730	6,603	24,761
Acct (1)	8,333	(80,000)	3,333	33,333	26,667	8,333
IT (2)	8,761	-	(68,333)	21,026	31,538	7,009
	-	-	-	$65,089	$64,808	$40,103

1. 5 ÷ 48 x $80,000 = $8,333

2 ÷ 48 x $80,000 = $3,333

20 ÷ 48 x $80,000 = $33,333

16 ÷ 48 x $80,000 = $26,667

5 ÷ 48 x $80,000 = $8,333

2. $65,000 + $3,333 = $68,333

250 ÷ 1,950 x $68,333 = $8,761

600 ÷ 1,950 x $68,333 = $21,026

900 ÷ 1,950 x $68,333 = $31,538

200 ÷ 1,950 x $68,333 = $7,009

3. $25,000 + $8,333 + $8,761 = $42,094

2,600 ÷ 10,200 x $42,094 = $10,730

1,600 ÷ 10,200 x $42,094 = $6,603

6,000 ÷ 10,200 x $42,094 = $24,761

b. Ranked by support depts to other support depts – IT, Acct, Billing

Billing – no support to other depts

Acct – (5 + 2) ÷ (5 + 2 +20 + 16 + 5) = 15%

IT – (250 + 120) ÷ (250 + 120 + 600 + 900 + 200) = 18%

Total # of employees = 5 + 20 + 16 + 5 = 46 (not including acct or IT department)

Total IT hours = 250 + 120 + 600 + 900 + 200 = 2,070 (not including Acct)

Total billable hours = 2,600 + 1,600 + 6,000 = 10,200

	Billing	Acct	IT	Shipping	Packing	Receiving
Cost	25,000	80,000	65,000
Billing (3)	(41,955)			10,694	6,581	24,679
Acct (2)	9,105	(83,768)		36,421	29,137	9,105
IT (1)	7,850	3,768	(65,000)	18,841	28,261	6,280
	-	-	-	65,956	63,979	40,065

1. 250 ÷ 2,070 x $65,000 = $7,850

120 ÷ 2,070 x $65,000 = $3,768

600 ÷ 2,070 x $65,000 = $18,841

900 ÷ 2,070 x $65,000 = $28,261

200 ÷ 2,070 x $65,000 = $6,280

2. $80,000 + $3,768 = $83,768

5 ÷ 46 x $83,7680 = $9,105

20 ÷ 46 x $83,7680 = $36,421

16 ÷ 46 x $83,7680 = $29,137

5 ÷ 46 x $83,7680 = $9,105

3. $25,000 + $9,105 + $7,850 = $41,955

2,600 ÷ 10,200 x $41,955 = $10,694

1,600 ÷ 10,200 x $41,955 = $6,581

6,000 ÷ 10,200 x $41,955 = $24,679

Part a

	Shipping	Packing	Receiving
Revenue	960,000	1,300,000	620,000
Direct Cost	630,000	920,000	360,000
Gross Margin	330,000	380,000	260,000
Allocated Costs	65,089	64,808	40,103
Operating Income	264,911	315,192	219,897

Shipping $330,000 ÷ $960,000 = 34%

$264,911 ÷ $960,000 = 28%

Packing $380,000 ÷ $1,300,000 = 29%

$315,192 ÷ $1,300,000 = 24%

Receiving $260,000 ÷ $620,000 = 42%

$219,897 ÷ $620,000 = 35%

Part b

	Shipping	Packing	Receiving
Revenue	960,000	1,300,000	620,000
Direct Cost	630,000	920,000	360,000
Gross Margin	330,000	380,000	260,000
Allocated Costs	65,956	63,979	40,065
Operating Income	264,044	316,021	219,935

Shipping $330,000 ÷ $960,000 = 34%

$264,044 ÷ $960,000 = 28%

Packing $380,000 ÷ $1,300,000 = 29%

$316,021 ÷ $1,300,000 = 24%

Receiving $260,000 ÷ $620,000 = 42%

$219,935 ÷ $620,000 = 35%

121. Aim Industries manufactures framers for large trucks within three operating units (T2, T4, and T6). Maintenance and facilities are considered the support departments. Maintenance is allocated base on maintenance hours and facilities is allocated base on square footage. Information is as follows:

Support Departments Operating Units

Maintenance Facilities T2 T4 T6

Cost $16,000 $35,000 $145,000 $185,000 $409,000

Maint hours 400 800 1,200 1,600

Square Feet 600 400 1,200 1,800

Instructions

a. Allocate the support department costs to the operating units using the direct method.

b. Allocate the support department costs to the operating units using the reciprocal method.

c. What is the total cost (allocated and direct) that will be reported for each operating unit under the (1) direct method, (2) reciprocal method?

Ans: N/A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Cost Management.

Answer:

a. T2 = $7,673

T4 = $17,686

T6 = $25,641

b. T2 = $8,030

T4 = $17,619

T6 = $25,350

c. (1) T2 = $152,673

T4 = $202,686

T6 = $434,641

c. (2) T2 = $153,030

T4 = $202,619

T6 = $434,350

Solution:

a. Total maintenance Hours = 800 + 1,200 + 1,600 = 3,600

Total Square Feet = 400 + 1,200 + 1,800 = 3,400

T2 = ((800 ÷ 3,600) x $16,000) + ((400 ÷ 3,400) x $35,000) = $7,673

T4 = ((1,200 ÷ 3,600) x $16,000) + ((1,200 ÷ 3,400) x $35,000) = $17,686

T6 = ((1,600 ÷ 3,600) x $16,000) + ((1,800 ÷ 3,400) x $35,000) = $25,641

b. Total maintenance Hours = 400 + 800 + 1,200 + 1,600 = 4,000

Total Square Feet = 600 + 400 + 1,200 + 1,800 = 4,000

*Percentages were calculated by taking the individual amounts divided by the total amounts (e.g.: 400 ÷ 4,000 = 10%)

c. (1) T2 = $145,000 + $7,673 = $152,673

T4 = $185,000 + $17,686 = $202,686

T6 = $409,000 + $25,641 = $434,641

c. (2) T2 = 145,000 + $8,030 = $153,030

T4 = $185,000 + $17,619 = $202,619

T6 = $409,000 + $25,350 = $434,350

122. Becky Hansen is the manager of American Autos. American Autos provides three types of services, Sales, Repairs, and Rebuilds. Becky needs to provide a profit analysis to the CEO at the end of the current fiscal year so the pricing and marketing strategies can be adjusted as needed. She has gathered the following information for the company.

Support Departments Operating Units

Marketing Maintenance HR Sales Repairs Rebuilds

Cost $210,000 $315,000 $50,000 $360,000 $860,000 $1,100,000

# of employees 5 7 2 12 16 6

Maint Hours 50 300 25 800 1,900 2,600

HR Hours 100 25 180 1,200 850 800

Sales Repairs Rebuilds

Revenue $990,000 $1,300,000 $2,100,000

Instructions

a. Allocate the support department costs to the operating units using the reciprocal method.

b. Calculate gross margin, operating income, and profit margin percentage for each operating unit after accounting for allocated costs.

c. Your local competitor, Wheels N More, is reporting a profit margin of 20% for its Repairs department. How much would American Auto’s need to increase its total sales in the repair department to meet its competitor’s profit margin?

Ans: N/A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Cost Management.

Answer:

a. Sales $137,137

Repairs $221,660

Rebuilds $216,203

Gross Operating Profit

Margin Income Margin %

Sales $630,000 $492,863 50%

Repairs $440,000 $218,340 17%

Rebuilds $1,000,000 $783,797 37%

c. Increase Sales by $52,075

Solution:

a. Total # of employees = 7 + 2 + 12 + 16 + 6 = 43

Total Maint hours = 50 + 25 + 800 + 1,900 + 2,600 = 5,375

Total HR Hours = 100 + 25 + 1,200 + 850 + 800 = 2,975

*Percentages were calculated by taking the individual amounts divided by the total amounts (e.g. 7 ÷ 43 = 16%)

	Sales	Repairs	Rebuilds
Revenue	990,000	1,300,000	2,100,000
Direct Cost	360,000	860,000	1,100,000
Gross Margin	630,000	440,000	1,000,000
Allocated Costs	137,137	221,660	216,203
Operating Income	492,863	218,340	783,797

Sales, $492,863 ÷ $990,000 = 50%

Repairs, $218,340 ÷ $1,300,000 = 17%

Rebuilds, $783,797 ÷ $2,100,000 = 37%

20% = (Revenues – (860,000 + 221,660)) ÷ Revenues

Revenues $1,352,075

Current Revenues 1,300,000

Difference $ 52,075

123. Carpet Plus has outgrown its current building and needs to find additional storage space. The company currently operates three divisions, Carpet, Tile, and Vinyl. The needs of each division are as follows.

Carpet Tile Vinyl

Square Footage Needs 1,500 900 1,200

Each division tried to separately find their own rental space. The carpet division found what it needed for $600 per month, the tile division’s quote came in at $500 per month, and the Vinyl division found a space for $900 per month. The company manager feels it would be more beneficial for the company to find one space that all three divisions can share. The larger facility came in at $1,500 per month, and the manager chose to rent that space. Now he needs to decide how to allocate the common costs to all three divisions.

Instructions

a. Determine how much cost will be allocated to each division if the manager uses the stand-alone method.

b. Determine how much cost will be allocated to each division if the manager uses the incremental method.

c. Which method should the manager use and why?

d. Are there any other methods the manager could use to allocate the costs?

Ans: N/A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Cost Management.

Answer:

a. Carpet $450

Tile $375

Vinyl $675

b. Carpet $600

Tile $0

Vinyl $900

c. The stand-alone method appears to allocate the costs more proportionally than the incremental cost allocation method. If the incremental method is used, the tile division would have no allocated costs. Since the tile division does also use the space, it should have some allocated cost.

d. The manager could divide the costs equally (1/3 each) or allocate the cost based on square footage required for each division.

Solution:

a. Total separate costs = $600 + $500 + $900 = $2,000

Carpet ($600 ÷ $2,000) x $1,500 = $450

Tile ($500 ÷ $2,000) x $1,500 = $375

Vinyl ($900 ÷ $2,000) x $1,500 = $675

b. Carpet $600 (Second Ranked User)

Tile $$1,500 – 900 – 600 = 0

Vinyl $900 (First Ranked User)

124. The Medina Street Vault is a little coffee shop in downtown Cairo. They offer coffee, lunch, and a variety of sweet treats. They also host large groups and do some small catering events. The manager has segregated the coffee shop into three areas. Most customers come in for just coffee and a sweet treat, and it would cost about $400 per month if that is all the shop offered. The lunch group takes a bit more space, as most customers use the dining area to relax while enjoying their food. This part of the business would cost about $1,100 if it needed its separate facility. The coffee shop currently pays $1,200 per month on its current building.

The Medina Street Vault’s accountant is trying to analyze the profitability of the two separate areas.

Instructions

a. If the accountant uses the incremental method to allocate the common costs, rank the areas, and determine how much would be allocated to each area of the coffee shop?

b. If the accountant uses the stand-alone method instead to allocate the common costs, how much would be allocated to each area of the coffee shop?

c. Which of the methods would be fair and why?

Ans: N/A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement IMA: Cost Management.

Answer:

a. Lunch $1,100

Coffee and Treats $100

b. Coffee and Treats $320

Lunch $880

c. The stand-alone method appears to allocate the costs more proportionally than the incremental cost allocation method.

Solution:

a. Lunch $1,100 (First Ranked)

Coffee and Treats $100 ($1,200 - $1,100)

b. Total separate costs = $400 + $1,100 = $1,500

Coffee and Treats ($400 ÷ $1,500) x $1,200 = $320

Lunch ($1,100 ÷ $1,500) x $1,200 = $880

125. The local meat locker processes a variety of different cuts of meat. A typical steak would cost about $15, while ribs would be closer to $18. They also sell ground beef, roasts and tri-tips. The meat locker charges approximately $5 for the ground beef, $12 for the roast, and $20 for the tri-tips.

The manager of the meat locker would like to offer a special promotion to attract more customers. He wants to offer one package of each (steak, ribs, ground beef, roast, and tri-tips) for $60.

Instructions

a. To sort out the revenues from the promotion, the manager decides to use the incremental method to allocate the transaction price. Rank the products and determine what portion should be allocated to each product.

b. If the manager uses the stand-alone method instead, how much revenue would be recorded for each product? (Do not round intermediary calculations. Round the final answers to the nearest cent.)

c. Determine the difference between the two methods.

Ans: N/A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement IMA: Cost Management.

Answer:

a. Tri -Tips $20

Ribs $ $18

Steak $15

Roast $7

Ground Beef $0

b. Steak $12.86

Ribs $15.43

Ground Beef $4.29

Roasts $10.29

Tri-tips $17.14

c. Steak $2.14

Ribs $2.57

Ground Beef $(4.29)

Roasts $(3.29)

Tri-tips $2.86

Solution:

a. Ranked in Order

Tri -Tips $20

Ribs $ $18

Steak $15

Roast $7 ($60 - $20 - $18 - $15)

Ground Beef $0 ($60 - $20 - $18 - $15 - $7)

b. Total separate prices = $15 + $18 + $5 + $12 + $20 = $70

Steak ($15 ÷ $70) x $60 = $12.86

Ribs ($18 ÷ $70) x $60 = $15.43

Ground Beef ($5 ÷ $70) x $60 = $4.29

Roasts ($12 ÷ $70) x $60 = $10.29

Tri-tips ($20 ÷ $70) x $60 = $17.14

	Steak	Ribs	Ground Beef	Roasts	Tri-Tips
Incremental	15.00	18.00	-	7.00	20.00
Stand-Alone	12.86	15.43	4.29	10.29	17.14
Difference	2.14	2.57	(4.29)	(3.29)	2.86

126. Steph just started a hair salon business and is working on providing specials for her customers. She offers various services and would like to package some of the services and products she provides at a special bundled price. She is considering two options:

Option one would allow customers to get their hair colored, cut, styled, and purchase a shampoo and conditioner for $150.
Option two would provide customers with highlights, a cut, style, shampoo, conditioner, and two styling products of their choosing for $200.

The normal prices that Steph charges a customer, for each product or service, is as follows:

Highlights $110

Color 90

Cut 25

Style 20

Shampoo 18

Conditioner 15

Styling Products (Average price) 12

Instructions

a. Calculate the allocated price, using the stand-alone method, for option 1 to each service or product provided. (Do not round intermediary calculations. Round the final answers to the nearest cent.)

b. Calculate the allocated price, using the stand-alone method, for option 2 to each service or product provided. (Do not round intermediary calculations. Round the final answers to the nearest cent.)

c. Which option do you feel provides the best discount to the customers and why?

Ans: N/A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement IMA: Cost Management.

Answer:

a. Color $80.36

Cut $22.32

Style $17.86

Shampoo $16.07

Conditioner $13.39

b. Highlight $103.77

Cut $23.58

Style $18.87

Shampoo $16.98

Conditioner $14.15

Styling Products, $11.32 each or ($22.64)

c. While Option 2 offers more benefits for the price, Option 1 provides a bigger discount ($18 versus $12) than Option 2. Therefore, option 1 would provide a larger discount for the customers.

Solution:

a. Total transaction price = $90 + $25 + $20 + $18 + $15 = $168

Color ($90 ÷ $168) x $150 = $80.36

Cut ($25 ÷ $168) x $150 = $22.32

Style ($20 ÷ $168) x $150 = $17.86

Shampoo ($18 ÷ $168) x $150 = $16.07

Conditioner ($15 ÷ $168) x $150 = $13.39

b. Total transaction price = $110 + $25 + $20 + $18 + $15 + $12 + $12 = $212

Highlight $110 ÷ $212 x $200 = $103.77

Cut ($110 ÷ $212) x $200 = $23.58

Style ($25 ÷ $212) x $200 = $18.87

Shampoo ($20 ÷ $212) x $200 = $16.98

Conditioner ($18 ÷ $212) x $200 = $14.15

Styling Products ($12 ÷ $212) x $200 = $11.32 each or ($22.64, $11.32 x 2)

Option 1 Total transaction Price $168

Option 1 Bundled transaction price 150

Option 1 Discount Provided $18

Option 2 Total transaction Price $212

Option 2 Bundled transaction price 200

Option 2 Discount Provided $12

Problems

127. Olsson Consulting Services has three divisions and four support departments. The divisions (operating units) include Surveying, Engineering, and Testing. They provide a variety of services to their clients, and at the end of each fiscal year, the operating units are evaluated for profitability, and bonuses are given out to managers and employees of each division.

The support department managers and employees are also given bonuses based on how well each division does and how much support they give to each division. The support departments include Administration (Admin), Human Resources (HR), Technology (IT), and Accounting (Acct). Each support department’s costs are allocated based on how many hours each department provides to the other support departments and divisions.

Information on the four support departments is as follows:

Admin HR IT Acct

Operating Costs $320,000 $230,000 $680,000 $420,000

Admin hours used 880 1,320 990

HR hours used 220 352 132

IT hours used 1,760 2,640 3,168

Acct hours used 1,848 1,716 396

Information on the divisions is as follows:

Surveying Engineering Testing

Revenue $1,220,000 $1,885,000 $972,000

Operating Costs $623,000 $1,156,000 $412,000

Admin hours used 2,750 3,300 1,760

HR hours used 1,584 1,100 1,012

IT hours used 4,576 2,288 3,168

Acct hours used 3,432 4,448 1,320

The company is trying to determine which divisions should get bonuses. To earn a bonus, the division must earn a profit margin of at least 8%. The bonuses will then be paid the amount earned over the minimum profit margin percent.

In your calculations, do not round any intermediary calculations and round your final answer to the nearest dollar.

Instructions

a. If Olsson uses the direct method to allocate support costs, how much support costs would be allocated to each division?

b. Rank the divisions in order of operating costs and then use the step method to allocate support costs. How much support costs would be allocated to each division?

c. Rank the divisions in order of the largest percentage of support provided to other support departments and then use the step method to allocate support costs. How much support costs would be allocated to each division?

d. If Olsson uses the reciprocal method to allocate support costs, how much support costs would be allocated to each division?

e. Which divisions would receive bonuses based on (1) direct method, (2) step method – ranked by operating costs, (3) step method – ranked by support percentages, (4) reciprocal method? Prove your results with calculations.

f. Which method do you believe Olsson should use to allocate the support costs and why?

Ans: N/A, LO 1, 2 Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: FC, Measurement IMA: Cost Management.

Answer:

a. Surveying $678,101

Engineering $561,812

Testing $410,087

b. Ranked by Operating Costs – IT, Acct, Admin, HR

Surveying $664,062

Engineering $589,152

Testing $396,787

c. Ranked by Support percentage – IT, Acct, Admin, HR

Surveying $664,062

Engineering $589,152

Testing $396,787

d. Surveying $667,728

Engineering $585,807

Testing $396,465

1. Engineering (9%) and Testing (15%) (Surveying had a loss with a -7% profit margin)

2. Testing only (17%) (Engineering had a 7% profit margin and Engineering and Surveying had a loss with a -5% profit margin)

3. Testing only (17%) (Engineering had a 7% profit margin and Engineering and Surveying had a loss with a -5% profit margin)

4. Engineering (17%) and Testing(8%) (Surveying had a loss with a -6% profit margin)

f. Because the method used will affect bonuses, the reciprocal method should be used as it is the most accurate in allocating support costs.

Solution:

a. Total Admin Hours used = 2,750 + 3,330 + 1,760 = 7,810

Total HR hours used = 1,584 + 1,100 + 1,012 = 3,696

Total IT hours used = 4,576 + 2,288 + 3,168 = 10,032

Total Acct hours used = 3,432 + 4,448 + 1,320 = 9,200

Surveying Engineering Testing

Division hours Used 2,750 3,330 1,760

÷ total Admin hours used 7,810 7,810 7,810

x Admin operating costs $320,000 $320,000 $320,000

=allocated Admin costs to division $112,676 $135,211 $72,113

Surveying Engineering Testing

Division hours Used 1,584 1,110 1,012

÷ total HR hours used 3,696 3,696 3,696

x HR operating costs $230,000 $230,000 $230,000

=allocated HR costs to division $98,571 $68,452 $62,976

Surveying Engineering Testing

Division hours Used 4,576 2,288 3,168

÷ total IT hours used 10,032 10,032 10,032

x IT operating costs $680,000 $680,000 $680,000

=allocated IT costs to division $310,175 $155,088 $214,737

Surveying Engineering Testing

Division hours Used 3,432 4,448 1,320

÷ total Acct hours used 9,200 9,200 9,200

x Acct operating costs $420,000 $420,000 $420,000

=allocated Acct costs to division $156,678 $203,061 $410,087

Surveying Engineering Testing

Admin allocated costs $112,676 $135,211 $72,113

HR allocated costs 98,571 68,452 62,976

IR allocated costs 310,175 155,088 214,737

HR allocated costs 156,678 203,061 60,261

Total support costs $678,101 $561,812 $410,087

Calculation of hours used based on rank

	Admin	HR	Acct	Surveying	Engineering	Testing	Total
Admin Hrs used		880		2,750	3,300	1,760	8,690
HR hrs used				1,584	1,100	1,012	3,696
IT hrs used	1,760	2,640	3,168	4,576	2,288	3,168	17,600
Acct hrs used	1,848	1,716		3,432	4,448	1,320	12,764

Calculation of percentages based on total hours and hours used

	Admin	HR	Acct	Surveying	Engineering	Testing
Admin Hrs used	0%	10%	0%	32%	38%	20%
HR hrs used	0%	0%	0%	43%	30%	27%
IT hrs used	10%	15%	18%	26%	13%	18%
Acct hrs used	14%	13%	0%	27%	35%	10%

Percentages were calculated by taking the hours used divided by the total hours (e.g., 880 ÷ 8,690 = 10%)

Allocated costs

	Admin	HR	IT	Acct	Surveying	Engineering	Testing
Operating Costs	320,000	230,000	680,000	420,000
Admin allocated costs^	(466,530)	47,244			147,636	177,163	94,487
HR allocated costs ^^		(452,164)			193,785	134,573	123,807
IT allocated costs *	68,000	102,000	(680,000)	122,400	176,800	88,400	122,400
Acct allocation costs **	78,530	72,921	-	(542,400)	145,841	189,016	56,093
	-	-	-	-	664,062	589,152	396,787

* 680,000 x the percentages per IT department (i.e. 680,000 x 10% = $68,000)

** $420,000 + $122,400 = $542,400

Other allocations, $542,400 x the percentage used per acct department (i.e. $542,400 x 14% = $78,350)

^ $320,000 + $68,000 + $78,530 = $ $466,530

Other allocations, $466,530 x the percentage used per acct department (i.e. $466,530 x 10% = $47,244)

^^ $230,000 + $47,244 + $102,000 + $72,921 = $452,164

Other allocations, $452,164 x the percentage used per acct department (i.e. $452,164 x 143% = $$193,785)

Note – as the percentages are rounded, the values will be approximate.

Calculation of Rank:

Admin = (880 + 1,320 + 900) ÷ (880 + 1,320 + 900 + 2,750 + 3,300 + 1,760) = 28%

HR = (220 + 352 + 132) ÷ (220 + 352 + 132 + 1,584 + 1,100 + 1,012) = 16%

IT = (1,760 + 2,640 + 3,168) ÷ (1,760 + 2,640 + 3,168 + 4,576 + 2,288 + 3,168) = 43%

ACCT = (1,848 + 1,716 + 396) ÷ (1,848 + 1,716 + 396 + 3,432 + 4,448 + 1,320) = 30%

Because the rank stayed the same, all calculations from part b are still applicable.

	Surveying	Engineering	Testing
Revenues	1,220,000	1,885,000	972,000
Direct Costs	623,000	1,156,000	412,000
Alloc Operating Costs	678,101	561,812	410,087
Operating Income	(81,101)	167,188	149,913
÷ Revenues	1,220,000	1,885,000	972,000
Profit Margin	-7%	9%	15%

	Surveying	Engineering	Testing
Revenues	1,220,000	1,885,000	972,000
Direct Costs	623,000	1,156,000	412,000
Alloc Operating Costs	664,062	589,152	396,787
Operating Income	(67,062)	139,848	163,213
÷ Revenues	1,220,000	1,885,000	972,000
Profit Margin	-5%	7%	17%

3. Because the allocation did not change from 2, the solutions will be the same

	Surveying	Engineering	Testing
Revenues	1,220,000	1,885,000	972,000
Direct Costs	623,000	1,156,000	412,000
Alloc Operating Costs	667,728	585,807	396,465
Operating Income	(70,728)	143,193	163,535
÷ Revenues	1,220,000	1,885,000	972,000
Profit Margin	-6%	8%	17%

128. Thelma and Louise operate businesses in downtown Lincoln. Three joint businesses share one building.

Thelma operates a bakery. Her current rent is $2,200 per month, and she sells a variety of baked goods that are divided into three divisions. Cakes, Cookies, and Pastries. The breakout of the average revenue per one unit is Cakes - $45, 1 Dozen Cookes - $12, 6 Pastries - $18.

Louise operates a card and gift shop. Her current rent is $1,500 per month, and she has broken her business into three divisions as well: Cards, Ceramics, and Frames. She typically sells a package of cards for $5, an average ceramic sells for $25, and the average frame sells for $15.

Currently, Thelma rents the left section, and Louise rents the right section. Both sections are equal in square footage. The middle section just became available, and the ladies are considering renting it and sharing it to expand their current operations. The middle section is quite a bit larger and would rent for $3,000 per month.

In your calculations, do not round any intermediary calculations and round your final answer to the nearest dollar for the rent and nearest cent for the revenue.

Instructions

a. If Thelma and Louise rent the middle section and divide the cost using the stand-alone method, how much cost would be allocated to each?

b. If Thelma and Louise rent the middle section and divide the cost using the incremental method, how much cost would be allocated to each? (rank the cost by who currently pays the most rent)

c. Calculate the differences in allocated cost between the stand-alone method and the incremental method.

d. Which method would you suggest to Thelma and Louise to allocate the additional cost of renting the middle section?

e. Thelma and Louise decided to put together a few options for bundled deals for the customers.

1. The customer would receive a dozen cookies, a package of cards, and a frame for $30.

2. The customer would receive a cake and a ceramic for $60.

3. The customer would receive a six-pack of pastries, a dozen cookies, and a package of cards for $30.

Using the stand-alone method of allocating the transaction price of the bundles, how much revenue will Thelma receive, and how much revenue will Louise receive?

f. Using the same options as part (e), recalculate the division of revenues to Thelma and Louise, using the incremental method. Rank the products based on individual selling prices.

g. Which method would more accurately represent a fair division of revenue for Thelma and Louise.

Ans: N/A, LO 3 Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement IMA: Cost Management.

Answer:

a. Thelma $1,784

Louise $1,216

b. Thelma $2,200

Louise $800

c. Thelma $(416)

Louise $416

d. While Louise would prefer the incremental method, the stand-alone method appears to calculate the shared cost more proportionally.

1. Thelma $11.25

Louise $18.75

2. Thelma $38.57

Louise $21.43

3. Thelma $25.71

Louise $4.29

1. Thelma $12.00

Louise $18.00

2. Thelma $45.00

Louise $15.00

3. Thelma $30.00

Louise $0.00

g. The stand-alone method proportionally allocates the bundled transction price to each owner.

Solution:

a. Thelma (2,200 ÷ 3,700) x $3,000 = $1,784

Louise (1,500 ÷ 3,700) x $3,000 = $1,216

b. Thelma $2,200 Ranked First

Louise $800 ($3,000 - $2,200)

	Thelma	Louise
Stand-Alone	1,784	1,216
Incremental	2,200	800
Difference	(416)	416

e. Total separate transaction price = $12 + $5 + $15 = $32

1. Total transaction price = $12 + $5 + $15 = $32

Thelma = ($12 ÷ $32) x $30 = $11.25

Louise =( $5 ÷ $32) x $30 + $15 ÷ $32 x $30 = $18.75

2. Total transaction price = $45 + $25 = $70

Thelma = ($45 ÷ $70) x $60 = $38.57

Louise = ($25 ÷ $70) x $60 = $21.43

3. Total transaction price = $12 + $5 + $15 = $32

Thelma = (($12 ÷ $35) x $30) + (($18 ÷ $35) x $30 ) = $25.71

Louise = ($5 ÷ $35) x $30 = $4.29

1. Products Ranked = Frame ($15), Cookies ($12), Cards ($5)

Frames = $15

Cookies = $12

Cards = $3 ($30 - $15 - $12)

Thelma = $12

Louise = $15 + $3 = $18

2. Products Ranked = Cake ($45), Ceramic ($25)

Thelma = $45

Louise = $15 ($60 - $45)

3. Products Ranked = Pastries ($18), Cookies ($12), Cards ($5)

Frames = $18

Cookies = $12

Cards = $0 ($30 - $18 - $12)

Thelma = $30 ($18 + $12)

Louise = $0

Document Information

Document Type:

DOCX

Chapter Number:

Created Date:

Aug 21, 2025

Chapter Name:

Chapter 14 Support Department Costing

Author:

Karen Congo Farmer

Connected Book

Chapter Test Bank | Cost Accounting & Analytics 1e

By Karen Congo Farmer

Test Bank General

View Product →

Explore recommendations drawn directly from what you're reading

Chapter 12 Absorption Versus Variable Costing

DOCX Ch. 12

Chapter 13 Data Analytics

DOCX Ch. 13

Chapter 14 Support Department Costing

DOCX Ch. 14 Current

Chapter 15 Joint Costs And Decision[1]making

DOCX Ch. 15

Chapter 16 The Art And Science Of Pricing To Optimize Revenue

DOCX Ch. 16

$24.99

100% satisfaction guarantee

Buy Full Test Bank

Quick Navigation

Preview Document Info Connected Book Recommendations

Benefits

Immediately available after payment

Answers are available after payment

ZIP file includes all related files

Files are in Word format (DOCX)

Check the description to see the contents of each ZIP file

We do not share your information with any third party

Complete Test Bank Chapter 14 Support Department Costing

Document Information

Connected Book

Chapter Test Bank | Cost Accounting & Analytics 1e

Explore recommendations drawn directly from what you're reading

$24.99

Quick Navigation

Benefits

Report Unauthorized Use

Added to Cart