Exam 17: Allocation of Support Activity Costs and Joint Costs

Consider the following statements about dual-cost allocation: I. Dual-cost allocation prevents a change in the short-run activity of one department from affecting the cost allocated to another department. II. Dual-cost allocations create an incentive for user department managers to understate their expected long-run service needs. III. Dual-cost allocations are generally preferred over lump-sum allocations, or those that combine variable and fixed costs together. Which of the above statements is (are) true?

Use this information to answer the following Questions Rave Reviews Company has two service departments (Cafeteria and Human Resources) and two production departments (Machining and Assembly). The number of employees in each department follows. -Rave Reviews uses the direct method of cost allocation and allocates cost on the basis of employees. If Human Resources cost amounts to $1,800,000, how much of the department's cost would be allocated to Assembly?

The net-realizable-value method is the least preferred cost allocation method since it does not consider the economic characteristics of the joint products.

Oxmoor Corporation has two service departments (Maintenance and Human Resources) and three production departments (Machining, Assembly, and Finishing). The two service departments service the production departments as well as each other, and studies have shown that Maintenance provides the greater amount of service. On the basis of this information, which of the following cost allocations would likely occur under the step-down method?

Dodge City Corporation is developing departmental overhead rates based on direct labor hours for its two production departments, Molding and Assembly. The Molding Department worked 20,000 hours during the period just ended, and the Assembly Department worked 40,000 hours. The overhead costs incurred by Molding and Assembly were $151,250 and $440,750, respectively. Two service departments, Repair and Power, directly support the two production departments. These service departments have costs of $90,000 and $250,000, respectively. The following schedule reflects the use of Repair and Power's output by the various departments: Required: A. Allocate the company's service department costs to production departments by using the direct method. B. Calculate the overhead application rates of the production departments. Hint: Consider both directly traceable and allocated overhead when deriving your answer. C. Allocate the company's service department costs to production departments by using the step-down method. Begin with the Power Department, and round calculations to the nearest dollar.

The point in a joint production process where each individual product becomes separately identifiable is commonly called the:

In the net-realizable-value method, the joint cost is allocated to the joint products in proportion to the joint products' net realizable values.

Sparkle Metallurgy, Inc. has two service departments (Human Resources and Building Maintenance) and two production departments (Machining and Assembly). The company allocates Building Maintenance cost on the basis of square footage and Human Resources cost on the basis of employees. It believes that Building Maintenance provides more service than Human Resources. The square footage and employees in each department follow. Assuming use of the step-down method, which of the following choices correctly denotes the number of square feet and employees over which the Building Maintenance cost and Human Resources cost would be allocated (i.e., spread)?

Use the following information to answer the following Questions Aldo Industries, Inc. has two service departments (Human Resources and Building Maintenance) and two production departments (Machining and Assembly). The company allocates Building Maintenance cost on the basis of square footage and believes that Building Maintenance provides more service than Human Resources. The square footage occupied by each department follows. -Assuming use of the direct method, over how many square feet would the Building Maintenance cost be allocated (i.e., spread)?

Which of the following methods ignores the fact that some service departments provide service to other service departments?

Use the following information to answer the following Questions Marshall Welding Company has two service departments (Cafeteria and Human Resources) and two production departments (Machining and Assembly). The number of employees in each department follows. -Marshall Welding uses the step-down method of cost allocation and allocates cost on the basis of employees. Human Resources cost amounts to $1,200,000, and the department provides more service to the firm than Cafeteria. How much Human Resources cost would be allocated to Assembly?

The Buckaneer Clinic has two service departments (Human Resources and Information Resources) and two "production" departments (In-patient Treatment and Out-patient Treatment). The service departments service the "production" departments as well as each other, and studies have shown that Information Resources provides the greater amount of service. Which of the following allocations would occur if Buckaneer uses the direct method of cost allocation?

A company that uses activity-based costing would likely allocate costs from:

Use this information to answer the following Questions Rave Reviews Company has two service departments (Cafeteria and Human Resources) and two production departments (Machining and Assembly). The number of employees in each department follows. -Rave Reviews uses the direct method of cost allocation and allocates cost on the basis of employees. If Human Resources cost amounts to $1,800,000, how much of the department's cost would be allocated to Machining?

Use the following information to answer the following Questions Kingston Specialty Corporation manufactures joint products P and Q. During a recent period, joint costs amounted to $80,000 in the production of 20,000 gallons of P and 60,000 gallons of Q. Kingston can sell P and Q at split-off for $2.20 per gallon and $2.60 per gallon, respectively. Alternatively, both products can be processed beyond the split-off point, as follows -The joint cost allocated to Q under the relative-sales-value method would be:

The direct method ignores the fact that some service departments provide service to other service departments.

Use the following information to answer the following Questions The Xtra Store has a Human Resources Department and a Janitorial Department that provide service to three sales departments. The Human Resources Department cost is allocated on the basis of employees, and the Janitorial Department cost is allocated on the basis of space. The following information is available: -Using the step-down method and assuming that the Human Resources Department is allocated first, the amount of Human Resources cost allocated to Sales Department no. 2 is:

City Hospital has two service departments (Patient Records and Accounting) and two "production" departments (Internal Medicine and Surgery). It uses the reciprocal-services method of cost allocation and should allocate Internal Medicine cost to Surgery.

Companies are free to use the direct, step-down, and reciprocal allocation methods when dealing with service-department costs. Required: A. How does the direct method work? What is its chief limitation? B. Is the step-down method an improvement over the direct method? Explain. C. Which of the three methods is the most correct from a conceptual viewpoint? Why?

Nichols Corporation allocates administrative costs on the basis of staff hours. Short-run monthly usage and anticipated long-run monthly usage of staff hours for Operating Departments 1 and 2 follow. Variable and fixed administrative costs total $180,000 and $400,000, respectively. If Nichols uses dual-cost accounting procedures, the total amount of administrative cost to allocate to Department 2 would be: