Exam 12: Cost Allocation

The names of two popular methods for allocating service department costs are the direct method and the step- up method.

Some cost- allocation methods provide for penalties to managers that over- predict potential usage of a cost driver.

Type 1 allocations are costs that flow from:

In the step- down method, the first service department in the sequence is the one that renders the:

is a cost objective.

Simba Company has three service departments, A, B, and C, and two production departments, P1 and P2. Costs in departments A and B are allocated based on square feet, and costs in department C are allocated based on direct- labor hours. The following data are available: Direct Square Feet Direct- Department Costs Occupied Labor Hours Service Dep artment: \ 300,000 6,000 13,000 B 225,000 4,000 7,000 C 480,000 3,000 6,000 Production Department: P1 \ 750,000 8,000 17,000 P2 600,000 7,000 15,000 Required: Assuming the direct method of allocating costs, determine the amount of each service department's costs that will be allocated to each production department.

Roadrunner Company processes copper ore into two products, C and U. The ore costs $5 per pound and conversion costs are $15 per pound. Roadrunner Company plans to produce 40,000 pounds of C and 20,000 pounds of U from 60,000 pounds of ore. C sells for $30 per pound and U sells for $40 per pound. Assuming the relative- sales- value method of allocating joint costs, the amount of joint cost allocated to product C would be:

Many companies that previously applied costs to final products based on direct- labor hours have changed to another cost driver, such as machine hours. Why?

Ranger Company produces three products from a joint process. Products Hee and Haw are considered main products. Product Cims is a by- product. Joint processing costs should be allocated to:

Costs that are added to the production process before individual products are separately identifiable

In the dual method of allocation, fixed costs should be allocated using budgeted cost rates times the actual cost driver level.

Why should budgeted cost rates, rather than actual cost rates, be used for allocating the variable costs of service departments?

Redford Company's power plant provides electricity for its two producing departments, A and B. The budget for the power plant shows the following: Budgeted fixed costs $\$ 400,000$ Budgeted variable cos ts per kilowatt hour $\quad\quad \$ 1$ Additional data are as follows: Dept. A Dept. B Long- runcap acity available 350,000 200,000 280,000 175,000 270,000 165,000 in kilowatt hours Actual power plant costs were $215,000 fixed and $350,000 variable. Required: a. Compute the amount of fixed costs allocated to each department. b. Compute the amount of variable costs allocated to each department.

Lewis Company manufactures two models of pens-a standard and a deluxe model. Three activities have been identified as cost drivers and the related overhead costs ($60,000) pooled together to arrive at the following information: Product Number of Setups Number of Components Number of DLH Standard 22 8 375 Deluxe 28 12 225 Costs per pool \ 15,000 \ 36,000 \ 9,000 If activity- based costing is used, the cost assigned to the standard model using the number of direct labor hours would be:

This joint cost allocation method requires a common physical unit for measuring the output of each product

Carter Company manufactures two models of pens-a standard and a deluxe model. Three activities have been identified as cost drivers and the related overhead costs ($60,000) pooled together to arrive at the following information: Number of Number of Number of Product Setups Components DLH Standard 22 8 375 Deluxe 28 12 225 Costs per pool \ 15,000 \ 36,000 \ 9,000 is the total amount of overhead costs assigned to the deluxe model assuming traditional costing and applying overhead costs based on direct labor hours is used.

is not likely to be a cost driver.

B. G. Drive- In is a fast- food restaurant that sells burgers and hot dogs in a 1950s environment. The fixed operating cost of the company is $20,000 per month. The owner wants all costs allocated to either the sale of burgers or hot dogs. Other items, mostly drinks and fries, are sold in equal proportions on a per order basis. The following information is provided for the operations of the company: Burgers Hot Dogs Budget S ales 3,000 2,000 Actual Sales 2,500 1,500 Required: a. Compute the cost assigned to each food item if budgeted sales are used as the allocation base. b. Compute the cost assigned to each food item if actual sales is used as the base.

What are the four purposes of cost allocation?

Dove Company processes copper ore into two products, C and U. The ore costs $5 per pound and conversion costs are $15 per pound. Dove Company plans to produce 40,000 pounds of C and 20,000 pounds of U from 60,000 pounds of ore. C sells for $30 per pound and U sells for $40 per pound. Assuming the physical- units method of allocating joint costs, the amount of joints costs allocated to product U would be: