Exam 9: Cost Allocations: Theory and Applications

The following information is available for the Downtown Furniture Company which produces two types of tables. Management feels that the fixed manufacturing costs should be allocated based on direct labor costs and fixed administrative costs should be allocated based on units sold. The amount of fixed administrative costs which should be allocated to the Cherry tables is:

Administrative costs are currently split equally among 4 different product lines at WDT Company. To encourage the managers of each of the product lines to implement a new material waste policy aimed at reducing materials used in manufacturing, which of the following would best achieve this goal? a. Allocating administrative costs based on the cost per unit of materials used in production. B) Allocating administrative costs based on the number of labor hours used in manufacturing. C) Allocating administrative costs based on the amount of scrap produced from manufacturing. D) Allocating administrative costs based on the speed of production.

When firms use allocated costs to make decisions, the quality of their decisions depend on how well the allocation estimates the capacity cost associated with the various options.

Tire Town has two product lines of tires currently on the manufacturing floor. The product line managers provided the following information concerning the fixed overhead cost and production: Total fixed costs to be allocated: $4,322,500 Standard Tire: 20,000 tires produced with $975,000 of direct labor cost Deluxe Tire: 15,000 tires produced with $1,300,000 of direct labor cost Which one of the following is a correct amount to be allocated to one of the two types of tires?

Brown Corporation produced 2,200 units during the most recent period. Brown's costs were as follows: Sales totaled 1,800 units ($10,800). If Brown uses absorption costing, the ending inventory would be valued at:

The following information is available for the Rollin' Baby Company which produces two types of strollers, standard and deluxe. If the company shifts its product mix to 3,000 standard units and 4,500 deluxe units, profit before tax will:

Capacity costs are controllable over the long-term.

An example of organizations using allocated costs to justify prices is when a hospital negotiates rates with insurance companies and other payers.

If a company produces more units than it sells in a period, net operating income under variable costing will:

An example of allocations to justify costs and reimbursements is when government entities contract to compensate their suppliers on a fixed negotiated contract amount.

While profit margin is the appropriate measure of value for short-term decisions, contribution margin is the appropriate measure for long-term decisions.

Accounting for fixed manufacturing overhead is the only difference between variable and absorption costing.

In the month of November, the Philly Company produced and sold 40,000 units of a single product. Costs incurred during the month included: Using variable costing the unit product cost would be:

Marquez, Inc. noted that its sales volume was less than its production volume for the month of March. Which one of the following is correct when comparing absorption costing and variable costing? a. With variable costing, fixed manufacturing overhead is fully expensed on the income statement in the period the units are sold. B) With absorption costing, a portion of the fixed manufacturing overhead incurred is included in inventory cost. C) Variable costing requires that a portion of the fixed manufacturing overhead cost be reported as inventory cost on the balance sheet. D) Absorption costing requires that fixed manufacturing overhead cost be allocated to all units produced using the number of units sold as the cost driver.

In the month of December the Valhalla Company produced 28,000 units and sold 30,000 units. Under absorption costing:

The budget analyst for Tire Town determined that the volume of tires sold for each product line is the best cost driver for the fixed marketing and administrative costs related to its two tire models. How would you determine the total allocated cost to each of two models of tires for marketing and administrative costs? a. Divide the total overhead by the total number of tires produced. B) Calculate the allocation rate per tire. Then multiply the rate by the fixed marketing and administrative costs for each type of tire. Then divide by the fixed marketing and administrative cost pool. C) Calculate the allocation rate per tire by dividing the fixed marketing and administrative cost pool by the direct labor dollar amount. Then multiply the rate by the fixed marketing and administrative costs for each model of tire. D) Calculate the allocation rate per tire by dividing the fixed marketing and administrative cost pool by the number of tires. Then multiply the rate by the fixed marketing and administrative costs for each model of tire.

Why do managers care about the costs allocated to their individual departments? a. Managers' performance evaluations frequently depend on their unit's performance more than overall firm performance. B) The cost allocated is an integral part of the department's reported profit. C) Carefully chosen allocation methods can induce desired behavior. D) Carefully chosen allocation methods can dissuade undesired behavior. E) All of the above are reasons managers care about the costs allocated to their individual departments.

A driver that is appropriate for some resources may not be appropriate for other resources. The solution to the problem is:

The allocation rate is calculated by:

Cost allocations provide subtle, ineffective means to achieve change.