Exam 10: Managing and Allocating Support-Service Costs

Island Credit Checks Company produces two styles of credit reports: Individual and Corporate. The difference between the two is the amount of background information and data collection required. The Corporate report uses more skilled personnel because additional checking and data are required. The relevant figures for the year just completed follow. Total support service costs to be allocated are $3,200,000. Required: For each of the four potential allocation bases, determine the amount of support-service cost allocated to each type of report. Round all percentages to two decimal places.

The direct method of cost allocation allocates the cost of support-service departments to all departments including other service departments.

Using multiple cost pools usually results in better decisions about the use of service resources than single cost pools.

Rogers Corporation has two production departments, Assembly and Finishing and three service departments, Personnel, Maintenance and Cafeteria. Data relevant to Rogers are: Assembly and Finishing work on two jobs during the month: Job 100 and 101. Costs are allocated to jobs based on machine hours in assembly and labor hours in Finishing. The machine and labor hours worked in each department are as follows: Required: Determine the amount of service department costs to be allocated to Jobs 100 and 101. Rogers allocates service department costs to production departments using the direct-method of allocation.

Use the following to answer questions: The following costs were incurred in three operating departments and three service departments in Gagetown Molding Company: The use of services by other departments is as follows: The following questions refer to a system of simultaneous linear equations that allocate costs using the reciprocal method. -The equation for department P1 (subassemblies) is

Use the following to answer questions: A summary of the usage of the service department services by other services departments as well as by two producing departments is as follows: Direct costs in the various departments are as follows: -If the direct-method of allocation is used, how much of S3's occupancy cost would be allocated to P2?

Without allocation of service department costs to users, service departments will tend to grow uncontrollably.

Step method allocations usually begin with the service department with the largest proportion of its total allocation base in other service departments.

If internal customers are required to use internal services, they might spend valuable time negotiating and lobbying over fair prices, resulting in internal inefficiencies.

Use the following to answer questions: Brandeis Corporation has two production Departments: P1 and P2 and two service departments: S1 and S2. Direct costs for each department and the proportion of service costs used by the various departments for the month of July are as follows: -Under the step-method of allocation, the total departmental budget for P2 after all allocations have been made will be:

What is the amount of supervision that would be allocated to the machining department, assuming Hampton uses the direct-method to allocate the costs of service departments?

Which of the following is the first step in the process of allocating service costs?

Which of the following statements is true regarding the use of multiple cost-pools?

Square footage occupied would be an appropriate way to allocate building insurance cost to user departments.

Use the following to answer questions: A summary of the usage of the service department services by other services departments as well as by two producing departments is as follows: Direct costs in the various departments are as follows: -If the step-method of allocation is used, the total cost after allocation in P1 would be:

Use the following to answer questions: A summary of the usage of the service department services by other services departments as well as by two producing departments is as follows: Direct costs in the various departments are as follows: -If the reciprocal-method of allocation is used, what equation would represent service department S1?

Which of the following is not a recognized method of allocating costs of service departments to user departments?

Which of the following is not an appropriate justification for allocating support-service costs?

What is the amount of total service costs allocated to the assembly department, assuming Hampton uses the step-method to allocate the costs of service departments?

Goldberg and Rogal Consultants is a large, international consulting organization. The company provides consulting services in the computer and Internet areas. The company also has several divisions that provide manufacturing of various computer parts. The company has five divisions which are all profit centers. Each division includes allocated corporate costs in its annual budget. The budget for the coming year for the Building and Grounds Service department is $6,000,000. Included in this budget is the maintenance of all corporate buildings, depreciation, cleaning, insurance and all other facility-related maintenance costs. The company uses a weighted method of allocating facility costs based on the type of space maintained by each division. Space ranges from manufacturing warehouses, which are least expensive to maintain, to computer mainframe space, which requires specialized temperature controls, air conditioning and maintenance. The company has decided to use a weighting system assigning the following relative weights to each type of space: 1 for warehouse, 3 for office and 5 for computer space. Below find data relating to the five divisions and the square footage of each type of space. Currently, Division 5, the Internet consulting division, is the largest in sales volume and profits for the company, which has been growing at the rate of 20% per year, while divisions 3 and 4 have been struggling due to declining margins on technology products. Required: (a) As director of corporate budgeting, you are required to send to each division its facility allocation for the coming year. Prepare a schedule showing how the budget of $6,000,000 will be allocated to each division. (b) Describe potential motivational problems brought on by these allocations. (Based on an actual company)