Exam 15: Allocation of Support Activity Costs and Joint Costs

The Glowmeter Manufacturing Company has two production departments (Assembly and Finishing) and two service departments (Human Resources and Maintenance). The projected usage of the two service departments is as follows: Use of Human Use of Resources Maintenance Human Resources N/A 10\% Maintenance 5\% N/A Assembly 70\% 30\% Finishing 25\% 60\% The budgeted costs in the service departments are: Human Resources, $60,000 and Maintenance, $30,000. Using the step-down method and assuming the Human Resources Department cost is allocated first, the amount of Human Resources cost allocated to the Assembly Department is:

Memorex Clinic has two service departments (Laboratory and Human Resources) and three production departments (In-patient Treatment, Neurology, and After-Care). The two service departments service each other, and studies have shown that Laboratory provides the greatest amount of service. Given the various cost allocation methods, which of the following choices correctly denotes whether Laboratory cost would be allocated to Human Resources?

The Cassidy 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 Cassidy uses the direct method of cost allocation?

Which of the following would not be considered a service department for an airline?

Consider the following four independent cases that relate to service department cost allocations: Case A: Strickland Company has two service departments [Human Resources (H/R) and Information Systems] and two production departments (Machining and Assembly). Human Resource cost is allocated by using the direct method based on the number of personnel in each department. For the period just ended, there were 189 employees in Machining, and Machining received $90,000 of H/R's overhead of $200,000. How many employees are in the Assembly Department? Case B: Walter Burke, controller of Alexander Enterprises, wants service department managers to be aware that their use of other service departments costs the firm a substantial amount of money. Would Burke prefer the direct method or the step-down method of cost allocation? Why? Case C: Lockwood Company has four service departments (S1, S2, S3, and S4) and two production departments (P1 and P2). The costs of S1 are allocated first, followed in order by the costs of S2, S3, and S4. Lockwood uses the step-down method, and the costs of S2 are allocated based on the number of computer hours used. Computer hours logged during the period were as follows: S1, 4,600; S2, 7,100; S3, 10,400; S4, 17,600; P1, 37,000; and P2, 48,600. Over how many hours would S2's cost be allocated? Case D: A recently hired staff accountant noted that given the nature of the allocations, the total cost allocated to production departments is typically less under the step-down method than under the direct method. Do you agree with the accountant? Why? Required: Answer the questions that are raised in Cases A, B, C, and

Many companies use the dual-cost method of cost allocation. Required: A. How does the dual-cost method work? B. Is there any advantage of the dual-cost method over a method that uses a combined, lump-sum single rate? Briefly explain.

Digitech Corporation, has centralized much of its specialized data processing operation, with the Computer Department performing services for Departments A and B. Service hours consumed during Quarter No. 1 and Quarter No. 2 follow: Quarter No.1 30 30 Quarter No.2 10 30 Computer Department operating costs were: Variable Quarter No. 1 \ 30 \ 60,000 Quarter No. 2 25 28,000 Company policy currently requires that total variable and fixed costs be combined and allocated as a lump-sum to users based on service hours. Digitech has been financially healthy for a number of years but began to experience problems toward the end of Quarter No. 1. In response to these problems, management issued a directive to closely monitor costs and computer usage, effective at the start of Quarter No. 2. Required: A. Compute Quarter No. 1's total computer cost and determine the allocation to Department A and Department B. B. How much cost would be allocated to Departments A and B during Quarter No. 2, and how would the heads of these departments likely react to the allocations in light of management's directive? C. Assume that at the beginning of Quarter No. 2, the company switched to dual-cost allocations, with variable costs allocated based on current usage and fixed costs allocated based on long-run average utilization. An analysis of projected usage found that work for Department A was expected to consume 55% of the Computer Department's time over the coming year. How much cost would be allocated to A and B in Quarter No. 2?

The Maplewood Clinic has two service departments (Human Resources and Information Systems) 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 Systems provides the greatest amount of service. Which of the following allocations would not occur if Maplewood uses the step-down method of cost allocation?

Hilton Hamlet Corp. has an Advertising Department and a Human Resources Department that provide service to three store locations. The Human Resources Department cost is allocated on the basis of employees, and the Advertising Department cost is allocated on the basis of space. The following information is available: Human Resources Advertising Store \#1 Store \#2 Store \#3 Budgeted Cost \ 30,000 \ 15,000 Space in Square 2,000 500 10,000 33,000 40,000 feet Number of 10 5 20 50 35 Employees Using the direct method, the amount of Advertising Department cost allocated to Store #2 is:

Suppose that one hog yields 200 pounds of ham, 75 pounds of chops, and 25 pounds of miscellaneous items. The sales value of each of the products is as follows: Ham \ 1.20 Chops \ 2.00 Miscellaneous items \ 0.40 The hog costs $550. Processing costs are $40. Required: A. Determine the proper allocation of joint costs to the three products by using the physical-units method. B. Repeat part "B" by using the relative-sales-value method.

The Scarsdale Clinic has two service departments (S1 and S2) and two "production" departments (P1 and P2). The service departments service the "production" departments as well as each other, and studies have shown that S2 provides the greatest amount of service. Which of the following choices correctly denotes an allocation that would occur under the step-down method of cost allocation?

Ferndale Corp. is developing departmental overhead rates based on direct labour 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 and 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: Repair (repair hours) 500 500 4,000 Power (kilowatt hours) 120,000 420,000 60,000 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.

Newfoundland Chemical Company manufactures two industrial chemicals in a joint process. In October, $120,000 of direct materials were processed at a cost of $300,000, resulting in 16,000 pounds of Pentex and 4,000 pounds of Glaxco. Pentex sells for $35 per pound and Glaxco sells for $60 per pound. Management generally processes each of these chemicals further in separable processes to manufacture more refined products. Pentex is processed separately at a cost of $7.50 per pound, with the resulting product, Pentex-R, selling for $45 per pound. Glaxco is processed separately at a cost of $10 per pound, and the resulting product, Glaxco-R, sells for $100 per pound. Required: A. Compute the company's total joint production costs. B. Assuming that total joint production costs amounted to $500,000, allocate these costs by using: 1. The physical-units method.2. The relative-sales-value method.3. The net-realizable-value method.

Ronan 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. Dept. 1 Dept. 2 Total Short-run usage (hours) 80.000 120,000 200,000 Long-run usage (hours) 90,000 110,000 200,000 If Ronan uses dual-cost accounting procedures and fixed administrative costs total $1,000,000, the amount of fixed administrative cost to allocate to Department 1 would be:

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

La Mer Company manufactures gauges for automobile dashboards. The company has two production departments, Molding and Assembly. There are three service departments: Human Resources, Maintenance, and Engineering. Usage of services by the various departments follows. Human Human Resources -- -- Maintenance 5\% - -- Engineering 5\% 10\% -- Molding 40\% 40\% 75\% Assembly 50\% 50\% 25\% The budgeted costs in La Mer's service departments are: Human Resources, $180,000; Maintenance, $270,000; and Engineering, $200,000. The company rounds all calculations to the nearest dollar. Required: A. Use the direct method to allocate La Mer's service department costs to the production departments. B. Determine the proper departmental sequence to use in allocating the company's service costs by the step-down method. C. Ignoring your answer in part "B," assume that Human Resources costs are allocated first, Maintenance costs second, and Engineering costs third. Use the step-down method to allocate La Mer's service department costs.

Nashville 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. Dept. 1 Dept. 2 Total Short-run usage (hours) 45,000 55,000 100,000 Long-run usage (hours) 48,000 52,000 100,000 Variable and fixed administrative costs total $180,000 and $400,000, respectively. If Nashville uses dual-cost accounting procedures, the total amount of administrative cost to allocate to Department 2 would be:

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?

Watrus Manufacturing Co. makes three products, 1, 2, and 3, all of which are joint products, and products 4, which is classified as a by-product. If joint manufacturing costs amount to $600,000 and the company is using a popular accounting method, the firm will:

Under dual-cost allocation, fixed costs are allocated on the basis of a user department's: