Exam 6: Cost Allocation and Activity-Based Costing

In order to provide full cost information for external reporting purposes, indirect production costs must be allocated to goods produced.

Sweet Cocoa produces chocolate syrup used by candy companies. Recently, the company has had excess capacity due to a foreign supplier entering its market. Sweet Cocoa is currently bidding on a potential order from Kilwin's Candy for 5,000 cases of syrup. The estimated cost of each case is $27.50, as follows: direct material, $10; direct labor, $5; and manufacturing overhead, $12.50. The overhead rate of $2.50 per direct labor dollar is based on estimated annual overhead of $1,500,000 and estimated direct labor cost of $600,000, composed 40% of variable costs and 60% of fixed costs. The largest fixed cost relates to depreciation of plant and equipment. How much is the variable cost of producing a case of chocolate syrup?

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 What is the overhead cost for each foam pillow using ABC?

A cost pool is

Cost allocation methods that provide the most accurate full cost information for financial reporting, also provide the most accurate information for cost-plus contracts.

Once the opportunity cost associated with a shared resource is determined, it is unlikely to change.

From a decision-making standpoint, the allocated cost should measure the

Which of the following is a method of allocation used to assign service department costs to production departments, but not to other service departments?

VelCraft allocates costs from its payroll department and the maintenance department to its production departments using the direct method of allocation. Payroll department costs are allocated based on the number of employees in the department and maintenance department costs are allocated based on the number of square feet that the production department occupies within the factory. Information about the departments is presented below: Denartment Costs Number of Emplovees Number of Square Eeet Occupied Payroll \ 150,000 2 2,000 Maintenance \ 220,000 8 64,000 Molding 75 100,000 Finishing 50 60,000 Packaging 25 40,000 When the maintenance department costs are allocated, what amount will be charged to the molding department? (Round your intermediate calculation to two decimal places)

Indirect costs occur when

The more costs that are allocated to a cost-plus contract, the smaller the profit will be for the supplier of the contract.

Which of the following allocations would not occur when the direct method is used in a manufacturing company?

Which of the following is the overriding concern in forming a cost pool?

ABC is more likely than traditional costing systems to undercost complex, low-volume products.

Managers should not be held responsible for noncontrollable costs.

The allocation base selected should ideally have a relative benefits relationship with the costs to be allocated.

The law firm of Barnes & Cohen purchased a new $17,600 copier. Copying costs will be shared by the purchasing, accounting, and information technology departments since those are the only departments that will have access to the machine. The company has decided to allocate the copying cost based on the number of copies made by each department. The sales person who sold the copier to the attorneys expects it will generate 1,000,000 copies. The manager of each department has estimated the number of copies that his or her department will make over the life of the copier: Department Purchasing 150,000 Accounting 450,000 Information Technology 200,000 If the purchasing department makes 23,000 copies this quarter, how much copying cost will Barnes & Cohen allocate to purchasing?

Ransall Auto Parts has two service departments-maintenance and personnel, and three production departments-fabrication, assembly, and packaging. Service costs are allocated to producing departments using the direct method. Information on overhead in each department and possible allocation bases appear below: Maintenance Personnel Eabrication Assembly Packaging Cost \ 90,000 \ 130,000 Machine hours 12,000 30,000 18,000 Employees 4 16 24 30 20 Using the most logical activity base, how much personnel cost will be allocated to the packaging department?

An allocation of a predetermined amount that is not affected by changes in the activity level of the organizational unit receiving the allocation is called a(n)

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 How much is the overhead cost of each hat if all overhead is assigned using ABC?