Exam 6: Cost Allocation and Activity-Based Costing

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. What amount of the computer department's fixed costs will be allocated to the business consulting division?

Dewey, Cheatham, and How, Attorneys-at-Law, specialize in three areas: criminal, civil, and family law. When specifications for a new IT system were established, the partners agreed to allocate fixed costs based on gigabytes needed by each department. The criminal law division needed 40% of the capacity, civil law needed 35%, and family law needed 25%. Variable costs for the IT department are allocated on the amount of bandwidth used by each division used. The IT department's budgeted monthly fixed costs are $640,000, and the budgeted monthly variable costs are $160,000. The firm estimates that 8,000,000 gigabytes of computer time will be used in June. The criminal law division actually used 3,040,000 gigabytes of bandwidth during June. How much fixed IT costs will be allocated to the criminal law division during June?

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

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 Assume that activity-based costing is used. What is the rate per setup that should be used to assign setup cost to hats?

When service department costs are allocated using actual costs and actual usage, the amount allocated to one department will depend on the usage of other departments.

Large cost pools that contain many different kinds of costs are most useful to managers in making decisions.

One of the reasons that companies allocate costs is to encourage managers to use externally provided services, rather than those that are internally provided.

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 Which two cost pools could be combined without affecting the unit costs using ABC?

Costs may not be allocated to

Fifth Third Bank is a banking services company that offers several different types of checking accounts. The bank has recently adopted an activity-based costing system to assign costs to its checking accounts. The following data relate to the Mind Your Money checking accounts and the ABC cost pools: $\text { Annual number of accounts }=60,000 \text { accounts }$ Cost Pool Cost Cost Drivers Returned check costs \ 3,000,000 Number of returned checks Account reconciliation costs 60,000 Number of account reconciliation requests New account setup 650,000 Number of new accounts Archive requests 400,000 Number of archive requests Web site costs 195,000 Per account type Total checking account costs \4 ,305,000 $\text { Annual activity information related to cost drivers: }$ Cost Pool All Products Mind Your Monev Checking Returned checks 200,000 returned checks 18,000 Account reconciliation costs 3,000 reconciliation requests 420 New account setups 60,000 new accounts 15,000 Archive requests 100,000 archive requests 60,000 Web site costs 10 types of accounts 1 How much is the rate to be used to apply the cost of new accounts to each Mind Your Money checking account?

A major problem with cost-plus contracts is that they

Allocating unitized fixed and variable costs leads to better decision making than allocating total costs.

The Copy Department of Hernandez Hardware is budgeted to incur $30,000 per month in fixed costs plus a cost of $0.02 per copy. The company allocates copy costs to user departments as follows: .Fixed costs are allocated as a lump sum based on budgeted fixed costs and estimated peak demand for each department. .Variable costs are allocated based on the budgeted rate per copy times the department's actual usage. Which of the following is an advantage of this allocation scheme over allocating all actual service costs based on actual usage?

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 During June, 2,100 boxes were packed and shipped. How much is the packaging and shipping cost for each box shipped?

From a decision-making standpoint, the allocated cost should measure the opportunity cost of using a company resource.

If managers are not charged for centrally administered services, what may managers likely do?

Activity-based costing uses benchmarking to compare the cost of an activity in one organization to the cost for a similar activity in another organization.

Which of the following is not a problem caused by assigning actual service department costs to operating departments based on actual usage of service department activities by the operating departments?

Happy Foods uses ABC costing. Which of the following is most likely to be a cost driver for the cost of cashiering at a convenience store?

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 During June, 4,000 items were sold reflecting 800 orders that were packed and shipped in 2,100 boxes. What amount is allocated to each order for general operations of the department?