Exam 15: Allocation of Support-Department Costs, Common Costs, and Revenues

The selling prices method under stand-alone revenue-allocation method is best because the weights explicitly consider the prices customers are willing to pay for the individual products

The FASB (Financial Accounting Standards Board) provides cost accounting guidance (standards) for U.S. government contractors who do business with the federal government.

Under which allocation method are one-way reciprocal support services recognized?

Electro Corp sells a refrigerator and a freezer as a single package for $1,000. Other data are in the chart below. Using the stand-alone method with physical units as the weight for revenue allocation, what amount will be allocated to the refrigerator?

Revenue allocation based on the number of physical units is only appropriate when individual products in the bundle are of equal value.

In costs-plus-fixed-fee contracts the allocation of a specific cost may be difficult to defend on the basis of any cause-and-effect reasoning.

Alfred, owner of Hi-Tech Fiberglass Fabricators, Inc., is interested in using the reciprocal allocation method. The following data from operations were collected for analysis: What is the complete reciprocated cost of the Data Processing Department? (Do not round any intermediary calculations.)

The reciprocal allocation method ________.

Which of the following is not one of the methods used to to allocate the revenues of a bundled product?

The Pitt Corporation has been outsourcing data processing in the belief that such outsourcing would reduce costs and increase corporate profitability. In spite of this, there has been no meaningful increase in corporate profitability. Previously, Pitt used a single-rate method to allocate data processing costs. A per unit cost for data processing was computed and compared to the price of the outside supplier. The price of the outside supplier was lower and thus, the outside bid was accepted. Required: Formulate a possible reason why Pitt's profitability has not shown improvement in terms of the cost allocation method used.

Hanung Corp has two service departments, Maintenance and Personnel. Maintenance Department costs of $400,000 are allocated on the basis of budgeted maintenance-hours. Personnel Department costs of $200,000 are allocated based on the number of employees. The costs of operating departments A and B are $240,000 and $360,000, respectively. Data on budgeted maintenance-hours and number of employees are as follows: Production Support DepartmentsDepartments Using the direct method, what amount of Personnel Department costs will be allocated to Department A? (Do not round any intermediary calculations.)

Why do organizations use budgeted rates instead of actual rates to allocate the costs of support departments to each other and to user departments and divisions? Explain.

Hanung Corp has two service departments, Maintenance and Personnel. Maintenance Department costs of $300,000 are allocated on the basis of budgeted maintenance-hours. Personnel Department costs of $170,000 are allocated based on the number of employees. The costs of operating departments A and B are $188,000 and $282,000, respectively. Data on budgeted maintenance-hours and number of employees are as follows: Production Support DepartmentsDepartments Using the direct method, what amount of Personnel Department costs will be allocated to Department B? (Do not round any intermediary calculations.)

The Charmatz Corporation has a central copying facility. The copying facility has only two users, the Marketing Department and the Operations Department. The following data apply to the coming budget year: Budgeted amounts are used to calculate the allocation rates. Actual usage for the year by the Marketing Department was 70,000 copies and by the Operations Department was 330,000 copies. If a single-rate cost-allocation method is used, what amount of copying facility costs will be allocated to the Marketing Department? Assume actual usage is used to allocate copying costs. (Do not round interim calculations and round the final calculation to the nearest dollar.)

John Peters is drafting the provisions of a cost-plus contract and is concerned with ironing out any possible misunderstandings during the life of the contract. What advice can you provide to reduce contract disputes over reimbursement amounts based on costs?

Goldfarb's Book and Music Store has two service departments, Warehouse and Data Center. Warehouse Department costs of $320,000 are allocated on the basis of budgeted warehouse-hours. Data Center Department costs of $180,000 are allocated based on the number of computer log-on hours. The costs of operating departments Music and Books are $125,000 and $150,000, respectively. Data on budgeted warehouse-hours and number of computer log-on hours are as follows: Production Support DepartmentsDepartments Using the step-down method, what amount of Data Center Department cost will be allocated to the Warehouse Department if the service department with the highest percentage of interdepartmental support service is allocated first? (Round up)

Illumination Corp operates one central plant that has two divisions, the Flashlight Division and the Night Light Division. The following data apply to the coming budget year: Assume that practical capacity is used to calculate the allocation rates. Actual usage for the year by the Flashlight Division was 1400 hours and by the Night Light Division was 700 hours. If a dual-rate cost-allocation method is used, what amount of cost will be allocated to the Night Light Division? Assume budgeted usage is used to allocate fixed operating costs and actual usage is used to allocate variable operating costs.

Both direct and the step-down method can provide relevant information for outsourcing decisions.

Max's Movie Store encounters revenue-allocation decisions with its bundled product sales. Here, two or more of the movie videos are sold as a single package. Managers at Max's are keenly interested in individual product-profitability figures. Information pertaining to its three bundled products and the stand-alone selling prices of its individual products is as follows: Required: a.With selling prices as the weights, allocate the $25 packaged price of "All Three" to the three videos using the stand-alone revenue-allocation method. b.Allocate the $25 packaged price of "All Three" to the three types of videos using the incremental revenue-allocation method. Assume New Releases is the primary product, followed by Older Releases, and then Classics.

When allocating the revenues between a bundled product offering, management judgement can be used in issuing revenue-allocation weights.