Exam 11: Service Department and Joint Cost Allocation

Liberty Credit Checks produces two styles of credit reports: personal and corporate. The difference between the two is the amount of background information and data collection required. The corporate report uses more skilled personnel because additional checking and data are required. Total support service costs to be allocated are $3,200,000. The relevant figures for the year just completed follow: Allocation base Individual Corporate Data purchased \ 40,000 \ 80,000 Research hours 24,000 30,000 Interview hours 1,000 10,000 Number of reports 16,000 3,000 Required: (a) Which allocation base would be preferred by each manager? Which allocation base would be least preferred? (b) Provide arguments that each manager would make for his/her preferred allocation base. How would each manager argue against his/her least preferred allocation base?

Net realizable value at the split-off point is used to allocate: Costs After Split-off Point Incurred Joint Costs A. No No B. No Yes C. Yes No D. Yes Yes

In deciding whether to outsource a service department or not, the cost of the service department should be estimated using the step method of allocation.

Which of the following departments is not a service department in a typical manufacturing company?

One potential disadvantage of the reciprocal method is it could overstate the cost of running the organization's service departments.

Simpson Manufacturing Enterprises uses a joint production process that produces three products at the split-off point. Joint production costs during April were $720,000. The company uses the net realizable value method for allocating joint costs. Product information for April was as follows: Required: a. Assume that all three products are main products and that they can be sold at the split-off point or processed further, whichever is economically beneficial to Simpson. Allocate the joint costs to the three products. b. Assume that Simpson uses the physical quantities method to allocate the joint costs. How much would be allocated to each of the three products?

Which of the three service department allocation methods should be used for decision making? Explain your reasoning.

Castro Corporation has one service department and three producing departments. The budget for the following year allocates the service department costs to the producing departments based on the number of employees in each department. Currently, the budget for the service department is $2,400,000 and the number of employees in each department is as follows: Department 1: 100 Department 2: 50 Department 3: 150 During the year, due to sudden expanded growth, Department 2 has to add 50 new employees; however the service department costs have not increased due to budget constraints. Required: (a) What were the expected service department allocations at the beginning of the year to each production department? (b) What will be the actual allocations based on the number of employees each department has at year end? (c) Comment on the reasonableness of the situation. What are the potential causes of any problems created by this allocation method?

The following is a system of simultaneous linear equations to allocate costs using the reciprocal method. Matrix algebra is not required. The following costs were incurred in three operating departments and three service departments in Westmoreland Company. Department Direct Costs Label Subassemblies \ 550,000 P1 Final assembly 775,000 P2 Marketing 285,000 P3 Building occupancy 85,000 S 1 Research \& development 120,000 S 2 Supervision 45,000 S 3 Use of services by other departments is as follows. - The equation for department S1 (building occupancy) is:

Because this allocation method recognizes that service departments often provide each other with interdepartmental service, it is theoretically considered to be the most accurate method for allocating service department costs to production departments. This method is: (CMA adapted)

Delite Confectionary Company produces various types of candies. Several candies could be sold at the split-off point or processed further and sold in a different form after further processing. The candies are produced in a joint processing operation with $500,000 of joint processing costs monthly, which are allocated based on pounds produced. Information concerning this process for a recent month appears below: Further Price after Number of Price per pound at processing processing Candy type pounds split-off costs further Sweet Meats 50,000 \8 \7 5,000 \1 0.00 Chocolate 100,000 \1 0 \3 0,000 \1 0.50 Delight Minty Wonders 25,000 \5 \2 0,000 \5 .50 - If Chocolate Delight is processed further, the gross profit margin that will appear in a product line income statement for Chocolate Delight (rounded to the nearest whole dollar) would be:

The Mallak Company produced three joint products at a joint cost of $100,000. Two of these products were processed further. Production and sales were: Additional Processing Product Weight Sales Costs P 300,000 \ 245,000 \ 200,000 Q 100,000 30,000 -0- R 100,000 175,000 100,000 - What is the net income of Mallak Company if the estimated net realizable value method of joint cost allocation is used?

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

Indicate whether the following costs would be treated as joint product costs or costs incurred after the split-off point. Use J for joint product costs and S for costs incurred after the split-off point.

The following is a system of simultaneous linear equations to allocate costs using the reciprocal method. Matrix algebra is not required. The following costs were incurred in three operating departments and three service departments in Westmoreland Company. Department Direct Costs Label Subassemblies \ 550,000 P1 Final assembly 775,000 P2 Marketing 285,000 P3 Building occupancy 85,000 S1 Research \& development 120,000 S 2 Supervision 45,000 S 3 Use of services by other departments is as follows. - The equation for department P3 (marketing) is:

Which of the following statements about maximizing the profit of joint product processes is true?

The step method allocates some, but not all, service department costs to other service departments.

Cordner Corporation has two production departments, P1 and P2, and two service departments, S1 and S2. Direct costs for each department and the proportion of service costs used by the various departments for the month of July are as follows: Proportion of Services Used by: Department Direct costs S1 S2 P1 P2 S1 \ 60,000 0.70 0.10 0.20 S2 \ 100,000 0.20 0.30 0.50 P1 \ 160,000 P2 \ 140,000 - Under the step method of cost allocation, the amount of S2 costs allocated to S1 would be:

If a company's two joint products can be sold at the split-off point, there is no reason for allocating the joint costs to the products.

Advanced Computer Solutions, Inc. has two main services: (1) time on a timeshared computer system, and (2) proprietary computer programs. The operation department (Op) provides computer time and the programming department (P) writes programs. The percentage of each service used by each department for a typical period is: Supplied User Op P Op --- 40\% P 30\% --- Sold to customers 70\% 60\% In a typical period, the operation department (Op) spends $4,500 and the programming department (P) spends $2,500. - Under the reciprocal method what is the algebraic solution to the cost allocation problem?