Exam 6: Cost Allocation and Activity-Based Costing

In which of the following industries are cost-plus contracts common?

Bayard Backup is a manufacturer of data storage devices. Bayard operates two service departments-maintenance and technology, and two production departments-assembly and testing. Maintenance costs are allocated on the basis of square footage occupied, and technology costs are allocated on the basis of the number of workstations. The following data relate to allocations of service department costs: Maintenance Technology Assembly Testing Service department costs \ 400,000 \ 230,000 Square footage 2,000 3,000 20,000 30,000 Workstations 4 16 10 9 How much technology department costs will be allocated to the testing department using the direct method?

From the perspective of a manager of a producing department, which of the following is a desired feature of a cost allocation received from a service department?

Dragon Fire Hot Sauce makes two types of hot sauces-meek and mild. Budgeted information for the two flavors appears below: Meek Mild Sales \ 600,000 \ 400,000 Direct materials \ 100,000 \ 120,000 Direct labor cost \ 108,000 \ 180,000 Labor hourly cost \ 12.00 \ 12.00 The company estimates it will incur $345,600 in overhead costs for the period. Dragon Fire allocates overhead cost to products based on the labor hours worked on each product. How much is the total overhead applied to Meek?

An allocation base

A contract that specifies that the supplier will be paid for the cost of production as well as some fixed amount or percentage of cost is called a(n)

Teal Sports offers 2 different types of water sport activities-sailfish rental and banana boat rides. The company has two different activities-lifeguarding and maintenance-that provide input into its cost objectives. Data on estimated overhead for the year follows: Activity Driver Estimated Overhead Cost Sailfish Rental Estimate Boat Rides Estimate Lifeguarding \#of Labor hours hours hours Maintenance Hours of riding time 1,500 hours hours The company provides 2,400 banana boat rides and 1,200 sailfish rentals each year. How much overhead will be assigned to each banana boat ride?

Maintenance costs at Sturgeon Company are allocated to the production departments based on area occupied. Maintenance costs of $300,000 are budgeted to maintain a 60,000 square foot production area. If the finishing department occupies 25,000 square feet, how much of the maintenance department costs will be allocated to the finishing department?

Fox Hunting Gear manufactures two products: camouflage jackets and camouflage hats. The company makes 50,000 jackets and 20,000 hats each year. Information for overhead costs and for the two products appears below. Estimated Total Activity Driver Overhead Cost Jackets Hats Setups \# of setups \ 200,000 500 setups 1,500 setups Ordering parts \# of parts 300,000 60,000 parts 40,000 parts Machining \# of machine hours 600,000 12,000 machine hrs. 6,000 machine hrs. Inspections \# of inspections 400,000 10,000 inspections 40,000 inspections Shipping \# of shipments 300,000 10,000 shipments 10,000 shipments Total overhead \1 ,800,000 If the company uses a single cost pool and assigns overhead using machine hours, how much overhead will be assigned to each hat?

Which of the following is a grouping of individual costs whose total is allocated using one allocation base?

Random House uses activity-based costing. The company produces soft and hardcover books. The estimated costs and expected activity for each of the overhead activity pools follow: Activity Estimated Expected Activity Cost Pool Cost ( Hard-Cover Soft-Cover Total Activity 1 \ 15,000 800 700 1,500 Activity 2 \ 14,900 500 1,500 2,000 Activity 3 \ 27,600 800 400 1,200 How much are total overhead costs to be charged to hardcover books?

Rather Bedding makes two types of pillow-down and foam. It is currently implementing an activity-based costing system. In the past, all overhead had been applied on the basis of machine hours. The company produces 6,000 down pillows and 18,000 foam pillows per year. Cost Pool Driver and Level Estimated Costs Use of Driver by Down Pillows Use of Driver by Foam Pillows Equiument setup 360 setups \ 216,000 120 setups 240 setups Materials ordering 6,000 orders \ 60,000 2,400 orders 3,600 orders Quality control 2,000 inspections \ 36,000 800 inspections 1,200 inspections Machining 8,000 machine hours \8 6,000 4,200 machine hours 3,800 machine hours Using ABC, what is the cost per setup to be assigned to down pillows?

A cost objective is the product, service, or department that will receive the allocated cost.

Which of the following is a measure of activity used to distribute indirect costs?

Allocating fixed costs on a per unit basis will often cause the managers receiving the allocations to perceive the costs as variable.

The production departments at Windsor Parke occupy a total area of 50,000 square feet. Heating costs total $600,000 and are allocated based on the area that each department occupies. The finishing department occupies 30,000 square feet and the packaging department occupies 20,000 square feet. What amount of heating cost will be allocated to the finishing and packaging departments, respectively?

Ransom Widgets allocates the estimated cost of its accounting department, $200,000, to its production and sales departments since the accounting department supports these departments with regard to payroll and accounts payable functions. The accounting department costs will be allocated based on the number of employees using the direct method. Information regarding employees follows: Department Employees Accounting 4 Production 36 Sales 12 How much of the accounting department costs will be allocated to the production and sales departments, respectively? Production Sales A. \ 150,000 \ 50,000 B. \ 180,000 \ 60,000 C. \ 1,800,000 \ 600,000 D. \ 22,222 \ 66,667

Under the ABC approach, costs are assigned to cost drivers based on a chosen cost objective.

Kamber Designs produces floral bouquets for commercial businesses (i.e. hotels) and uses an activity-based costing system. The company estimated that it would design 15,000 bouquets, make 2,000 deliveries totaling 25,000 miles, and accept 300 online orders. Data concerning overhead costs and activity pools is as follows: Bouquet designs \ 60,000 Deliveries 21,000 Online ordering 6,000 Total \ 87.000 During June, the company made 1,500 bouquets using 1,100 designs, made 325 deliveries and accepted 45 online orders. Using activity-based costing, what is the approximate overhead cost per bouquet during June?

Activity-based management aims at improving the efficiency and effectiveness of business processes.