Exam 6: Cost Allocation and Activity-Based Costing

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 May, the company made 1,400 bouquets using 1,300 designs, made 420 deliveries, and accepted 30 online orders.Using activity-based costing, what is the approximate overhead cost per bouquet during May?

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?

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

When activity-based costing is implemented, the initial outcome is that

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)?

An allocation base

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

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?

Which of the following is not a criterion typically used to allocate indirect fixed costs?

Which of the following is least likely to be a cost objective?

Manufacturing overhead is allocated to products based on the number of machine hours required.In a year when 40,000 machine hours and 60,000 direct labor hours were anticipated, indirect costs were budgeted at $252,000.If production of wagons requires 9,000 machine hours and 10,800 direct labor hours, how much manufacturing overhead will be allocated to wagons?

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: Number of Number of Square Department Costs Emplovees Feet 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 What amount of the payroll department costs will be allocated to the packaging department?

Costs may not be allocated to

PaperPro produces two models of staplers-Executive and Basic.The annual production and sales of Executive and Basic are 800 and 500 units, respectively.The company has traditionally used direct labor hours to apply manufacturing overhead.Executive requires 0.3 labor hours per unit and Basic requires 0.2 labor hours per unit.The company has decided to utilize activity-based costing with three cost pools.Estimated costs for each pool are as follows: Estimated Activity Overhead Expected Activity Cost Pool Costs Executive Basic Total Assembly \ 24,025 450 420 870 Packaging 16,880 2,000 750 2,750 General Factory 32,014 120 150 270 Total \ 72,919 Which of the following is closest to the overhead rate for assembly using activity-based costing?

Freely Service provides residential and commercial monthly swimming pool cleaning services.Information on this service is as follows: Service revenue $140,000 Direct materials 18,000 Direct labor 44,000 Estimated travel costs for the month total $2,340 and are allocated to each client based on miles driven to each pool cleaning.The company estimates it will clean 50 residential pools and 80 commercial pools per month with 1,200 total miles used for commercial pools and 2,400 total miles used for residential pools.Because commercial pools are much larger, they take 3 hours to clean, while residential pools take a half hour each.During the month, the actual mileage totaled 2,600 miles.How much is the rate at which travel costs will be allocated to residential pools?

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 Estim ated Costs Use of Driver by Down Pillows Use of Driver by Foam Pillows Equipment 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 \ 86,800 4,200 machine hours 3,800 machine hours What is the overhead cost for each foam pillow using ABC?

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?

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

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

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