ALLOCATION OF SUPPORT DEPARTMENT

COMMON COSTS, AND REVENUES
TRUE/FALSE
1. The dual cost-allocation method classifies costs into two pools, a budgeted cost pool and an actual cost pool.

Answer: False Difficulty: 1 Objective: 1 Terms to Learn: dual-rate cost-allocation method The dual cost-allocation method classifies costs into two pools, a variable cost pool and a fixed cost pool.

1. Using the single-rate method transforms the fixed costs per hour into a variable cost to users of that facility.

Answer: True Difficulty: 3 Objective: 1 Terms to Learn: single-rate cost-allocation method

1. The single-rate cost-allocation method provides better information for decision making than the dual-rate method.

Answer: False Difficulty: 2 Objective: 1 Terms to Learn: single-rate cost-allocation method, dual-rate cost-allocation method The dual-rate cost-allocation method provides better information for decision making than the single-rate method.

1. An advantage of the single-rate method is that it is easier and always the most accurate cost-allocation choice.

Answer: False Difficulty: 2 Objective: 1 Terms to Learn: single-rate method The single-rate method is the easiest cost allocation method, but it is the least accurate cost-allocation choice.

1. When budgeted cost-allocation rates are used, user-division managers face uncertainty about the allocation rates for that budget period.

Answer: False Difficulty: 2 Objective: 2 Terms to Learn: single-rate cost-allocation method, dual-rate cost-allocation method When budgeted cost-allocation rates are used, user-division managers face no uncertainty about the allocation rates for that budget period.

1. When budgeted cost-allocation rates are used, managers of the supplier division are motivated to improve efficiency.

Answer: True Difficulty: 2 Objective: 2 Terms to Learn: single-rate cost-allocation method, dual-rate cost-allocation method

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

Answer: False Difficulty: 2 Objective: 2 Terms to Learn: single-rate cost-allocation method, dual-rate cost-allocation method When actual cost-allocations rates are used, variations in actual usage by one division affect the costs allocated to other divisions.

1. The only choices that a firm has for support department cost allocation rates are to use either a budgeted rate or an actual rate.

Answer: False Difficulty: 2 Objective: 2 Terms to Learn: single-rate method, dual-rate method The choices a firm has for support department cost allocation rates include using a budgeted rate, an actual rate, or some negotiated rate.

1. The direct allocation method highlights recognition of services rendered by support departments to other support departments.

Answer: False Difficulty: 2 Objective: 3 Terms to Learn: direct allocation method The direct allocation method allows for no recognition of services rendered by support departments to other support departments.

1. The reciprocal allocation method incorporates mutual services provided among all support departments.

Answer: True Difficulty: 2 Objective: 3 Terms to Learn: reciprocal allocation method

1. The reciprocal method of support department cost allocation is the most precise method and therefore is used most often.

Answer: False Difficulty: 2 Objective: 3 Terms to Learn: reciprocal method The reciprocal method of support department cost allocation is the most precise method but is not often used due to its relative complexity.

1. The stand-alone method of allocating common costs emphasizes fairness and equity among users.

Answer: True Difficulty: 2 Objective: 4 Terms to Learn: stand-alone cost-allocation method

1. Under the incremental method, the first incremental user usually receives the highest allocation of the common costs.

Answer: False Difficulty: 2 Objective: 4 Terms to Learn: incremental cost-allocation method Under the incremental method of allocating common costs, the primary user receives the highest allocation of the common costs.

1. A common cost is a cost of operating a facility or activity that is shared by two or more users.

Answer: True Difficulty: 2 Objective: 4 Terms to Learn: common cost

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

Answer: True Difficulty: 2 Objective: 4 Terms to Learn: stand-alone cost-allocation method

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

Answer: True Difficulty: 3 Objective: 4 Terms to Learn: incremental cost-allocation method

1. All contracts with U. government agencies must comply with the cost accounting standards issued by the Cost Accounting Standards Board.

Answer: True Difficulty: 1 Objective: 5 Terms to Learn: Cost Accounting Standards Board (CASB)

1. Without explicit written cost-plus contracts, producer costs can be passed on to the buyer.

Answer: True Difficulty: 2 Objective: 5 Terms to Learn: allowable cost

1. The issue of “allowable costs” is not applicable in government cost-plus contracts.

Answer: False Difficulty: 2 Objective: 5 Terms to Learn: allowable costs The issue of “allowable costs” is very important in government cost-plus contracts.

1. An example of a bundled product is when a resort hotel charges a single price for lodging, food, and recreational activities.

Answer: True Difficulty: 1 Objective: 6 Terms to Learn: bundled product

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

Answer: True Difficulty: 2 Objective: 6 Terms to Learn: bundled product, revenue allocation

1. The stand-alone method may use selling price or unit costs to allocate revenues.

Answer: True Difficulty: 2 Objective: 7 Terms to Learn: revenue allocation, stand-alone method

1. Under the incremental revenue-allocation method, there is an incentive to be the first-ranked user.

Answer: True Difficulty: 2 Objective: 7 Terms to Learn: incremental revenue-allocation method, revenue allocation

1. When using the single-rate method, fixed cost allocation may be based on: a. actual usage b. budgeted usage c. incremental cost allocation d. Either a or b are correct.

Answer: d Difficulty: 1 Objective: 1 Terms to Learn: single-rate cost-allocation method

1. Benefits of the single-rate method include: a. the low cost of implementation b. fixed costs that are transformed into variable costs for user decision making c. signals regarding how variable and fixed costs behave differently d. information that leads to outsourcing decisions that benefit the organization as a whole

Answer: a Difficulty: 3 Objective: 1 Terms to Learn: single-rate cost-allocation method

1. Benefits of the dual-rate method include: a. variable costs that are transformed into fixed costs for user decision making b. the low cost of implementation c. avoidance of expensive analysis for categorizing costs as either fixed or variable d. information that leads to outsourcing decisions that benefit the organization as a whole

Answer: d Difficulty: 3 Objective: 1 Terms to Learn: dual-rate cost-allocation method

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 36 THROUGH 39: The Bonawitz Corporation has a central copying facility. The copying facility has only two users, the Marketing Department and the Operations Department. The following data apply to the coming budget year:

Budgeted costs of operating the copying facility for 200,000 to 300,000 copies: Fixed costs per year $30, Variable costs 3 cents (.03) per copy Budgeted long-run usage in copies per year: Marketing Department 60,000 copies Operations Department 190,000 copies

Budgeted amounts are used to calculate the allocation rates.

Actual usage for the year by the Marketing Department was 40,000 copies and by the Operations Department was 180,000 copies.

1. If a single-rate cost-allocation method is used, what amount of copying facility costs will be budgeted for the Marketing Department? a. $9, b. $1, c. $7, d. $8,

Answer: a Difficulty: 2 Objective: 1 Terms to Learn: single-rate cost-allocation method [(60,000/ (60,000 + 190,000)) x $30,000] + (60,000 x $0) = $9,

1. If a single-rate cost-allocation method is used, what amount of copying facility costs will be allocated to the Marketing Department? Assume actual usage is used to allocate copying costs. a. $8, b. $9, c. $6, d. $4,

Answer: c Difficulty: 3 Objective: 1 Terms to Learn: single-rate cost-allocation method [(60,000) / (60,000 + 190,000)) x $30,000] + (60,000 x $0) = $9, $9,000/60,000 copies = $0 per copy x 40,000 = $6,

1. If a dual-rate cost-allocation method is used, what amount of copying facility costs will be budgeted for the Operations Department? a. $28, b. $28, c. $30, d. $29,

Answer: a Difficulty: 2 Objective: 1 Terms to Learn: dual-rate cost-allocation method [(190,000) / (60,000 + 190,000)) x $30,000] + (190,000 x $0) = $28,

1. If a single-rate cost-allocation method is used, what amount of cost will be allocated to the Flashlight Division? Assume actual usage is used to allocate operating costs. a. $2,280, b. $2,400, c. $3,000, d. $2,100,

Answer: d Difficulty: 3 Objective: 1 Terms to Learn: single-rate cost-allocation method $3,000,000/2,000 x 1,400 = $2,100, (see calculation for answer to question 40)

1. If a dual-rate cost-allocation method is used, what amount of operating costs will be budgeted for the Night Light Division? a. $780, b. $900, c. $750, d. $870,

Answer: c Difficulty: 2 Objective: 1 Terms to Learn: dual-rate cost-allocation method [(500/3,000) x $900,000] + (500 x $1,200) = $750,

1. 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. $750, b. $870, c. $780, d. $900,

Answer: b Difficulty: 3 Objective: 1 Terms to Learn: dual-rate cost-allocation method [(500/3,000) x $900,000] + (600 x $1,200) = $870,

1. When budgeted cost-allocations rates are used: a. variations in actual usage by one division affect the costs allocated to other divisions b. the manager of the supplier division bears the risk of unfavorable cost variances c. user divisions pay for costs that exceed budgeted amounts d. user divisions pay for inefficiencies of the supplier department

Answer: b Difficulty: 3 Objective: 2 Terms to Learn: single-rate cost-allocation method, dual-rate cost-allocation method

1. When actual cost-allocations rates are used: a. user divisions pay for costs that exceed budgeted amounts b. managers of the supplier division are motivated to improve efficiency c. user divisions do not know allocated amounts until the end of the accounting period d. managers of the user divisions may be tempted to underestimate planned usage

Answer: c Difficulty: 3 Objective: 2 Terms to Learn: single-rate cost-allocation method, dual-rate cost-allocation method

1. 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

Answer: d Difficulty: 3 Objective: 2 Terms to Learn: dual-rate cost-allocation method

1. 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

Answer: c Difficulty: 2 Objective: 2 Terms to Learn: single-rate cost-allocation method, dual-rate cost-allocation method

1. The support department allocation method that is the most widely used because of its simplicity is the: a. step-down method b. reciprocal allocation method c. direct allocation method d. sequential allocation method

Answer: c Difficulty: 1 Objective: 3 Terms to Learn: direct allocation method

1. The method that allocates costs by explicitly including all the services rendered among all support departments is the: a. direct method b. step-down method c. reciprocal method d. sequential method

Answer: c Difficulty: 2 Objective: 3 Terms to Learn: reciprocal method

1. 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

Answer: d Difficulty: 2 Objective: 3 Terms to Learn: step-down allocation method

1. The direct allocation method: a. partially recognizes the services provided among support departments b. is also referred to as the sequential method c. is conceptually the most precise method d. results in allocating only the support costs used by operating departments

Answer: d Difficulty: 3 Objective: 3 Terms to Learn: direct allocation method

1. The step-down allocation method: a. typically begins with the support department that provides the highest percentage of its total services to other support departments b. recognizes the total amount of services that support departments provide to each other c. allocates complete reciprocated costs d. offers key input for outsourcing decisions

Answer: a Difficulty: 3 Objective: 3 Terms to Learn: step-down allocation method

1. 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. is conceptually the most precise d. results in allocating more support costs to operating departments than actually incurred

Answer: c Difficulty: 3 Objective: 3 Terms to Learn: reciprocal allocation method

1. Complete reciprocated costs: a. are less than the support department’s own costs b. include the support department’s costs plus any interdepartmental cost allocations c. are used for step-down allocations d. are also referred to as budgeted costs

Answer: b Difficulty: 2 Objective: 3 Terms to Learn: complete reciprocated costs

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 59 THROUGH 61: Jake’s Battery Company has two service departments, Maintenance and Personnel. Maintenance Department costs of $160,000 are allocated on the basis of budgeted maintenance-hours. Personnel Department costs of $40,000 are allocated based on the number of employees. The costs of operating departments A and B are $80,000 and $120,000, respectively. Data on budgeted maintenance-hours and number of employees are as follows:

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 62 THROUGH 64:
Jake’s Battery Company has two service departments, Maintenance and Personnel. Maintenance Department costs of $160,000 are allocated on the basis of budgeted maintenance-hours. Personnel Department costs of $40,000 are allocated based on the number of employees. The costs of operating departments A and B are $80,000 and $120,000, respectively. Data on budgeted maintenance-hours and number of employees are as follows:

Support Departments Production Departments

Maintenance Department

Personnel Department

A B
Budgeted costs $160,000 $40,000 $80,000 $120, Budgeted maintenance- hours

NA Number of employees 20 NA . Using the direct method, what amount of Maintenance Department costs will be allocated to Department A? a. $48, b. $64, c. $78, d. $96,

Answer: d Difficulty: 2 Objective: 3 Terms to Learn: direct allocation method 480 / (320 + 480) x $160,000 = $96,

1. Using the direct method, what amount of Personnel Department costs will be allocated to Department A? a. $10, b. $16, c. $24, d. $30,

Answer: a Difficulty: 2 Objective: 3 Terms to Learn: direct allocation method 80 / (80 + 240) x $40,000= $10,

1. 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? (Round up) a. $32, b. $42, c. $57, d. $64,

Answer: d Difficulty: 3 Objective: 3 Terms to Learn: step-down allocation method

Maintenance provided to Personnel: 400 / (400 + 480 + 320) =. Personnel provided to Maintenance: 20 / (20 + 80 + 240) =. Maintenance provides the greatest amount of service to support departments, so it is allocated first. Dept A: 480 / (400 + 480 + 320) x $160,000 = $64,

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 65 THROUGH 67: 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) $350, Data Processing DP (Support Dept) $ 75, Machining M (Operating Dept) $225, Capping C (Operating Dept) $125,

Services furnished: By Plant Maintenance (budgeted labor-hours): to Data Processing 3, to Machining 5, to Capping 8, By Data Processing (budgeted computer time): to Plant Maintenance 600 to Machining 3, to Capping . Which of the following linear equations represents the complete reciprocated cost of the Data Processing Department? a. DP= $75,000 + (600/4,700) PM b. DP= $75,000 + (3,500/16,700) PM c. DP= $75,000 x (600/4,700) + $350,000 x (3,340/16,700) d. DP= $350,000 + (600/16,700) DP

Answer: b Difficulty: 3 Objective: 3 Terms to Learn: service department, complete reciprocated costs

1. What is the complete reciprocated cost of the Plant Maintenance Department? a. $393, b. $369, c. $365, d. $375,

Answer: b Difficulty: 3 Objective: 3 Terms to Learn: complete reciprocated costs DP = $75,000 + (3,500/16,700) PM PM= $350,000 + (600/4,700) DP PM= $350,000 + (600/4,700) x [$75,000 + (3,500/16,700) PM] PM= $350,000 + $9,574 + (0)PM 0 PM = $359, PM= $369,

1. A cost of operating a facility, department, activity area, or like cost object that is shared by two or more users is called a: a. direct cost b. joint cost c. fixed cost d. common cost

Answer: d Difficulty: 1 Objective: 4 Terms to Learn: common cost

1. Under the stand-alone method of allocating common costs: a. a ranking is used to allocate costs among the 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. an incentive is created to be the first-ranked user

Answer: c Difficulty: 3 Objective: 4 Terms to Learn: stand-alone cost-allocation method

1. Under the incremental method of allocating common costs: a. the parties are interested in being viewed as primary users b. each party bears a proportionate share of the total costs in relation to their individual stand-alone costs c. fairness and equity are emphasized d. there is a disincentive to be titled the primary user Answer: d Difficulty: 3 Objective: 4 Terms to Learn: incremental cost-allocation method

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 74 AND 75: The Sturgeon Bay Corporation currently uses a manufacturing facility costing $400, per year; 80% of the facility’s capacity is currently being used. A start-up business has proposed a plan that would utilize the other 20% of the facility and increase the overall costs of maintaining the space by 5%.

1. If the stand-alone method were used, what amount of cost would be allocated to the start-up business? a. $20, b. $100, c. $80, d. $84,

Answer: d Difficulty: 2 Objective: 4 Terms to Learn: stand-alone cost-allocation method $400,000 x 1 = $420,000; $420,000 x= $84,

1. If the incremental method were used, what amount of cost would be allocated to the start-up business? a. $20, b. $100, c. $80, d. $84,

Answer: a Difficulty: 2 Objective: 4 Terms to Learn: incremental cost-allocation method $400,000 x 0 = $20,

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 76 AND 77: The Egg Harbor Corporation currently leases a corporate suite in an office building for a cost of $90,000 a year. Only 70% of the corporate suite is currently being used. A start- up business has proposed a plan that would use the other 30% of the suite and increase the overall costs of maintaining the space by $10,000.

1. If the stand-alone method were used, what amount of cost would be allocated to the start-up business? a. $10, b. $27, c. $30, d. $37,

Answer: c Difficulty: 2 Objective: 4 Terms to Learn: stand-alone cost-allocation method $100,000 x 0 = $30,

1. If the incremental method were used, what amount of cost would be allocated to the start-up business? a. $10, b. $27, c. $30, d. $37,

Answer: a Difficulty: 2 Objective: 4 Terms to Learn: incremental cost-allocation method $10,000, the increased cost of maintaining the space