Exam 6: Cost Allocation and Activity-Based Costing

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. What is the overhead application rate to be used when allocating to Meek?

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 Ricles Estimate Lifeguarding \# of Labor hours \ 63,940 3,280 hours 2,280 hours Maintenance Hours of riding time \ 88,000 1,500 hours 2,500 hours What overhead rates will be used in each department to assign costs to the banana boat rides? A. Lifeguarding Maintenance B. \ 28.04 \ 22.00 C. \ 11.50 \ 22.00 D. \ 28.04 \ 35.20 \ 11.50 \ 35.20

Ernst & Gray, CPAs has three divisions: audit, tax, and business consulting. When the specifications for the new computer system were established, the audit division needed 50% of the capacity, the tax division required 30%, and business consulting required 20%. The fixed computer department costs are allocated based on computer needs. The variable costs of the computer department are allocated based on the minutes of computer time that each department uses. The computer division budget for fixed costs is $450,000, and the budget for variable costs is $145,600. The company anticipates using 520,000 minutes of computer time. If the tax division uses 104,000 minutes of computer time this year, what is the total amount of computer department costs that will be allocated to the tax division (round your intermediate calculation to two decimal places)?

ABC allocates cost pools to cost objectives using cost drivers as the allocation base.

How many distinct activities are used by most companies that design ABC systems?

Before resources used by the major activities of a business can be identified, managers using activity-based management must identify ways to improve the effectiveness of the activities.

Cost-plus contracts guarantee that the supplier will pay for production costs and the customer will pay a fixed amount or percentage of the cost.

Which of the following statements about cost pools is true?

One of the reasons that companies allocate costs is to allow for the frivolous use of common resources.

Unique Finds sells fine collectible statues and has implemented activity-based costing. Costs in the shipping department have been divided into three cost pools. The first cost pool contains costs that are related to packaging and shipping. Unique has determined that the number of boxes shipped is an appropriate cost driver for these costs. The second cost pool is made up of costs related to the final inspection of each item before it is shipped and the cost driver for this pool is the number of individual items that are inspected. The final cost pool is used for general operations of the department and the cost driver is the number of orders. Information about the activities is summarized below: Cost Pool Estimated Total Costs Cost Driver Estimated Annual Activity Packaging and shipping \ 67,200 Number of boxes shipped 16,000 boxes Final inspection 200,000 Number of individual items inspected 100,000 items General operations 85,000 Number of orders 10,000 orders A new customer orders two items that can be shipped in a single box. What is the total shipping department cost that will be allocated to this order?

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 packaging department? (Round your intermediate calculation to two decimal places)

Marley Music produces toy instruments-trumpet and flute- for children. Molding costs are allocated to products based on a percentage of material costs. Molding costs of $15,000 per month are budgeted and the store anticipates spending $30,000 in materials. By the end of the month, it was determined that actual molding costs were $14,500. If the company spends $6.50 per trumpet for materials, and $3.50 per flute for materials, how much of the molding costs will be allocated to each trumpet?

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: $\text { possible allocation bases appear below: }$ 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 maintenance cost will be allocated to the personnel department?

The manager of the molding department at the Category Products Company is evaluated based on the profit performance of his department. Personnel costs at Category Products are estimated to be $40,000. These costs are allocated based on the number of employees in each production department. The welding department has 40 employees, and the molding department has 60 employees. The personnel department actually incurred $52,000 in personnel costs. The profit of the molding department is down this year because the molding department's share of allocated personnel costs is much higher than last year. The allocation of personnel costs to the molding department is higher in the current year. This is most likely due to

In the direct method of allocating costs, service department costs are allocated only to production departments, not to other service departments.

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 How much overhead will be allocated each time a copy is made by the accounting department?

Intermodal Moving uses the direct method and allocates its maintenance costs on the basis of repair hours and its payroll department costs on the basis of employees. Estimated costs and information on the services and production departments follows: Payroll \ 36,000 Maintenance \ 48,000 Packing 30 employees, 280 repair hours Driving 10 employees, 1,960 repar hours How much of the payroll and maintenance costs will be allocated to the packing department? Payroll Maintenance A. \ 900 \ 171.43 B. \ 27,000 \ 6,000 C. \ 27,000 \ 21.43 D. \ 1,200 \ 6,000

The building maintenance department for Advantage Toys budgets annual costs of $4,200,000 based on the expected operating level for the coming year. The costs are allocated to two production departments. The following data relate to the potential allocation bases: Production Dept. A Production Dept. B Square footage 15,000 45,000 Direct labor hours 25,000 50,000 If Advantage assigns costs to departments based on square footage, how much maintenance cost will be allocated to Production Department A?

Which of the following is not a step in the cost allocation process?

ZanaTech has an on-site cafeteria in which it provides free meals for employees. The company allocates the cost of the cafeteria to production departments using the direct method based on the number of employees in each department. The four production departments in the company have the following number of employees: molding, 15; polishing, 20; engraving, 10; and packaging, 15. There are 20 employees in the cafeteria. The cafeteria's costs are budgeted at $144,000 for the year. When the cafeteria's costs are allocated, what is the amount per employee that will be allocated to the packaging department each year?