Support Dept Costs | Ch16 – Complete Test Bank 17e

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Horngren's Cost Accounting: A Managerial Emphasis, 17e, Global Edition by Datar/Rajan

Chapter 16 Allocation of Support-Department Costs, Common Costs, and Revenues

Objective 16.1

1) The method that allocates costs in each cost pool using the same rate per unit is known as the:

A) incremental cost-allocation method

B) reciprocal cost-allocation method

C) single-rate cost allocation method

D) dual-rate cost-allocation method

Diff: 1

Objective: 1

AACSB: Analytical thinking

2) The dual-rate cost-allocation method classifies costs in each cost pool into a:

A) budgeted-cost pool and an actual-cost pool

B) variable-cost pool and a fixed-cost pool

C) direct-cost pool and an indirect-cost pool

D) direct-cost pool and a reciprocal-cost pool

Diff: 1

Objective: 1

AACSB: Analytical thinking

3) Which of the following departments would NOT be considered a service or support department?

A) assembly

B) information systems

C) shipping

D) plant maintenance

Diff: 2

Objective: 1

AACSB: Analytical thinking

4) Which of the following would be distinguishing features or attributes of a support (service) department of a manufacturer?

A) directly adding value to the finish product to be purchased by customers

B) directly adding value to service contracts to be purchased by customers

C) assisting the production area with services such as maintenance and janitorial work

D) assisting potential customers who need to utilize the service agreement

Diff: 1

Objective: 1

AACSB: Analytical thinking

5) The ________ would be consistent with the main functions/activities of an operational area of a manufacturer.

A) installation of information technology

B) materials management in a warehouse

C) factory activities

D) plant maintenance

Diff: 1

Objective: 1

AACSB: Analytical thinking

6) When using the dual-rate method, the fixed cost allocation is based on:

A) actual rate

B) budgeted usage

C) incremental cost allocation

D) prime cost allocation

Diff: 1

Objective: 1

AACSB: Analytical thinking

7) Consider the following information attributed to the material management department

Budgeted usage of materials-handling labor-hours 3,500

Budgeted cost pools:

Fixed costs $164,500

Variable costs $126,000 (3,500 hours × $36 per hour)

The company uses the single-rate method to allocate support costs to the Machining and Assembly Departments. Assuming that the actual hours tracked in the Machining and Assembly department are 400 for the month, what would be the allocation rate and how much cost would be allocated to the Machining and Assembly Department for the operations of the month? (Round final answers to the nearest dollar.)

A) $83 an hour for a total of $33,200

B) $36 an hour for a total of $33,200

C) $36 an hour for a total of $14,400

D) $726 an hour for a total of $83

Diff: 2

Objective: 1

AACSB: Analytical thinking

8) Which of the following is a disadvantage of single-rate method?

A) It is very costly to implement.

B) It may lead operating department managers to make sub-optimal decisions that are in their own best interest.

C) It does not signal to department managers how variable costs and fixed costs behave differently.

D) It requires managers to distinguish variable costs from fixed costs, which is often a challenging task.

Diff: 2

Objective: 1

AACSB: Analytical thinking

9) Which of the following is an advantage of a dual-rate method?

A) It is the most widely used method in practice.

B) It is less costly to implement.

C) It avoids the expensive analysis for categorizing costs as either fixed or variable.

D) It allocates fixed cost as per the budgeted usage that helps in short and long-run planning.

Diff: 2

Objective: 1

AACSB: Analytical thinking

10) Which of the following is a disadvantage of a dual-rate method?

A) It allocates fixed costs on the basis of budgeted long-run usage, which may tempt some managers to underestimate their planned usage.

B) It may lead operating department managers to make sub-optimal decisions that are in their own best interest.

C) It allocates fixed and variable-cost pool using the same cost-allocation base, which will mislead managers in making decisions.

D) It does not guide department managers to make decisions that benefit both the organization as a whole and each department.

Diff: 2

Objective: 1

AACSB: Analytical thinking

11) Which of the following is an advantage of using practical capacity to allocate costs?

A) is that it allows a downward supply spiral to develop

B) is that it focuses management's attention on managing unused capacity

C) is that budgets are much easier to develop

D) is that it results in departments bearing a lower percentage of fixed costs

Diff: 2

Objective: 1

AACSB: Analytical thinking

12) Which of the following would be considered the biggest advantage of using practical capacity to allocate costs?

A) focuses the user's division with the costs of overused capacity

B) never causes over or under-allocated overhead

C) burdens the user divisions with the costs of unused capacity

D) focuses management's attention on unused capacity

Diff: 2

Objective: 1

AACSB: Analytical thinking

13) The Charmatz Corporation has a central copying facility. The copying facility has only two users, the Marketing Department and the Operations Department. The following data apply to the coming budget year:

Budgeted costs of operating the copying facility

for 400,000 to 600,000 copies:

Fixed costs per year $64,000

Variable costs 7 cents (0.07) per copy

Budgeted long-run usage in copies per year:

Marketing Department 90,000 copies

Operations Department 310,000 copies

Budgeted amounts are used to calculate the allocation rates.

Actual usage for the year by the Marketing Department was 120,000 copies and by the Operations Department was 380,000 copies. If a single-rate cost-allocation method is used, what amount of copying facility costs will be budgeted for the Marketing Department? (Round any intermediary calculations to the nearest cent.)

A) $20,700

B) $6,300

C) $14,400

D) $17,820

Diff: 2

Objective: 1

AACSB: Application of knowledge

14) The Charmatz Corporation has a central copying facility. The copying facility has only two users, the Marketing Department and the Operations Department. The following data apply to the coming budget year:

Budgeted costs of operating the copying facility

for 400,000 to 600,000 copies:

Fixed costs per year $64,000

Variable costs 6 cents (0.06) per copy

Budgeted long-run usage in copies per year:

Marketing Department 90,000 copies

Operations Department 310,000 copies

Budgeted amounts are used to calculate the allocation rates.

Actual usage for the year by the Marketing Department was 120,000 copies and by the Operations Department was 380,000 copies. If a single-rate cost-allocation method is used, what amount of copying facility costs will be allocated to the Marketing Department? Assume actual usage is used to allocate copying costs. (Do not round interim calculations and round the final calculation to the nearest dollar.)

A) $16,920

B) $19,800

C) $26,400

D) $7,200

Diff: 3

Objective: 1

AACSB: Application of knowledge

15) The Charmatz Corporation has a central copying facility. The copying facility has only two users, the Marketing Department and the Operations Department. The following data apply to the coming budget year:

Budgeted costs of operating the copying facility

for 400,000 to 600,000 copies:

Fixed costs per year $70,000

Variable costs 2 cents (0.02) per copy

Budgeted long-run usage in copies per year:

Marketing Department 120,000 copies

Operations Department 480,000 copies

Budgeted amounts are used to calculate the allocation rates.

Actual usage for the year by the Marketing Department was 150,000 copies and by the Operations Department was 410,000 copies. If a dual-rate cost-allocation method is used, what amount of copying facility costs will be budgeted for the Operations Department?

A) $65,600

B) $64,200

C) $60,850

D) $59,450

Diff: 2

Objective: 1

AACSB: Application of knowledge

16) The Charmatz Corporation has a central copying facility. The copying facility has only two users, the Marketing Department and the Operations Department. The following data apply to the coming budget year:

Budgeted costs of operating the copying facility

for 400,000 to 600,000 copies:

Fixed costs per year $60,000

Variable costs 3 cents (0.03) per copy

Budgeted long-run usage in copies per year:

Marketing Department 120,000 copies

Operations Department 380,000 copies

Budgeted amounts are used to calculate the allocation rates.

Actual usage for the year by the Marketing Department was 90,000 copies and by the Operations Department was 360,000 copies. If a dual-rate cost-allocation method is used, what amount of copying facility costs will be allocated to the Operations Department? Assume budgeted usage is used to allocate fixed copying costs and actual usage is used to allocate variable copying costs.

A) $59,400

B) $130,800

C) $57,000

D) $56,400

Diff: 3

Objective: 1

AACSB: Application of knowledge

17) The Speedjet Aircraft Corporation has a central materials laboratory. The laboratory has only two users, the Large Plane Department and the Small Plane Department. The following data apply to the coming budget year:

Budgeted costs of operating the materials laboratory

for 150,000 to 250,000 technician hours per year:

Fixed costs per year $8,600,000

Variable costs $73 per technician hour

Budgeted long-run usage in hours per year:

Large Plane Department 80,000 technician hours

Small Plane Department 120,000 technician hours

Budgeted amounts are used to calculate the allocation rates.

Actual usage for the year by the Large Plane Department was 60,000 technician hours and by the Small Plane Department was 100,000 technician hours. If a single-rate cost-allocation method is used, what is the allocation rate per hour used? (Round the final answer to the nearest dollar.)

A) $126.75

B) $116.00

C) $145.00

D) $101.40

Diff: 2

Objective: 1

AACSB: Application of knowledge

18) The Speedjet Aircraft Corporation has a central materials laboratory. The laboratory has only two users, the Large Plane Department and the Small Plane Department. The following data apply to the coming budget year:

Budgeted costs of operating the materials laboratory

for 100,000 to 200,000 technician hours per year:

Fixed costs per year $7,200,000

Variable costs $65 per technician hour

Budgeted long-run usage in hours per year:

Large Plane Department 90,000 technician hours

Small Plane Department 110,000 technician hours

Budgeted amounts are used to calculate the allocation rates.

Actual usage for the year by the Large Plane Department was 70,000 technician hours and by the Small Plane Department was 80,000 technician hours. If a dual-rate cost-allocation method is used, what amount of materials laboratory costs will be budgeted for the Large Plane Department?

A) $9,090,000

B) $7,910,000

C) $7,070,000

D) $10,170,000

Diff: 2

Objective: 1

AACSB: Application of knowledge

19) The Speedjet Aircraft Corporation has a central materials laboratory. The laboratory has only two users, the Large Plane Department and the Small Plane Department. The following data apply to the coming budget year:

Budgeted costs of operating the materials laboratory

for 150,000 to 250,000 technician hours per year:

Fixed costs per year $9,000,000

Variable costs $67 per technician hour

Budgeted long-run usage in hours per year:

Large Plane Department 100,000 technician hours

Small Plane Department 60,000 technician hours

Budgeted amounts are used to calculate the allocation rates.

Actual usage for the year by the Large Plane Department was 90,000 technician hours and by the Small Plane Department was 110,000 technician hours. If a single-rate cost-allocation method is used, what amount of materials laboratory costs will be allocated to the Large Plane Department? Assume actual usage is used to allocate laboratory costs.

A) $11,200,000

B) $12,325,000

C) $10,080,000

D) $11,092,500

Diff: 3

Objective: 1

AACSB: Application of knowledge

20) The Speedjet Aircraft Corporation has a central materials laboratory. The laboratory has only two users, the Large Plane Department and the Small Plane Department. The following data apply to the coming budget year:

Budgeted costs of operating the materials laboratory

for 100,000 to 200,000 technician hours per year:

Fixed costs per year $8,400,000

Variable costs $66 per technician hour

Budgeted long-run usage in hours per year:

Large Plane Department 80,000 technician hours

Small Plane Department 120,000 technician hours

Budgeted amounts are used to calculate the allocation rates.

Actual usage for the year by the Large Plane Department was 60,000 technician hours and by the Small Plane Department was 80,000 technician hours. If a dual-rate cost-allocation method is used, what amount of materials laboratory costs will be allocated to the Large Plane Department? Assume budgeted usage is used to allocate fixed materials laboratory costs and actual usage is used to allocate variable materials laboratory costs.

A) $7,800,000

B) $7,320,000

C) $6,480,000

D) $8,640,000

Diff: 3

Objective: 1

AACSB: Application of knowledge

21) The Speedjet Aircraft Corporation has a central materials laboratory. The laboratory has only two users, the Large Plane Department and the Small Plane Department. The following data apply to the coming budget year:

Budgeted costs of operating the materials laboratory

for 100,000 to 200,000 technician hours per year:

Fixed costs per year $7,800,000

Variable costs $66 per technician hour

Budgeted long-run usage in hours per year:

Large Plane Department 80,000 technician hours

Small Plane Department 120,000 technician hours

Budgeted amounts are used to calculate the allocation rates.

Actual usage for the year by the Large Plane Department was 60,000 technician hours and by the Small Plane Department was 80,000 technician hours. If a dual-rate cost-allocation method is used, what amount of materials laboratory costs will be budgeted for the Small Plane Department?

A) $14,605,714

B) $9,737,143

C) $8,400,000

D) $12,600,000

Diff: 2

Objective: 1

AACSB: Application of knowledge

22) The Speedjet Aircraft Corporation has a central materials laboratory. The laboratory has only two users, the Large Plane Department and the Small Plane Department. The following data apply to the coming budget year:

Budgeted costs of operating the materials laboratory

for 100,000 to 200,000 technician hours per year:

Fixed costs per year $9,000,000

Variable costs $66 per technician hour

Budgeted long-run usage in hours per year:

Large Plane Department 80,000 technician hours

Small Plane Department 120,000 technician hours

Budgeted amounts are used to calculate the allocation rates.

Actual usage for the year by the Large Plane Department was 60,000 technician hours and by the Small Plane Department was 80,000 technician hours. If a dual-rate cost-allocation method is used, what amount of materials laboratory costs will be allocated to the Small Plane Department? Assume budgeted usage is used to allocate fixed materials laboratory costs and actual usage is used to allocate variable materials laboratory costs.

A) $8,880,000

B) $10,680,000

C) $11,520,000

D) $13,320,000

Diff: 3

Objective: 1

AACSB: Application of knowledge

23) Illumination Corporation operates one central plant that has two divisions, the Flashlight Division and the Night Light Division. The following data apply to the coming budget year:

Budgeted costs of operating the plant for 2,000 to 3,000 hours:

Fixed operating costs per year $500,000

Variable operating costs $900 per hour

Budgeted long-run usage per year:

Flashlight Division 2,000 hours

Night Light Division 1,000 hours

Practical capacity 4,000 hours

Assume that practical capacity is used to calculate the allocation rates.

Actual usage for the year by the Flashlight Division was 1,500 hours and by the Night Light Division was 800 hours. If a single-rate cost-allocation method is used, what amount of operating costs will be budgeted for the Flashlight Division?

A) $2,050,000

B) $1,537,500

C) $1,987,500

D) $1,600,000

Diff: 2

Objective: 1

AACSB: Application of knowledge

24) Illumination Corporation operates one central plant that has two divisions, the Flashlight Division and the Night Light Division. The following data apply to the coming budget year:

Budgeted costs of operating the plant for 2,000 to 3,000 hours:

Fixed operating costs per year $500,000

Variable operating costs $750 per hour

Budgeted long-run usage per year:

Flashlight Division 2,000 hours

Night Light Division 1,000 hours

Practical capacity 4,000 hours

Assume that practical capacity is used to calculate the allocation rates.

Actual usage for the year by the Flashlight Division was 1,500 hours and by the Night Light Division was 800 hours. If a single-rate cost-allocation method is used, what amount of cost will be allocated to the Flashlight Division? Assume actual usage is used to allocate operating costs.

A) $1,750,000

B) $1,625,000

C) $1,031,250

D) $1,312,500

Diff: 3

Objective: 1

AACSB: Application of knowledge

25) Illumination Corporation operates one central plant that has two divisions, the Flashlight Division and the Night Light Division. The following data apply to the coming budget year:

Budgeted costs of operating the plant for 2,000 to 3,000 hours:

Fixed operating costs per year $480,000

Variable operating costs $650 per hour

Budgeted long-run usage per year:

Flashlight Division 1,500 hours

Night Light Division 600 hours

Practical capacity 3,000 hours

Assume that practical capacity is used to calculate the allocation rates.

Actual usage for the year by the Flashlight Division was 1,400 hours and by the Night Light Division was 700 hours. If a dual-rate cost-allocation method is used, what amount of operating costs will be budgeted for the Night Light Division?

A) $695,000

B) $502,000

C) $486,000

D) $567,000

Diff: 2

Objective: 1

AACSB: Application of knowledge

26) Illumination Corp operates one central plant that has two divisions, the Flashlight Division and the Night Light Division. The following data apply to the coming budget year:

Budgeted costs of operating the plant for 2,000 to 3,000 hours:

Fixed operating costs per year $500,000

Variable operating costs $800 per hour

Budgeted long-run usage per year:

Flashlight Division 2,000 hours

Night Light Division 1,000 hours

Practical capacity 4,000 hours

Assume that practical capacity is used to calculate the allocation rates.

Actual usage for the year by the Flashlight Division was 1,500 hours and by the Night Light Division was 800 hours. If a dual-rate cost-allocation method is used, what amount of cost will be allocated to the Night Light Division? Assume budgeted usage is used to allocate fixed operating costs and actual usage is used to allocate variable operating costs.

A) $925,000

B) $765,000

C) $900,000

D) $740,000

Diff: 3

Objective: 1

AACSB: Application of knowledge

27) Costs incurred in the support departments must be allocated ultimately to the operating departments for planning and control purposes but not to the final cost object.

Diff: 2

Objective: 1

AACSB: Analytical thinking

28) The single-rate method makes a distinction between fixed and variable costs by allocating using a single rate for fixed costs and another single rate for variable costs.

Diff: 1

Objective: 1

AACSB: Application of knowledge

29) The dual cost-allocation method classifies costs into two pools, a budgeted cost pool and an actual cost pool.

Diff: 1

Objective: 1

AACSB: Analytical thinking

30) The single cost-allocation method makes no distinction between fixed and variable costs.

Diff: 1

Objective: 1

AACSB: Analytical thinking

31) The single-rate method transforms the direct costs per hour into indirect costs to users of that facility.

Diff: 3

Objective: 1

AACSB: Analytical thinking

32) The dual-rate cost-allocation method provides better information for decision making than the single-rate method as it differentiates between fixed and variable costs and its allocation.

Diff: 1

Objective: 1

AACSB: Analytical thinking

33) An advantage of the single-rate method is that it is the most accurate method of cost-allocation.

Diff: 1

Objective: 1

AACSB: Analytical thinking

34) The fixed costs of operating the maintenance facility of General Hospital are $4,500,000 annually. Variable costs are incurred at the rate of $30 per maintenance-hour. The facility averages 40,000 maintenance-hours a year. Budgeted and actual hours per user for 2020 are as follows:

Budgeted hours Actual hours

Building and grounds 10,000 12,000

Operating and emergency 8,000 8,000

Patient care 21,000 22,000

Administration 1,000 1,200

Total 40,000 43,200

Assume that budgeted maintenance-hours are used to calculate the allocation rates.

Required:

a. If a single-rate cost-allocation method is used, what amount of maintenance cost will be budgeted for each department?

b. If a single-rate cost-allocation method is used, what amount of maintenance cost will be allocated to each department based on actual usage?

c. If a dual-rate cost-allocation method is used, what amount of maintenance cost will be budgeted for each department?

d. If a dual-rate cost-allocation method is used, what amount of maintenance cost will be allocated to each department based on actual usage? Based on budgeted usage for fixed operating costs and actual usage for variable operating costs?

a. Total costs + $4,500,000 + ($30 × 40,000) = $5,700,000

Single rate = $5,700,000 / 40,000 mh = $142.50 per maintenance-hour

Single-rate budgeted amounts:

Building and grounds $142.50 × 10,000 = $1,425,000

Operating and emergency $142.50 × 8,000 = $1,140,000

Patient care $142.50 × 21,000 = $2,992,500

Administration $142.50 × 1,000 = $ 142,500

b. Total costs + $4,500,000 + ($30 × 40,000) = $5,700,000

Single rate = $5,700,000 / 40,000 mh = $142.50 per maintenance-hour

Single-rate allocated amounts:

Building and grounds $142.50 × 12,000 = $1,710,000

Operating and emergency $142.50 × 8,000 = $1,140,000

Patient care $142.50 × 22,000 = $3,135,000

Administration $142.50 × 1,200 = $ 171,000

c. Dual-rate budgeted amounts:

Building and grounds:

Fixed ($4,500,000 × 10/40) $1,125,000

Variable ($30 × 10,000) 300,000

Total $1,425,000

Operating and emergency:

Fixed ($4,500,000 × 8/40) $ 900,000

Variable ($30 × 8,000) 240,000

Total $1,140,000

Patient care:

Fixed ($4,500,000 × 21/40) $2,362,500

Variable ($30 × 21,000) 630,000

Total $2,992,500

Administration:

Fixed ($4,500,000 × 1/40) $112,500

Variable ($30 × 1,000) 30,000

Total $142,500

d. Dual-rate allocated amounts:

Building and grounds:

Fixed ($4,500,000 × 10/40) $1,125,000

Variable ($30 × 12,000) 360,000

Total $1,485,000

Operating and emergency:

Fixed ($4,500,000 × 8/40) $ 900,000

Variable ($30 × 8,000) 240,000

Total $1,140,000

Patient care:

Fixed ($4,500,000 × 21/40) $2,362,500

Variable ($30 × 22,000) 660,000

Total $3,022,500

Administration:

Fixed ($4,500,000 × 1/40) $112,500

Variable ($30 × 1,200) 36,000

Total $148,500

Diff: 3

Objective: 1

AACSB: Application of knowledge

35) The Alex Miller Corporation operates one central plant that has two divisions, the Flashlight Division and the Night Light Division. The following data apply to the coming budget year:

Budgeted costs of the operating the plant

for 10,000 to 20,000 hours:

Fixed operating costs per year $280,000

Variable operating costs $10 per hour

Practical capacity 20,000 hours per year

Budgeted long-run usage per year:

Lamp Division 800 hours × 12 months = 9,600 hours per year

Flashlight Division 450 hours × 12 months = 5,400 hours per year

Assume that practical capacity is used to calculate the allocation rates. Further assume that actual usage of the Lamp Division was 700 hours and the Flashlight Division was 400 hours for the month of June.

Required:

a. If a single-rate cost-allocation method is used, what amount of operating costs will be budgeted for the Lamp Division each month? For the Flashlight Division each month?

b. For the month of June, if a single-rate cost-allocation method is used, what amount of cost will be allocated to the Lamp Division? To the Flashlight Division? Assume actual usage is used to allocate operating costs.

c. If a dual-rate cost-allocation method is used, what amount of operating costs will be budgeted for the Lamp Division each month? For the Flashlight Division each month?

d. For the month of June, if a dual-rate cost-allocation method is used, what amount of cost will be allocated to the Lamp Division? To the Flashlight Division? Assume budgeted usage is used to allocate fixed operating costs and actual usage is used to allocate variable operating costs.

a. Fixed costs $280,000 / 20,000 practical capacity hours = $14 / hour

Single-rate cost-allocation = $14 + $10 = $24 per hour

Lamp Division 800 × $24 / hour = $19,200 per month

Flashlight Division 450 × $24 / hour = $10,800 per month

b. Lamp Division 700 × $24 / hour = $16,800 per month

Flashlight Division 400 × $24 / hour = $9,600 per month

c. Fixed costs $280,000 / 20,000 practical capacity hours = $14 / hour

Budgeted costs — Lamp Division

(800 × $14/hour) + (800 × $10/hour) = $19,200 per month

Budgeted costs — Flashlight Division

(450 × $14/hour) + (450 × $10/hour) = $10,800 per month

d. Allocated costs for June — Lamp Division

(800 × $14 / hour) + (700 × $10/hour) = $18,200 per month

Allocated costs for June — Flashlight Division

(450 × $14 / hour) + (400 × $10/hour) = $10,300 per month

Diff: 3

Objective: 1

AACSB: Application of knowledge

36) The Pitt Corporation has been outsourcing data processing in the belief that such outsourcing would reduce costs and increase corporate profitability. In spite of this, there has been no meaningful increase in corporate profitability.

Previously, Pitt used a single-rate method to allocate data processing costs. A per unit cost for data processing was computed and compared to the price of the outside supplier. The price of the outside supplier was lower and thus, the outside bid was accepted.

Required:

Formulate a possible reason why Pitt's profitability has not shown improvement in terms of the cost allocation method used.

Diff: 3

Objective: 1

AACSB: Application of knowledge

37) What is an operating department and how is it different from a support department? Give examples of each.

Diff: 2

Objective: 1

AACSB: Application of knowledge

38) Van Meter Fig Company has substantial fluctuations in its production costs because of the seasonality of figs.

Would you recommend an actual or budgeted allocation base? Why? Would you recommend calculating monthly, seasonal, or annual allocation rates? Why?

Diff: 3

Objective: 1

AACSB: Application of knowledge

Objective 16.2

1) When budgeted cost-allocations rates are used:

A) user departments are not informed about the charges until the end of the period which makes decision making during the period difficult

B) user departments can determine the amount of service to request and if allowed, can determine whether to use an internal or external resource

C) user divisions pay for costs that exceed budgeted amounts

D) user divisions pay for inefficiencies of the supplier department

Diff: 2

Objective: 2

AACSB: Analytical thinking

2) When actual cost-allocations rates are used, which of the following would be true?

A) user divisions pay for costs that exceed budgeted amounts

B) managers of the supplier division are motivated to improve efficiency

C) user divisions are unaware of the allocated amounts until the end of the budget period

D) managers know with certainty the rates to be used in that budget period

Diff: 2

Objective: 2

AACSB: Analytical thinking

3) Under the dual-rate cost-allocation method, when fixed costs are allocated based on actual usage then:

A) user-division managers are motivated to make accurate long-run usage forecasts

B) user-division managers can better plan for the short-run and for the long-run

C) the costs of unused capacity are highlighted

D) variations in one division's usage affect another division's allocation

Diff: 2

Objective: 2

AACSB: Analytical thinking

4) The costs of unused capacity are highlighted when:

A) actual usage based allocations are used

B) budgeted usage allocations are used

C) practical capacity-based allocations are used

D) the dual-rate cost-allocation method allocates fixed costs based on actual usage

Diff: 2

Objective: 2

AACSB: Analytical thinking

5) To discourage unnecessary use of a support department, management might:

A) allocate user department costs based upon support department usage

B) allocate support department costs based upon user department usage

C) allocate a fixed amount of support department costs to each and every department

D) allocate a fixed amount of user department costs to each and every department

Diff: 2

Objective: 2

AACSB: Analytical thinking

6) Single-rate and dual rate methods used in allocating service department costs:

A) both assign variable costs on the basis of budgeted rates and actual usage

B) ignore the causal link between variable cost and usage

C) both assign variable costs on the basis of actual rates

D) assign variable costs on the basis of budgeted rates and budgeted usage

Diff: 2

Objective: 2

AACSB: Analytical thinking

7) Allocating variable costs on the basis of budgeted usage would provide the user departments with no incentive to control their consumption of support services.

Diff: 1

Objective: 2

AACSB: Analytical thinking

8) When actual cost-allocation rates are used, managers of the supplier division are motivated to improve efficiency.

Diff: 1

Objective: 2

AACSB: Analytical thinking

9) When budgeted cost-allocation rates are used, variations in actual usage by one division affect the costs allocated to other divisions.

Diff: 2

Objective: 2

AACSB: Analytical thinking

10) Because the variable costs are directly and causally linked to usage, charging them as a function of the actual usage is appropriate.

Diff: 1

Objective: 2

AACSB: Analytical thinking

11) When budgeted fixed costs are allocated based on actual usage, user departments will not know their fixed-cost allocations until the end of the budget period.

Diff: 1

Objective: 2

AACSB: Analytical thinking

12) The use of actual rates to allocate support department costs to user departments is the most common approach because of its high level of accuracy.

Diff: 1

Objective: 2

AACSB: Analytical thinking

13) Foodiez Inn is a fast-food restaurant that sells burgers and hot dogs in a 1980s environment. The fixed operating costs of the company are $10,000 per month. The controlling shareholder, interested in product profitability and pricing, wants all costs allocated to either the burgers or the hot dogs. The following information is provided for the operations of the company:

Burgers Hot Dogs

Sales for January 4,000 2,700

Sales for February 6,500 2,800

Required:

a. What amount of fixed operating costs is assigned to the burgers and hot dogs when actual sales are used as the allocation base for January? For February?

b. Hot dog sales for January and February remained constant. Did the amount of fixed operating costs allocated to hot dogs also remain constant for January and February? Explain why or why not. Comment on any other observations.

a. January sales:

Burgers ($10,000 × 4,000) / (4,000 + 2,700) = $5,970

Hot dogs ($10,000 × 2,700) / (4,000 + 2,700) = $4,030

February sales:

Burgers ($10,000 × 6,500) / (6,500 + 2,800) = $6,989

Hot dogs ($10,000 × 2,800 / (6,500 + 2,800) = $3,011

b. Even though hot dog sales remained constant for both months, the allocation of fixed operating costs decreased by more than $1,000. The reason is that fixed overhead costs are allocated based on actual sales. The dollar amount is fixed, and since burger sales increased, more of the fixed costs were allocated to the burgers.

Another observation is that burger sales increased by more than 50% from January to February, while the fixed operating costs assigned to burgers increased by only 17.34%.

Diff: 3

Objective: 2

AACSB: Application of knowledge

14) Marvelous Motors is a small motor supply outlet that sells motors to companies that make various small motorized appliances. The fixed operating costs of the company are $300,000 per year. The controlling shareholder, interested in product profitability and pricing, wants all costs allocated to the motors and wants to review the company status on a quarterly basis. The shareholder is trying to determine whether the costs should be allocated each quarter based on the 25% of the annual fixed operating costs ($75,000) or by using an annual forecast budget to allocate the costs. The following information is provided for the operations of the company:

Forecast Actual

Sales for First Quarter 5,000 4,850

Sales for Second Quarter 8,000 7,900

Sales for Third Quarter 8,000 8,125

Sales for Fourth Quarter 3,000 3,125

Required:

a. What amount of fixed operating costs are assigned to each motor by quarter when actual sales are used as the allocation base and $75,000 is allocated?

b. How much fixed cost is recovered each quarter under requirement a.?

c. What amount of fixed operating costs are assigned to each motor by quarter when forecast sales are used as the allocation base and the rate is calculated annually as part of the budgetary process?

d. How much fixed cost is recovered each quarter under requirement c.?

e. Which method seems more appropriate in this case? Explain.

a. Rate per unit using Actual Sales by Quarter:

Q1 $75,000 / 4,850 = $15.46 per motor

Q2 $75,000 / 7,900 = $ 9.49 per motor

Q3 $75,000 / 8,125 = $ 9.23 per motor

Q4 $75,000 / 3,125 = $24.00 per motor

b. $75,000 cost is recovered each quarter => $300,000 cost recovered over the year.

c. Quarterly Cost Recovery using Annual Forecast of Sales:

Forecast Sales for the year = 5,000 + 8,000 + 8,000 + 3,000= 24,000

Rate per motor = $300,000 / 24,000 = $12.50 per motor

d. Quarterly Cost Recovery using Annual Forecast of Sales as the allocation basis:

Q1 4,850 × $12.50 = $ 60,625

Q2 7,900 × $12.50 = $ 98,750

Q3 8,125 × $12.50 = $101,563

Q4 3,125 × $12.50 = $ 39,062 => $300,000 cost recovered over the year

e. The budgeted rate based on an annualized forecast of sales is more appropriate to use.

The fluctuations in sales was predictable and using actual quantities per quarter to calculate the cost recovery rates would distort the objective of assigning appropriate costs to the units. There would be uncertainty in interpretation of why one quarter has a very high rate per unit and another quarter has a very low rate per unit if the actual quarters fixed costs were spread to the actual units sold each quarter.

Diff: 3

Objective: 2

AACSB: Application of knowledge

15) Jonathan has managed a downtown store in a major metropolitan city for several years. The firm has ten stores in varying locations. In the past, senior management noticed Jonathan's work and he has received very good annual evaluations for his management of the store.

This year his store has generated steady growth in sales, but earnings have been deteriorating. After examining the monthly performance report generated by the company budgeting department, he noticed that increasing fixed costs is causing the decrease in earnings.

Administrative corporate costs, primarily fixed costs, are allocated to individual stores each month based on actual sales for that month. Two of these stores are currently growing at a rapid pace, while four other stores are having operating difficulties.

Required:

From the information presented, what do you think is the cause of Jonathan's reported decrease in earnings? How can this be corrected?

To correct the problem, the corporation should change to using budgeted performance as the allocation base and use a denominator level that reflects expected performance over the long run. An allocation base other than sales may also want to be considered.

Diff: 3

Objective: 2

AACSB: Application of knowledge

16) Why do organizations use budgeted rates instead of actual rates to allocate the costs of support departments to each other and to user departments and divisions? Explain.

When allocations are made using budgeted rates, managers of departments to which costs are allocated know with certainty the rates to be used in that budgetary period. Users can determine the amount of service to request. Budgeted rates also help motivate the manager of the support department to improve efficiency. The supplier department bears the risk of unfavorable variances and is aware of factors which may be causing negative variances. In cases where the support department's costs are out of control of the support department manager, the uncontrollable factors can be identified and the supplier department can either be relieved of responsibility for those specific factors or there can be a risk sharing agreement negotiated between the support department and the user departments.

Diff: 3

Objective: 2

AACSB: Application of knowledge

17) Describe the conflict of interest that is created when fixed costs are allocated to user departments at a rate $10 per unit that is higher than a variable cost for the same service offered by an outside vendor at $4 per unit.

Diff: 3

Objective: 2

AACSB: Ethical understanding and reasoning

Objective 16.3

1) Special cost-allocation problems arise when:

A) support department costs exceed budgetary estimates

B) practical capacity is used as the allocation base

C) support departments provide reciprocal services to each other and operating departments

D) the same cost-allocation base is used among various support departments

Diff: 2

Objective: 3

AACSB: Analytical thinking

2) Which of the following describes reciprocal support?

A) the accounting department provides services to production

B) molding provides services to production and accounting provides services to both molding and production

C) assembling department provides services to three other departments

D) the materials management department provides support to all departments including the production control department which also provides services to the materials management department

Diff: 2

Objective: 3

AACSB: Application of knowledge

3) Which of the following describes the direct allocation method's allocation of support-department costs?

A) it allocates support-department costs to operating departments by fully recognizing the mutual services provided among all support departments

B) it allocates support-department costs to other support departments and to operating departments in a sequential manner that partially recognizes the mutual services provided among all support departments

C) it allocates each support-department's costs to operating departments only

D) it requires managers to rank the support departments after predicting the usage of multiple support departments

Diff: 1

Objective: 3

AACSB: Analytical thinking

4) The method that allocates each department's budgeted costs to operating departments only is called:

A) direct method

B) step-down method

C) reciprocal method

D) sequential method

Diff: 1

Objective: 3

AACSB: Analytical thinking

5) Under which allocation method are one-way reciprocal support services recognized?

A) direct method

B) artificial cost method

C) reciprocal method

D) step-down method

Diff: 1

Objective: 3

AACSB: Analytical thinking

6) Which of the following statements is true about the step-down method?

A) it partially recognizes the services provided among support departments

B) it does not recognize the total services that support departments provide to each other

C) it is conceptually the most precise method

D) it results in allocating only the support costs used by operating departments

Diff: 1

Objective: 3

AACSB: Analytical thinking

7) When using the direct allocation method, a cost accountant would:

A) not allocate support department costs to other support departments

B) use information about reciprocal services provided among support departments and therefore could generate inaccurate estimates of the cost of operating departments

C) allocate complete reciprocated costs

D) allocate support department costs to other support departments

Diff: 2

Objective: 3

AACSB: Analytical thinking

8) The reciprocal allocation method:

A) is the most widely used because of its simplicity

B) requires the ranking of support departments in the order that the allocation is to proceed

C) fully incorporates interdepartmental relationships into the support-department cost allocations

D) allocates support-department costs to other support departments and to operating departments in a sequential manner that partially recognizes the mutual services provided among all support departments

Diff: 2

Objective: 3

AACSB: Analytical thinking

9) Which of the following statements is false with regards to departmental cost allocations?

A) amounts allocated to departments will most likely differ depending on the cost allocation method used

B) the total amount allocated among departments will differ in total depending on the cost allocation method used

C) the reciprocal method is usually the most conceptually precise method because it considers mutual services provided among all support departments

D) the step-down and direct methods are simple for managers to compute and understand relative to the reciprocal method

Diff: 2

Objective: 3

AACSB: Analytical thinking

10) Managers of supplier departments:

A) view the budgeted rates positively if unfavorable cost variances occur due to price decreases outside of their control

B) view the budgeted rates negatively if favorable cost variances occur due to price decreases outside of their control

C) view the budgeted rates negatively if unfavorable cost variances occur due to price increases outside of their control

D) view the budgeted rates negatively if unfavorable cost variances occur due to price decreases outside of their control

Diff: 3

Objective: 3

AACSB: Analytical thinking

11) Hanung Corp has two service departments, Maintenance and Personnel. Maintenance Department costs of $330,000 are allocated on the basis of budgeted maintenance-hours. Personnel Department costs of $170,000 are allocated based on the number of employees. The costs of operating departments A and B are $200,000 and $300,000, respectively. Data on budgeted maintenance-hours and number of employees are as follows:

Production

Support Departments Departments

Using the direct method, what amount of Maintenance Department costs will be allocated to Department B? (Do not round any intermediary calculations.)

A) $102,162

B) $112,378

C) $75,876

D) $170,270

Diff: 2

Objective: 3

AACSB: Application of knowledge

12) Hanung Corp has two service departments, Maintenance and Personnel. Maintenance Department costs of $370,000 are allocated on the basis of budgeted maintenance-hours. Personnel Department costs of $120,000 are allocated based on the number of employees. The costs of operating departments A and B are $196,000 and $294,000, respectively. Data on budgeted maintenance-hours and number of employees are as follows:

Production

Support Departments Departments

Using the direct method, what amount of Personnel Department costs will be allocated to Department B? (Do not round any intermediary calculations.)

A) $32,000

B) $35,000

C) $77,714

D) $85,000

Diff: 2

Objective: 3

AACSB: Application of knowledge

13) Hanung Corp has two service departments, Maintenance and Personnel. Maintenance Department costs of $320,000 are allocated on the basis of budgeted maintenance-hours. Personnel Department costs of $120,000 are allocated based on the number of employees. The costs of operating departments A and B are $176,000 and $264,000, respectively. Data on budgeted maintenance-hours and number of employees are as follows:

Production

Support Departments Departments

Using the step-down method, what amount of Maintenance Department cost will be allocated to Department B if the service department with the highest percentage of interdepartmental support service is allocated first? (Do not round any intermediary calculations.)

A) $27,527

B) $79,140

C) $29,677

D) $51,613

Diff: 3

Objective: 3

AACSB: Application of knowledge

14) Hanung Corp has two service departments, Maintenance and Personnel. Maintenance Department costs of $370,000 are allocated on the basis of budgeted maintenance-hours. Personnel Department costs of $150,000 are allocated based on the number of employees. The costs of operating departments A and B are $208,000 and $312,000, respectively. Data on budgeted maintenance-hours and number of employees are as follows:

Production

Support Departments Departments

Using the direct method, what amount of Maintenance Department costs will be allocated to Department A? (Do not round any intermediary calculations.)

A) $172,218

B) $343,093

C) $137,237

D) $244,124

Diff: 2

Objective: 3

AACSB: Application of knowledge

15) Hanung Corp has two service departments, Maintenance and Personnel. Maintenance Department costs of $330,000 are allocated on the basis of budgeted maintenance-hours. Personnel Department costs of $140,000 are allocated based on the number of employees. The costs of operating departments A and B are $188,000 and $282,000, respectively. Data on budgeted maintenance-hours and number of employees are as follows:

Production

Support Departments Departments

Using the direct method, what amount of Personnel Department costs will be allocated to Department A? (Do not round any intermediary calculations.)

A) $40,645

B) $37,612

C) $54,581

D) $99,355

Diff: 2

Objective: 3

AACSB: Application of knowledge

16) Hanung Corp has two service departments, Maintenance and Personnel. Maintenance Department costs of $390,000 are allocated on the basis of budgeted maintenance-hours. Personnel Department costs of $110,000 are allocated based on the number of employees. The costs of operating departments A and B are $200,000 and $300,000, respectively. Data on budgeted maintenance-hours and number of employees are as follows:

Production

Support Departments Departments

Using the step-down method, what amount of Maintenance Department cost will be allocated to Department A if the service department with the highest percentage of interdepartmental support service is allocated first? (Do not round any intermediary calculations.)

A) $266,190

B) $136,508

C) $52,751

D) $187,026

Diff: 3

Objective: 3

AACSB: Application of knowledge

17) Goldfarb's Book and Music Store has two service departments, Warehouse and Data Center. Warehouse Department costs of $360,000 are allocated on the basis of budgeted warehouse-hours. Data Center Department costs of $100,000 are allocated based on the number of computer log-on hours. The costs of operating departments Music and Books are $115,000 and $138,000, respectively. Data on budgeted warehouse-hours and number of computer log-on hours are as follows:

Production

Support Departments Departments

Using the direct method, what amount of Warehouse Department costs will be allocated to Department Books? (Do not round any intermediary calculations.)

A) $146,512

B) $213,488

C) $138,000

D) $178,252

Diff: 2

Objective: 3

AACSB: Application of knowledge

18) Goldfarb's Book and Music Store has two service departments, Warehouse and Data Center. Warehouse Department costs of $380,000 are allocated on the basis of budgeted warehouse-hours. Data Center Department costs of $160,000 are allocated based on the number of computer log-on hours. The costs of operating departments Music and Books are $135,000 and $162,000, respectively. Data on budgeted warehouse-hours and number of computer log-on hours are as follows:

Production

Support Departments Departments

Using the direct method, what amount of Data Center Department costs will be allocated to Department Music? (Do not round any intermediary calculations.)

A) $160,000

B) $72,880

C) $87,120

D) $64,147

Diff: 2

Objective: 3

AACSB: Application of knowledge

19) Goldfarb's Book and Music Store has two service departments, Warehouse and Data Center. Warehouse Department costs of $400,000 are allocated on the basis of budgeted warehouse-hours. Data Center Department costs of $200,000 are allocated based on the number of computer log-on hours. The costs of operating departments Music and Books are $150,000 and $180,000, respectively. Data on budgeted warehouse-hours and number of computer log-on hours are as follows:

Production

Support Departments Departments

Using the step-down method, what amount of Data Center Department cost will be allocated to the Warehouse Department if the service department with the highest percentage of interdepartmental support service is allocated first? (Round up)

A) $65,409

B) $200,000

C) $19,910

D) $0

Diff: 3

Objective: 3

AACSB: Application of knowledge

20) Consider this information:

Support Departments Operating Departments

The ranking of support departments based on percentage of their services provided to other support departments would result in which of the following?

A) Support costs should be allocated to consumer sales as it would be ranked number 1 because the full-time equivalent employees dedicated to that function is the largest percentage.

B) Support work supplied by IS is ranked at number 1 at 10%

C) Support work supplied by human resources department is ranked number 1 at 20%

D) Support costs should be allocated to consumer sales as it would be ranked number 1 because the information system hours dedicated to that function is the largest percentage.

Diff: 3

Objective: 3

AACSB: Application of knowledge

21) Consider this information below while assuming that ranking based on percentage of services rendered to other support departments.

Support Departments Operating Departments

The amount of HR support allocated to IS is about:

A) $15,000

B) $30,500

C) $320,000

D) $400,000

Diff: 3

Objective: 3

AACSB: Application of knowledge

22) Goldfarb's Book and Music Store has two service departments, Warehouse and Data Center. Warehouse Department costs of $310,000 are allocated on the basis of budgeted warehouse-hours. Data Center Department costs of $200,000 are allocated based on the number of computer log-on hours. The costs of operating departments Music and Books are $127,500 and $153,000, respectively. Data on budgeted warehouse-hours and number of computer log-on hours are as follows:

Production

Support Departments Departments

Using the step-down method, what amount of Warehouse Department cost will be allocated to Department Music if the service department with the highest percentage of interdepartmental support service is allocated first? (Do not round any intermediary calculations.)

A) $65,176

B) $101,022

C) $124,980

D) $41,550

Diff: 3

Objective: 3

AACSB: Application of knowledge

23) Goldfarb's Book and Music Store has two service departments, Warehouse and Data Center. Warehouse Department costs of $400,000 are allocated on the basis of budgeted warehouse-hours. Data Center Department costs of $180,000 are allocated based on the number of computer log-on hours. The costs of operating departments Music and Books are $145,000 and $174,000, respectively. Data on budgeted warehouse-hours and number of computer log-on hours are as follows:

Production

Support Departments Departments

Using the step-down method, what amount of Data Center Department cost will be allocated to Department Music if the service department with the highest percentage of interdepartmental support service is allocated first? (Round intermediary calculations to three decimal places.)

A) $136,775

B) $81,047

C) $111,960

D) $98,953

Diff: 3

Objective: 3

AACSB: Application of knowledge

24) Alfred, owner of Hi-Tech Fiberglass Fabricators, Inc., is interested in using the reciprocal allocation method. The following data from operations were collected for analysis:

Budgeted manufacturing overhead costs:

Plant Maintenance PM (Support Dept) $330,000

Data Processing DP (Support Dept) $80,000

Machining M (Operating Dept) $230,000

Capping C (Operating Dept) $105,000

Services furnished:

By Plant Maintenance (budgeted labor-hours):

to Data Processing 3,500

to Machining 5,000

to Capping 8,700

By Data Processing (budgeted computer time):

to Plant Maintenance 1,000

to Machining 3,900

to Capping 550

Which of the following linear equations represents the complete reciprocated cost of the Data Processing Department?

A) DP = $80,000 + (1,000 / 5,450) PM

B) DP = $80,000 + (3,500/ 17,200) PM

C) DP = $80,000 × (1,000 / 5,450) + $330,000 × (3,500 / 17,200)

D) DP = $330,000 + (1,000 / 17,200) DP

Diff: 3

Objective: 3

AACSB: Application of knowledge

25) Alfred, owner of Hi-Tech Fiberglass Fabricators, Inc., is interested in using the reciprocal allocation method. The following data from operations were collected for analysis:

Budgeted manufacturing overhead costs:

Plant Maintenance PM (Support Dept) $370,000

Data Processing DP (Support Dept) $85,000

Machining M (Operating Dept) $230,000

Capping C (Operating Dept) $140,000

Services furnished:

By Plant Maintenance (budgeted labor-hours):

to Data Processing 3,000

to Machining 5,000

to Capping 8,900

By Data Processing (budgeted computer time):

to Plant Maintenance 800

to Machining 3,800

to Capping 750

What is the complete reciprocated cost of the Plant Maintenance Department? (Do not round any intermediary calculations.)

A) $397,618

B) $393,146

C) $455,000

D) $395,589

Diff: 3

Objective: 3

AACSB: Application of knowledge

26) Alfred, owner of Hi-Tech Fiberglass Fabricators, Inc., is interested in using the reciprocal allocation method. The following data from operations were collected for analysis:

Budgeted manufacturing overhead costs:

Plant Maintenance PM (Support Dept) $330,000

Data Processing DP (Support Dept) $90,000

Machining M (Operating Dept) $200,000

Capping C (Operating Dept) $110,000

Services furnished:

By Plant Maintenance (budgeted labor-hours):

to Data Processing 3,300

to Machining 5,900

to Capping 8,600

By Data Processing (budgeted computer time):

to Plant Maintenance 600

to Machining 3,750

to Capping 750

What is the complete reciprocated cost of the Data Processing Department? (Do not round any intermediary calculations.)

A) $240,000

B) $106,685

C) $130,963

D) $154,551

Diff: 3

Objective: 3

AACSB: Application of knowledge

27) Hugo, owner of Automated Fabric, Inc., is interested in using the reciprocal allocation method. The following data from operations were collected for analysis:

Budgeted manufacturing overhead costs:

Maintenance M (Support Dept) $330,000

Personnel P (Support Dept) $200,000

Weaving W (Weaving Dept) $660,000

Colorizing C (Colorizing Dept) $440,000

Services furnished:

By Maintenance (budgeted labor-hours):

to Personnel 1,100

to Weaving 7,600

to Colorizing 5,000

By Personnel (Number of employees serviced):

Plant Maintenance 9

Weaving 39

Colorizing 25

Which of the following linear equations represents the complete reciprocated cost of the Personnel Department?

A) P = $330,000 - $200,000 (1,100 / 13,700) M

B) P = (1,100 / 13,700) M

C) P = $200,000 + (1,100 / 13,700) M

D) P = $200,000

Diff: 3

Objective: 3

AACSB: Application of knowledge

28) Hugo, owner of Automated Fabric, Inc., is interested in using the reciprocal allocation method. The following data from operations were collected for analysis:

Budgeted manufacturing overhead costs:

Maintenance M (Support Dept) $380,000

Personnel P (Support Dept) $150,000

Weaving W (Weaving Dept) $610,000

Colorizing C (Colorizing Dept) $360,000

Services furnished:

By Maintenance (budgeted labor-hours):

to Personnel 2,000

to Weaving 7,500

to Colorizing 4,700

By Personnel (Number of employees serviced):

Plant Maintenance 6

Weaving 35

Colorizing 28

What is the complete reciprocated cost of the Maintenance Department? (Do not round any intermediary calculations.)

A) $397,916

B) $393,043

C) $380,000

D) $0

Diff: 3

Objective: 3

AACSB: Application of knowledge

29) Hugo, owner of Automated Fabric, Inc., is interested in using the reciprocal allocation method. The following data from operations were collected for analysis:

Budgeted manufacturing overhead costs:

Maintenance M (Support Dept) $320,000

Personnel P (Support Dept) $190,000

Weaving W (Weaving Dept) $680,000

Colorizing C (Colorizing Dept) $360,000

Services furnished:

By Maintenance (budgeted labor-hours):

to Personnel 1,600

to Weaving 7,200

to Colorizing 4,700

By Personnel (Number of employees serviced):

Plant Maintenance 11

Weaving 38

Colorizing 28

What is the complete reciprocated cost of the Personnel Department? (Do not round any intermediary calculations.)

A) $130,000

B) $231,851

C) $190,000

D) $240,446

Diff: 3

Objective: 3

AACSB: Application of knowledge

30) Which of the following is one of the methods of allocating support department costs to operating departments that partially recognizes mutual service provided among all support departments?

A) dual-cost allocation method

B) direct method

C) sequential allocation method

D) single-rate cost allocation method

Diff: 1

Objective: 3

AACSB: Analytical thinking

31) One version of the reciprocal method of cost allocation uses a sequence that begins with allocating the costs of the support department that renders the lowest amount of services to support departments and ends with the allocation of costs of the department that renders the highest dollar amount of services to other support departments.

Diff: 1

Objective: 3

AACSB: Application of knowledge

32) The cost-allocation method that allocates each support-department's costs to operating departments only is the direct method.

Diff: 1

Objective: 3

AACSB: Analytical thinking

33) Two or more support departments whose costs are being allocated can also provide support to each other and as well as to operating departments.

Diff: 1

Objective: 3

AACSB: Analytical thinking

34) Some companies prefer not to allocate production or plant administration costs to jobs, products or customers because these costs are fixed and independent of the level of activity.

Diff: 1

Objective: 3

AACSB: Analytical thinking

35) Both direct and the step-down method can provide relevant information for outsourcing decisions.

Diff: 2

Objective: 3

AACSB: Application of knowledge

36) Knowing the complete reciprocated costs of a support department is an important factor when deciding whether or not to outsource services that support services.

Diff: 2

Objective: 3

AACSB: Application of knowledge

37) Complete reciprocated costs is the support department's own costs plus any interdepartmental cost allocations.

Diff: 2

Objective: 3

AACSB: Analytical thinking

38) The direct allocation method provides key information for outsourcing decisions regarding support services.

Diff: 2

Objective: 3

AACSB: Analytical thinking

39) An alternative way to implement the reciprocal method is to formula and use linear equations.

Diff: 2

Objective: 3

AACSB: Analytical thinking

40) The direct method is conceptually the most precise method because it considers the mutual services provided among all support departments.

Diff: 2

Objective: 3

AACSB: Analytical thinking

41) The step-down method allocates support department costs to only operating departments in a sequential manner.

Diff: 2

Objective: 3

AACSB: Analytical thinking

42) Under the step-down method, once a support department's costs have been allocated, all subsequent support-department costs are allocated back to it.

Diff: 2

Objective: 3

AACSB: Analytical thinking

43) The direct and step-down methods of support department cost allocations are theoretically more precise than the reciprocal method.

Diff: 2

Objective: 3

AACSB: Analytical thinking

44) Tryst University offers only high-tech graduate-level programs. Tryst has two principal operating departments, Engineering and Social Sciences, and two support departments, Facility and Technology Maintenance and Enrollment Services. The base used to allocate facility and technology maintenance is budgeted total maintenance hours. The base used to allocate enrollment services is number of credit hours for a department. The Facility and Technology Maintenance budget is $450,000, while the Enrollment Services budget is $900,000. The following chart summarizes budgeted amounts and allocation-base amounts used by each department:

Required:

Use the direct method to allocate support costs to each of the two principal operating departments, Engineering and Social Sciences. Prepare a schedule showing the support costs allocated to each department.

Diff: 2

Objective: 3

AACSB: Application of knowledge

45) Marshall University offers only high-tech graduate-level programs. Marshall has two principal operating departments, Commerce and Social Sciences, and two support departments, Facility and Technology Maintenance and Enrollment Services. The base used to allocate facility and technology maintenance is budgeted total maintenance hours. The base used to allocate enrollment services is number of credit hours for a department. The Facility and Technology Maintenance budget is $500,000, while the Enrollment Services budget is $900,000. The following chart summarizes budgeted amounts and allocation-base amounts used by each department:

Required:

Prepare a schedule which allocates service department costs using the step-down method with the sequence of allocation based on the highest-percentage support concept. Compute the total amount of support costs allocated to each of the two principal operating departments, Commerce and Social Sciences.

Enrollment services provided to maintenance = 2,000/62,000

F&T Maintenance provides the greatest amount of service to support departments, so it is allocated first.

F&T Maintenance $500,000 to Enrollment Services = $500,000 × 5/14 = $178,571

to Commerce = $500,000 × 3/14= $107,143

to Social Sciences = $500,000 × 6/14 = $214,286

Enrollment Service costs of $900,000 + $178,571 = $1,078,571

are allocated to Commerce and Social Sciences

to Commerce = $1,078,571 × 25/60 = $449,405

to Social Sciences = $1,078,572 × 35/60 = $629,167

Diff: 3

Objective: 3

AACSB: Application of knowledge

46) Gotham University offers only high-tech graduate-level programs. Gotham has two principal operating departments, Engineering and Computer Sciences, and two support departments, Facility and Technology Maintenance and Enrollment Services. The base used to allocate facility and technology maintenance is budgeted total maintenance hours. The base used to allocate enrollment services is number of credit hours for a department. The Facility and Technology Maintenance budget is $350,000, while the Enrollment Services budget is $950,000. The following chart summarizes budgeted amounts and allocation-base amounts used by each department:

Required:

a. Set up algebraic equations in linear equation form for each activity.

b. Determine total costs for each department by solving the equations from part (a) using the reciprocal method.

(Engineering= Eng; Computer Sciences = CS; Facility and Technical Maintenance = FTM; Enrollment Service = ES)

a. Eng = $1,400,000 + 2/8 (FTM) + 24/62 (ES)

CS = $3,500,000 + 1/8 (FTM)+ 36/62 (ES)

FTM = $350,000 + 2/62 (ES)

ES = $950,000 + 5/8 (FTM)

b. Enrollment Service = $950,000 + 0.625 (FTM)

ES = $950,000 + .625 (350,000 + 2/62 ES)

ES = $950,000 + $218,750 + .02 ES

0.98 ES = $1,168,750

ES = $1,192,602

FTM = $350,000 + 2/62 ($1,192,602) = $388,471

Engineering = $1,400,000 + 2/8 ($388,471) + 24/62 ($1,192,602)

$1,400,000 + 97,118 + 461,652 = $1,958,770

CS = $3,500,000 + 1/8 ($388,471) + 36/62 ($1,192,602)

= $3,500,000 + $48,559 + $692,479

= $4,241,038

Diff: 3

Objective: 3

AACSB: Application of knowledge

47) Craylon Corp has two service departments, S1 and S2, and two production departments, P1 and P2.

The data for April were as follows:

Required:

a. Set up algebraic equations in linear form for each activity.

b. Determine total costs for each department by solving the equations from part (a) using the reciprocal method.

a. S1 = $100,000 + 0.10 (S2)

S2 = $80,000 + 0.20 (S1)

P1 =$400,000 + 0.40 (S1) + 0.55 (S2)

P2 = $500,000 + 0.50 (S1) + 0.25 (S2)

b. S1 = $100,000 + 0.10 ($80,000 + 0.20 (S1))

S1 = $100,000 + $8,000 + 0.02 (S1)

0.98 (S1) = $108,000

= $110,204

S2 = $80,000 + (0.20 × $110,204) = 102,041

P1 = $400,000 + (0.40 × $110,204) + (0.55 × $102,041) = $500,205

P2 = 500,000 +(0.50 × $110,204) + (0.25 × $102,041) = $580,612

Diff: 3

Objective: 3

AACSB: Application of knowledge

48) Describe methods which may be used to allocate support costs within organizations containing multiple support departments. Discuss advantages and disadvantages of the various methods.

The direct method allocates support department costs only to the operating departments. An advantage of this approach is simplicity. A disadvantage of the approach is that it does not take into account the extent to which some support departments use the services of other support departments. The resultant permutation of costs will not be distributed to the operating departments accurately because they will not have recognized the mutual services provided among all support departments.

The step-down method allocates support department costs to other support departments in a sequential manner that partially recognizes the mutual services provided among all support departments. The method usually ranks the support departments in order of the highest percentage of its total services to other support departments. This provides more accuracy than the direct method with a minimum added level of complexity in the process.

The reciprocal method allocates support department costs to operating departments by fully recognizing the mutual services provided among all support departments. The method is complicated in that it either requires an iterative series of allocations or a linear programming solution to determine the final amounts to be allocated between the support departments which use each other's services. It provides the highest level of accuracy but is complex to implement.

Diff: 2

Objective: 3

AACSB: Analytical thinking

Objective 16.4

1) Corny Solutions processes various corn related food items. One of its facilities located in Iowa, performs some initial processing of corn on the cob once it arrives from the corn fields. The corn from that facility will be further processed elsewhere into corn for popping and corn meal. The costs incurred at the Iowa plant would be considered:

A) combined costs

B) distinct costs

C) fixed costs

D) common costs

Diff: 1

Objective: 4

AACSB: Analytical thinking

2) Which of the following would be the case under the stand-alone method of allocating common costs?

A) the individual users of a cost object are ranked in the order of users least responsible for the common cost and then uses this ranking to allocate cost among those users

B) disputes can arise over who is the primary user

C) each party bears a proportionate share of the total costs in relation to their individual stand-alone costs

D) the individual users of a cost object are ranked in the order of users most responsible for the common cost and then uses this ranking to allocate cost among those users

Diff: 2

Objective: 4

AACSB: Analytical thinking

3) Under the incremental method of allocating common costs:

A) the parties are interested in being viewed as primary users

B) each party bears a proportionate share of the total costs in relation to their individual stand-alone costs

C) the first-incremental user bears a higher proportion of the cost in comparison with the primary user

D) the primary user bears the maximum of the total cost

Diff: 2

Objective: 4

AACSB: Analytical thinking

4) Emerald Corp currently uses a manufacturing facility costing $410,000 per year; 93% of the facility's capacity is currently being used. A start-up business has proposed a plan that would utilize the other 7% of the facility and increase the overall costs of maintaining the space by 5%. If the stand-alone method were used, what amount of cost would be allocated to the start-up business?

A) $28,126

B) $28,700

C) $26,691

D) $30,135

Diff: 2

Objective: 4

AACSB: Application of knowledge

5) Emerald Corp currently uses a manufacturing facility costing $450,000 per year; 89% of the facility's capacity is currently being used. A start-up business has proposed a plan that would utilize the other 11% of the facility and increase the overall costs of maintaining the space by 10%. If the incremental method were used, what amount of cost would be allocated to the start-up business?

A) $44,055

B) $45,000

C) $54,450

D) $49,005

Diff: 2

Objective: 4

AACSB: Application of knowledge

6) Harbor Corp currently leases a corporate suite in an office building for a cost of $340,000 a year. Only 88% of the corporate suite is currently being used. A start-up business has proposed a plan that would use the other 12% of the suite and increase the overall costs of maintaining the space by $25,995. If the stand-alone method were used, what amount of cost would be allocated to the start-up business? (Round the final answer to the nearest dollar.)

A) $63,676

B) $40,800

C) $43,919

D) $37,681

Diff: 2

Objective: 4

AACSB: Application of knowledge

7) Harbor Corp currently leases a corporate suite in an office building for a cost of $390,000 a year. Only 85% of the corporate suite is currently being used. A start-up business has proposed a plan that would use the other 15% of the suite and increase the overall costs of maintaining the space by $23,366. If the incremental method were used, what amount of cost would be allocated to the start-up business?

A) $23,366

B) $413,366

C) $62,005

D) $78,361

Diff: 2

Objective: 4

AACSB: Application of knowledge

8) Annual total travel expenses to visit two clients (A and B) are $110,000. Stand-alone weights for cost allocation were determined to be 50% for A and 50% for B however that was based on initial cost estimates and travel arrangements that were later changed to combine trips and make some savings ($30,000) possible. If management uses the incremental Shapely value method, what would be the cost allocation?

A) A = $55,000, B = $55,000

B) A = $40,000, B = $40,000

C) A = $55,000, B = $25,000

D) A = $80,000, B = $30,000

Diff: 2

Objective: 4

AACSB: Application of knowledge

9) The stand-alone method of allocating determines the weights for cost allocation by considering each user of the cost as a separate entity.

Diff: 2

Objective: 4

AACSB: Analytical thinking

10) Under the incremental method, the first incremental user receives the largest allocation of the common costs.

Diff: 2

Objective: 4

AACSB: Analytical thinking

11) If the incremental users are newly formed companies or subunits, the incremental method may decrease their chances for short-run survival by assigning them a high allocation of the common costs.

Diff: 2

Objective: 4

AACSB: Application of knowledge

12) Allocating common costs can best be achieved by using the stand-alone cost-allocation method.

Diff: 1

Objective: 4

AACSB: Analytical thinking

13) The Shapley value method of allocating common costs only considers each party as a primary party and ignores incremental parties.

Diff: 2

Objective: 4

AACSB: Analytical thinking

14) The incremental cost-allocation method ranks the individual users of the cost object in the order of users most responsible for the common cost and uses this ranking to allocate cost among those users.

Diff: 1

Objective: 4

AACSB: Analytical thinking

15) The stand-alone cost allocation method ranks the individual users of a cost object in order of users most responsible for a common cost and then uses these rankings to allocate the costs among the users.

Diff: 1

Objective: 4

AACSB: Analytical thinking

16) The Shapley value method of allocating common costs considers each party as first the primary party and then the incremental party and computes an average allocation.

Diff: 1

Objective: 4

AACSB: Analytical thinking

17) The Maintenance Department has been servicing Gizmo Production for four years. Beginning next year, the company is adding a Scrap-Processing Department to recycle the materials from Gizmo Production. As a result, maintenance costs are expected to increase from $460,000 per year to $525,000 per year. The Scrap-Processing Department will use 25% of the maintenance efforts.

Required:

a. Using the stand-alone cost-allocation method, identify the amount of maintenance cost that will be allocated to Gizmo Production and the Scrap-Processing Department next year.

b. Using the incremental cost-allocation method, identify the amount of maintenance cost that will be allocated to Gizmo Production and the Scrap-Processing Department next year.

a. Gizmo Production = $525,000 × 0.75 = $393,750

Scrap-Processing Department = $525,000 × 0.25 = $131,250

b. Gizmo Production would receive $460,000.

Scrap-Processing Department would receive $65,000, the incremental amount

Diff: 3

Objective: 4

AACSB: Application of knowledge

18) Buildz Corp has been servicing the Production Casting Department for five years. Beginning next year, the company is adding a Production Molding Department to compliment the materials produced by the Production Casting Department. As a result, data center costs are expected to increase from $800,000 per year to $1,000,000 per year. The Production Molding Department will use 20% of the data center efforts.

Required:

a. Using the stand-alone cost-allocation method, identify the amount of data center cost that will be allocated to Production Casting and the Production Molding Department next year.

b. Using the incremental cost-allocation method, identify the amount of data center cost that will be allocated to Production Casting and the Production Molding Department next year.

a. Production Casting Department = $1,000,000 × 0.80 = $800,000

Production Molding = $1,000,000 × 0.20 = $200,000

b. Production Casting Department would receive $800,000.

Production Molding Department would receive $200,000, the incremental amount.

Diff: 2

Objective: 4

AACSB: Application of knowledge

19) What is a "common cost"? What are two methods that a manager can use to allocate common costs to two or more users?

Two ways to allocate common costs would be the stand-alone method and the incremental method.

The stand-alone method uses information pertaining to each user of the cost object to determine the cost allocation weights.

The incremental method ranks individual users of the cost object and allocates common costs first to the primary user, and then to the other incremental users.

Diff: 2

Objective: 4

AACSB: Analytical thinking

Objective 16.5

1) Which of the following would be an explicit agreement of reimbursement on a contract?

A) contractor will produce a bill at the end of the contract without having disclose costs

B) contractor will seek payment for contract without having to submit a bid or disclose a mark-up

C) contractor agrees with customer before the project begins, on a set price

D) Contractor will bill the customer based on what the contractor perceives to be the going rate

Diff: 1

Objective: 5

AACSB: Analytical thinking

2) Contract disputes regarding cost allocation can be reduced by defining which of the following?

A) the material items allowed for production

B) the terms used, such as what constitutes direct labor

C) permissible tax deductions

D) minimum profit level the company should earn

Diff: 1

Objective: 5

AACSB: Analytical thinking

3) Cost-plus contracts negotiated with suppliers of the government usually involves:

A) a price that allows the contractor to break-even

B) a price that covers the contract's cost plus other noncash benefits

C) the supplier's cost to perform the contact (provide the product or service) plus a fee

D) a price that covers the contractor's direct costs plus an amount to cover overhead costs

Diff: 2

Objective: 5

AACSB: Analytical thinking

4) Which of the following is an example of an allowable cost considered by U.S. government contract?

A) supervision costs

B) costs of lobbying activities

C) costs of alcoholic beverages

D) costs of vacation for executives

Diff: 1

Objective: 5

AACSB: Application of knowledge

5) In certain high-cost defense contracts involving new weapons and equipment, contracts are rarely subject to competitive bidding because:

A) the government taxes the defense companies at a higher level than that of other public sector companies

B) there is an implicit agreement among defense contractors to "share contracts"

C) all defense contractors have essentially the same cost structure

D) no contractor is willing to assume all the risk of receiving a fixed price for the contract

Diff: 2

Objective: 5

AACSB: Analytical thinking

6) Contracts with the U.S. Government must comply with the accounting standards of the:

A) IRS

B) CASB

C) FASB

D) SEC

Diff: 1

Objective: 5

AACSB: Application of knowledge

7) Cost Accounting Standards Board has exclusive authority to:

A) make and implement cost accounting standards and interpretations

B) approve all government contracts between private parties and the federal government

C) specify that contractors doing business with the government are paid a set price

D) require that a government contract be paid based on an analysis of actual contract cost date

Diff: 1

Objective: 5

AACSB: Application of knowledge

8) All contracts with U.S. government agencies must comply with the cost accounting standards issued by the SEC.

Diff: 1

Objective: 5

AACSB: Analytical thinking

9) The FASB (Financial Accounting Standards Board) provides cost accounting guidance (standards) for U.S. government contractors who do business with the federal government.

Diff: 1

Objective: 5

AACSB: Analytical thinking

10) In costs-plus-fixed-fee contracts the allocation of a specific cost may be difficult to defend on the basis of any cause-and-effect reasoning.

Diff: 2

Objective: 5

AACSB: Analytical thinking

11) If the government wants to contract a very large scale project with significant uncertainty about what the final cost will be; often a cost-plus contract is awarded to attract qualified contractors who may otherwise not be willing to accept the risks inherent in a guaranteed bid price.

Diff: 2

Objective: 5

AACSB: Analytical thinking

12) The issue of "allowable costs" is applicable in government cost-plus contracts.

Diff: 2

Objective: 5

AACSB: Analytical thinking

13) An allowable cost is a cost that the contract parties agree to include in the costs to be reimbursed in a government contract.

Diff: 1

Objective: 5

AACSB: Analytical thinking

14) John Peters is drafting the provisions of a cost-plus contract and is concerned with ironing out any possible misunderstandings during the life of the contract. What advice can you provide to reduce contract disputes over reimbursement amounts based on costs?

Diff: 2

Objective: 5

AACSB: Analytical thinking

15) There is uncertainty in defense contracts about the final cost to produce a new weapon or equipment. Explain.

Diff: 2

Objective: 5

AACSB: Analytical thinking

Objective 16.6

1) Revenue allocation is used when:

A) revenues cannot be estimated but can be traced to specific cost objects

B) revenues are related to a particular revenue object but cannot be traced to it in an economically feasible way

C) revenues are not related to a particular object but can be traced to that object in an economically feasible way

D) revenue optimization is the goal

Diff: 1

Objective: 6

AACSB: Analytical thinking

2) Which of the following is an example of a revenue object?

A) suppliers

B) products

C) labor

D) duration to complete a given task

Diff: 1

Objective: 6

AACSB: Analytical thinking

3) Which of the following is an example of a bundled product?

A) a checking account

B) A complete mechanics tool kit

C) an accounting textbook with an access code to a homework/study system

D) Microsoft Excel

Diff: 1

Objective: 6

AACSB: Analytical thinking

4) Which of the following is NOT one of the methods used to allocate the revenues of a bundled product?

A) direct revenue method

B) stand-alone selling prices method

C) stand-alone physical units method

D) incremental revenue method

Diff: 2

Objective: 6

AACSB: Analytical thinking

5) Which of the following best describes the stand-alone revenue-allocation method?

A) uses product-specific information on the products in the bundle as weights for allocating the bundled revenues to the individual products

B) ranks individual products in a bundle according to criteria determined by management

C) ranks individual products in a bundle according to costs allocated to the products

D) survey customers about the importance of each of the individual products in their purchase decision

Diff: 1

Objective: 6

AACSB: Analytical thinking

6) The best method to determining weights for the stand-alone revenue-allocation method is:

A) selling prices revenue-allocation method because the weights explicitly consider the prices customers are willing to pay for the individual products

B) unit cost revenue-allocation method because it can be used on all occasions

C) the direct revenue-allocation method since selling prices or unit costs are difficult to calculate for individual products

D) physical-units revenue-allocation method because the physical units explicitly value the prices customers are willing to pay for the individual products

Diff: 3

Objective: 6

AACSB: Analytical thinking

7) Which of the following methods ranks individual products in a bundle for revenue allocation?

A) stand-alone revenue-allocation method

B) incremental revenue-allocation method

C) unit-cost weighting method

D) physical-unit weighting method

Diff: 2

Objective: 6

AACSB: Analytical thinking

8) If management wants to choose a method of revenue allocation that best captures the "benefits received" by customers then they would use ________ to allocate revenue to products in a bundle.

A) stand-alone revenue -allocation based on unit costs

B) stand-alone revenue-allocation based on selling prices

C) stand-alone revenue-allocation based on physical units

D) stand-alone revenue-allocation based on unit costs

Diff: 2

Objective: 6

AACSB: Analytical thinking

9) To give more weight to the product that most likely drives the sales of the bundled product, the revenue allocation should be weighted using:

A) selling prices

B) unit costs

C) physical units

D) stand-alone product revenues

Diff: 2

Objective: 6

AACSB: Analytical thinking

10) Craylon Corp sells two products X and Y. X sells for $250 and Y sells for $145. Both X and Y sell for $345 as a bundle. What is the revenue allocated to product Y, if product X is termed as the primary product in the bundle?

A) $95

B) $105

C) $73

D) $173

Diff: 2

Objective: 6

AACSB: Application of knowledge

11) Buzz's Educational Software Outlet sells two or more of the video games as a single package. Managers are keenly interested in individual product-profitability figures. Information pertaining to three bundled products and the stand-alone prices is as follows:

Using the stand-alone method with selling price as the weight for revenue allocation, what amount of revenue will be allocated to Reading Fun in the first package (Reading Fun & Math Fun)? (Do not round any intermediary calculations.)

A) $19.10

B) $29.90

C) $26.00

D) $23.00

Diff: 2

Objective: 6

AACSB: Application of knowledge

12) Buzz's Educational Software Outlet sells two or more of the video games as a single package. Managers are keenly interested in individual product-profitability figures. Information pertaining to three bundled products and the stand-alone prices is as follows:

Using the incremental method for revenue allocation, what amount of revenue will be allocated to Reading Fun in the first package (Reading Fun & Math Fun)? Assume Reading Fun is the primary product, followed by Math Fun, and then Analysis. (Do not round any intermediary calculations.)

A) $19.71

B) $26.29

C) $22.00

D) $24.00

Diff: 2

Objective: 6

AACSB: Application of knowledge

13) Buzz's Educational Software Outlet sells two or more of the video games as a single package. Managers are keenly interested in individual product-profitability figures. Information pertaining to three bundled products and the stand-alone prices is as follows:

Using the stand-alone method with selling price as the weight for revenue allocation, what amount of revenue will be allocated to Math Fun in the package that contains all three products? (Do not round any intermediary calculations.)

A) $17.40

B) $34.00

C) $26.30

D) $32.42

Diff: 2

Objective: 6

AACSB: Application of knowledge

14) Buzz's Educational Software Outlet sells two or more of the video games as a single package. Managers are keenly interested in individual product-profitability figures. Information pertaining to three bundled products and the stand-alone prices is as follows:

Using the incremental method, what amount of revenue will be allocated to Math Fun in the package that contains all three products? Assume Reading Fun is the primary product, followed by Math Fun, and then Analysis. (Do not round any intermediary calculations.)

A) $17.47

B) $33.00

C) $25.60

D) $32.22

Diff: 2

Objective: 6

AACSB: Application of knowledge

15) Electro Corp sells a refrigerator and a freezer as a single package for $1,050. Other data are in the chart below.

Using the stand-alone method with selling price as the weight for revenue allocation, what amount will be allocated to the refrigerator? (Do not round any intermediary calculations.)

A) $525.00

B) $336.00

C) $714.00

D) $850.00

Diff: 2

Objective: 6

AACSB: Application of knowledge

16) Electro Corp sells a refrigerator and a freezer as a single package for $1,020. Other data are in the chart below.

Using the stand-alone method with stand-alone product revenues as the weight for revenue allocation, what amount will be allocated to the refrigerator? (Do not round any intermediary calculations.)

A) $485.25

B) $611.06

C) $408.94

D) $510.00

Diff: 2

Objective: 6

AACSB: Application of knowledge

17) Electro Corp sells a refrigerator and a freezer as a single package for $1,140. Other data are in the chart below.

Using the stand-alone method with manufacturing cost per unit as the weight for revenue allocation, what amount will be allocated to the refrigerator? (Do not round any intermediary calculations.)

A) $305.85

B) $570.00

C) $658.54

D) $834.15

Diff: 2

Objective: 6

AACSB: Application of knowledge

18) Electro Corp sells a refrigerator and a freezer as a single package for $1,000. Other data are in the chart below.

Using the stand-alone method with physical units as the weight for revenue allocation, what amount will be allocated to the refrigerator?

A) $595

B) $250

C) $650

D) $900

Diff: 2

Objective: 6

AACSB: Application of knowledge

19) A company sells a software suite that includes a word processor and spreadsheet applications. The suite sells for $290 and the items are also available separately for $175 (spreadsheet) and $145 (word processor). The spreadsheet app is by far the best seller of the standalone product sales. Using the incremental-revenue allocation method and assuming that the spreadsheet is the primary product, how much of the $290 revenue from the bundled product sale would be allocated to the spreadsheet and to the word processing products?

A) $175 of revenue for the spreadsheet and $115 for the word processor

B) $175 of revenue for the spreadsheet and $0 for the word processor

C) $160 of revenue for the spreadsheet and $130 for the word processor

D) $290 of revenue for the spreadsheet and $0 for the word processor

Diff: 1

Objective: 6

AACSB: Analytical thinking

20) The Shapley value method:

A) is used only for common cost allocations and is not applied to revenue allocations

B) uses the average standalone revenue of each product in a bundle to allocate revenue among the products

C) helps mitigate the problem of each product manager claiming that their product is the primary one in the bundle

D) treats all products in the bundle as first-incremental products only

Diff: 1

Objective: 6

AACSB: Analytical thinking

21) Revenue allocation is required to determine the profitability of individual items within a bundled product.

Diff: 1

Objective: 6

AACSB: Analytical thinking

22) The stand-alone method uses the product in the bundle with the most sale and then uses this ranking to allocate bundled revenues to individual products.

Diff: 2

Objective: 6

AACSB: Analytical thinking

23) Revenue allocation based on the number of physical units is only appropriate when individual products in the bundle are of equal value.

Diff: 2

Objective: 6

AACSB: Analytical thinking

24) The selling prices method under stand-alone revenue-allocation method is best because the weights explicitly consider the prices customers are willing to pay for the individual products.

Diff: 2

Objective: 6

AACSB: Analytical thinking

25) When allocating the revenues between a bundled product offering, management judgement can be used in issuing revenue-allocation weights.

Diff: 2

Objective: 6

AACSB: Analytical thinking

26) The rankings of products for the purposes of allocating revenues can be based on stand-alone unit sales or managerial intuition.

Diff: 2

Objective: 6

AACSB: Analytical thinking

27) The price of a bundled product is typically more than the sum of the prices of the individual products sold separately.

Diff: 2

Objective: 6

AACSB: Analytical thinking

28) Give examples of bundled products for each of the following industries:

a. Resort hotel

b. Bank

c. Restaurant

d. Computer store

e. Super markets

f. Personal care products manufacturer

a. Hotel room plus meals, free drinks, use of athletic facilities, morning newspaper

b. Checking account, safe deposit box, wire transfers, certified checks, travelers checks

c. Fixed-price meal includes a beverage, appetizer, entree, and dessert

d. Computer, keyboard, monitor, printer, software, 1-year contract for the repair and maintenance of the computer

e. Vegetables, fruits, electronic goods etc.

f. Shaving gel, razors, and after shave cream

Diff: 2

Objective: 6

AACSB: Application of knowledge

29) Max's Movie Store encounters revenue-allocation decisions with its bundled product sales. Here, two or more of the movie videos are sold as a single package. Managers at Max's are keenly interested in individual product-profitability figures. Information pertaining to its three bundled products and the stand-alone selling prices of its individual products is as follows:

Required:

a. With selling prices as the weights, allocate the $25 packaged price of "All Three" to the three videos using the stand-alone revenue-allocation method.

b. Allocate the $25 packaged price of "All Three" to the three types of videos using the incremental revenue-allocation method. Assume New Releases is the primary product, followed by Older Releases, and then Classics.

a. New $15 + Older $10 + Classics $8 = $33.00

New $15 / $33 × $25 = $11.36

Old $10 / $33 × $25 = $ 7.58

Classics $8 / $33 × $25 = $ 6.06

Total $25.00

b.

Diff: 3

Objective: 6

AACSB: Application of knowledge

30) Software For You encounters revenue-allocation decisions with its bundled product sales. Here, two or more units of the software are sold as a single package. Managers at Software For You are keenly interested in individual product-profitability figures. Information pertaining to its three bundled products and the stand-alone selling prices of its individual products is as follows:

Required:

a. Using the stand-alone revenue-allocation method, allocate the $380 packaged price of "All Three" to the three software products

1. with selling prices as the weights.

2. with individual product costs as the weights.

3. based on physical units.

b. Allocate the $380 packaged price of "All Three" to the three software products using the incremental revenue-allocation method. Assume Word Processing is the primary product, followed by Spreadsheet, and then Accounting Software.

a1. WP $125 + SS $150 + AS $225 = $500

WP $125 / $500 × $380 = $ 95

SS $150 / $500 × $380 = $114

AS $225 / $500 × $380 = $171

Total $380

a2. WP $18 + SS $20 + AS $25 = $63

WP $18 / $63 × $380 = $108.57

SS $20 / $63 × $380 = $120.64

AS $25 / $63 × $380 = $150.79

Total $380.00

a3. 1 / (1 + 1 + 1) × $380 = $126.67 per software package

b.

Diff: 3

Objective: 6

AACSB: Application of knowledge

31) Describe and discuss the two methods of allocating revenues of a bundled package to the individual products in that package. Describe any special problems associated with the method.

Method 2. The incremental revenue-allocation method ranks the individual products in the bundled product according to criteria determined by management. This ranking is then used to allocate the bundled revenues to individual products. One problem is how to determine the ranking. Individual product managers want to ranked first so that as much of the revenue as possible is allocated to their product. This can result in disputes between managers.

Diff: 2

Objective: 6

AACSB: Analytical thinking

32) Explain three approaches to determining weights for the stand-alone revenue-allocation. Which method do managers prefer?

The selling prices method is best because the weights explicitly consider the prices customers are willing to pay for the individual products. Weighting approaches that use revenue information better capture "benefits received" by customers than unit costs or physical units. The physical-units revenue-allocation method is used when managers cannot use any of the other methods (such as when selling prices are unstable or unit costs are difficult to calculate for individual products).

Diff: 3

Objective: 6

AACSB: Application of knowledge