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

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Exam 1: The Accountants Role in the Organization195 Questionsadd course
Exam 2: An Introduction to Cost Terms and Purposes224 Questionsadd course
Exam 3: Cost-Volume-Profit Analysis207 Questionsadd course
Exam 4: Job Costing199 Questionsadd course
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Exam 13: Strategy, Balanced Scorecard, and Strategic Profitability Analysis171 Questionsadd course
Exam 14: Cost Allocation, Customer-Profitability Analysis, and Sales-Variance Analysis170 Questionsadd course
Exam 15: Allocation of Support-Department Costs, Common Costs, and Revenues144 Questionsadd course
Exam 16: Cost Allocation: Joint Products and Byproducts125 Questionsadd course
Exam 17: Process Costing126 Questionsadd course
Exam 18: Spoilage, Rework, and Scrap125 Questionsadd course
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Describe methods which may be used to allocate support costs within organizations containing multiple support departments. Discuss advantages and disadvantages of the various methods.

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Three methods which are used to allocate costs of support departments are; the direct method, the step-down method, and the reciprocal method.
The direct method allocates support department costs only to the operating departments. An advantage of this approach is simplicity. A disadvantage of the approach is that it does not take into account the extent to which some support departments use the services of other support departments. The resultant permutation of costs will not be distributed to the operating departments accurately because they will not have recognized the mutual services provided among all support departments.
The step-down method allocates support department costs to other support departments in a sequential manner that partially recognizes the mutual services provided among all support departments. The method usually ranks the support departments in order of the highest percentage of its total services to tother support departments. This provides more accuracy than the direct method with a minimum added level of complexity in the process.
The reciprocal method allocates support department costs to operating departments by fully recognizing the mutual services provided among all support departments. The method is complicated in that it either requires an iterative series of allocations or a linear programming solution to determine the final amounts to be allocated between the support departments which use each others services. It provides the highest level of accuracy but is complex to implement.

The Product Data Center has been servicing the Struble Production Casting Department for five years. Beginning next year, the company is adding a Production Molding Department to compliment the materials produced by the Struble Production Casting Department. As a result, data center costs are expected to increase from $700,000 per year to $800,000 per year. The Production Molding Department will use 20% of the data center efforts. Required: a. Using the stand-alone cost-allocation method, identify the amount of data center cost that will be allocated to Struble Production Casting and the Production Molding Department next year. b. Using the incremental cost-allocation method, identify the amount of data center cost that will be allocated to Struble Production Casting and the Production Molding Department next year.

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a. Struble Production Casting Department = $800,000 × 0.80 = $640,000
a. Struble Production Casting Department = $800,000 × 0.80 = $640,000 b. Struble Production Casting Department would receive $700,000. b. Struble Production Casting Department would receive $700,000.
a. Struble Production Casting Department = $800,000 × 0.80 = $640,000 b. Struble Production Casting Department would receive $700,000.

The fixed costs of operating the maintenance facility of General Hospital are $4,500,000 annually. Variable costs are incurred at the rate of $30 per maintenance-hour. The facility averages 40,000 maintenance-hours a year. Budgeted and actual hours per user for 20X3 are as follows: The fixed costs of operating the maintenance facility of General Hospital are $4,500,000 annually. Variable costs are incurred at the rate of $30 per maintenance-hour. The facility averages 40,000 maintenance-hours a year. Budgeted and actual hours per user for 20X3 are as follows: Assume that budgeted maintenance-hours are used to calculate the allocation rates. Required: a. If a single-rate cost-allocation method is used, what amount of maintenance cost will be budgeted for each department? b. If a single-rate cost-allocation method is used, what amount of maintenance cost will be allocated to each department based on actual usage? c. If a dual-rate cost-allocation method is used, what amount of maintenance cost will be budgeted for each department? d. If a dual-rate cost-allocation method is used, what amount of maintenance cost will be allocated to each department based on actual usage? Based on budgeted usage for fixed operating costs and actual usage for variable operating costs? Assume that budgeted maintenance-hours are used to calculate the allocation rates. Required: a. If a single-rate cost-allocation method is used, what amount of maintenance cost will be budgeted for each department? b. If a single-rate cost-allocation method is used, what amount of maintenance cost will be allocated to each department based on actual usage? c. If a dual-rate cost-allocation method is used, what amount of maintenance cost will be budgeted for each department? d. If a dual-rate cost-allocation method is used, what amount of maintenance cost will be allocated to each department based on actual usage? Based on budgeted usage for fixed operating costs and actual usage for variable operating costs?

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a. Total costs + $4,500,000 + ($30 × 40,000)= $5,700,000
a. Total costs + $4,500,000 + ($30 × 40,000)= $5,700,000 b. Total costs + $4,500,000 + ($30 × 40,000)= $5,700,000 d. Dual-rate allocated amounts: b. Total costs + $4,500,000 + ($30 × 40,000)= $5,700,000
a. Total costs + $4,500,000 + ($30 × 40,000)= $5,700,000 b. Total costs + $4,500,000 + ($30 × 40,000)= $5,700,000 d. Dual-rate allocated amounts: a. Total costs + $4,500,000 + ($30 × 40,000)= $5,700,000 b. Total costs + $4,500,000 + ($30 × 40,000)= $5,700,000 d. Dual-rate allocated amounts: a. Total costs + $4,500,000 + ($30 × 40,000)= $5,700,000 b. Total costs + $4,500,000 + ($30 × 40,000)= $5,700,000 d. Dual-rate allocated amounts: a. Total costs + $4,500,000 + ($30 × 40,000)= $5,700,000 b. Total costs + $4,500,000 + ($30 × 40,000)= $5,700,000 d. Dual-rate allocated amounts: a. Total costs + $4,500,000 + ($30 × 40,000)= $5,700,000 b. Total costs + $4,500,000 + ($30 × 40,000)= $5,700,000 d. Dual-rate allocated amounts: d. Dual-rate allocated amounts:
a. Total costs + $4,500,000 + ($30 × 40,000)= $5,700,000 b. Total costs + $4,500,000 + ($30 × 40,000)= $5,700,000 d. Dual-rate allocated amounts: a. Total costs + $4,500,000 + ($30 × 40,000)= $5,700,000 b. Total costs + $4,500,000 + ($30 × 40,000)= $5,700,000 d. Dual-rate allocated amounts: a. Total costs + $4,500,000 + ($30 × 40,000)= $5,700,000 b. Total costs + $4,500,000 + ($30 × 40,000)= $5,700,000 d. Dual-rate allocated amounts: a. Total costs + $4,500,000 + ($30 × 40,000)= $5,700,000 b. Total costs + $4,500,000 + ($30 × 40,000)= $5,700,000 d. Dual-rate allocated amounts:

Jonathan has managed a downtown store in a major metropolitan city for several years. The firm has ten stores in varying locations. In the past, senior management noticed Jonathan's work and he has received very good annual evaluations for his management of the store. This year his store has generated steady growth in sales, but earnings have been deteriorating. After examining the monthly performance report generated by the company budgeting department, he noticed that increasing fixed costs is causing the decrease in earnings. Administrative corporate costs, primarily fixed costs, are allocated to individual stores each month based on actual sales for that month. Two of these stores are currently growing at a rapid pace, while four other stores are having operating difficulties. Required: From the information presented, what do you think is the cause of Jonathan's reported decrease in earnings? How can this be corrected?

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Question 4

Answer the following questions using the information below: Hugo, owner of Automated Fabric, Inc., is interested in using the reciprocal allocation method. The following data from operations were collected for analysis: Budgeted manufacturing overhead costs: Answer the following questions using the information below: Hugo, owner of Automated Fabric, Inc., is interested in using the reciprocal allocation method. The following data from operations were collected for analysis: Budgeted manufacturing overhead costs: Services furnished: By Maintenance (budgeted labor-hours): By Personnel (Number of employees serviced): -What is the complete reciprocated cost of the Maintenance Department? Services furnished: By Maintenance (budgeted labor-hours): Answer the following questions using the information below: Hugo, owner of Automated Fabric, Inc., is interested in using the reciprocal allocation method. The following data from operations were collected for analysis: Budgeted manufacturing overhead costs: Services furnished: By Maintenance (budgeted labor-hours): By Personnel (Number of employees serviced): -What is the complete reciprocated cost of the Maintenance Department? By Personnel (Number of employees serviced): Answer the following questions using the information below: Hugo, owner of Automated Fabric, Inc., is interested in using the reciprocal allocation method. The following data from operations were collected for analysis: Budgeted manufacturing overhead costs: Services furnished: By Maintenance (budgeted labor-hours): By Personnel (Number of employees serviced): -What is the complete reciprocated cost of the Maintenance Department? -What is the complete reciprocated cost of the Maintenance Department?

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Question 5

Answer the following questions using the information below: The Appliance Store sells a refrigerator and a freezer as a single package for $1,000. Other data are in the chart below. Answer the following questions using the information below: The Appliance Store 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 stand-alone product revenues as the weight for revenue allocation, what amount will be allocated to the refrigerator? -Using the stand-alone method with stand-alone product revenues as the weight for revenue allocation, what amount will be allocated to the refrigerator?

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Question 6

The biggest advantage of using practical capacity to allocate costs is that it:

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Question 7

The step-down allocation method:

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Question 8

Answer the following questions using the information below: The Cold Spring Harbor Corporation currently leases a corporate suite in an office building for a cost of $180,000 a year. Only 70% of the corporate suite is currently being used. A start-up business has proposed a plan that would use the other 30% of the suite and increase the overall costs of maintaining the space by $20,000. -If the stand-alone method were used, what amount of cost would be allocated to the start-up business?

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Question 9

Answer the following questions using the information below: Goldfarb's Book and Music Store has two service departments, Warehouse and Data Center. Warehouse Department costs of $350,000 are allocated on the basis of budgeted warehouse-hours. Data Center Department costs of $150,000 are allocated based on the number of computer log-on hours. The costs of operating departments Music and Books are $250,000 and $300,000, respectively. Data on budgeted warehouse-hours and number of computer log-on hours are as follows: Answer the following questions using the information below: Goldfarb's Book and Music Store has two service departments, Warehouse and Data Center. Warehouse Department costs of $350,000 are allocated on the basis of budgeted warehouse-hours. Data Center Department costs of $150,000 are allocated based on the number of computer log-on hours. The costs of operating departments Music and Books are $250,000 and $300,000, respectively. Data on budgeted warehouse-hours and number of computer log-on hours are as follows: -Using the step-down method, what amount of Warehouse Department cost will be allocated to Department Music if the service department with the highest percentage of interdepartmental support service is allocated first? (Round up) -Using the step-down method, what amount of Warehouse Department cost will be allocated to Department Music if the service department with the highest percentage of interdepartmental support service is allocated first? (Round up)

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Question 10

The Alex Miller Corporation 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: Budgeted costs of the operating the plant for 10,000 to 20,000 hours: The Alex Miller Corporation 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: Budgeted costs of the operating the plant for 10,000 to 20,000 hours: Budgeted long-run usage per year: Assume that practical capacity is used to calculate the allocation rates. Further assume that actual usage of the Lamp Division was 700 hours and the Flashlight Division was 400 hours for the month of June. Required: a. If a single-rate cost-allocation method is used, what amount of operating costs will be budgeted for the Lamp Division each month? For the Flashlight Division each month? b. For the month of June, if a single-rate cost-allocation method is used, what amount of cost will be allocated to the Lamp Division? To the Flashlight Division? Assume actual usage is used to allocate operating costs. c. If a dual-rate cost-allocation method is used, what amount of operating costs will be budgeted for the Lamp Division each month? For the Flashlight Division each month? d. For the month of June, if a dual-rate cost-allocation method is used, what amount of cost will be allocated to the Lamp Division? To the Flashlight Division? Assume budgeted usage is used to allocate fixed operating costs and actual usage is used to allocate variable operating costs. Budgeted long-run usage per year: The Alex Miller Corporation 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: Budgeted costs of the operating the plant for 10,000 to 20,000 hours: Budgeted long-run usage per year: Assume that practical capacity is used to calculate the allocation rates. Further assume that actual usage of the Lamp Division was 700 hours and the Flashlight Division was 400 hours for the month of June. Required: a. If a single-rate cost-allocation method is used, what amount of operating costs will be budgeted for the Lamp Division each month? For the Flashlight Division each month? b. For the month of June, if a single-rate cost-allocation method is used, what amount of cost will be allocated to the Lamp Division? To the Flashlight Division? Assume actual usage is used to allocate operating costs. c. If a dual-rate cost-allocation method is used, what amount of operating costs will be budgeted for the Lamp Division each month? For the Flashlight Division each month? d. For the month of June, if a dual-rate cost-allocation method is used, what amount of cost will be allocated to the Lamp Division? To the Flashlight Division? Assume budgeted usage is used to allocate fixed operating costs and actual usage is used to allocate variable operating costs. Assume that practical capacity is used to calculate the allocation rates. Further assume that actual usage of the Lamp Division was 700 hours and the Flashlight Division was 400 hours for the month of June. Required: a. If a single-rate cost-allocation method is used, what amount of operating costs will be budgeted for the Lamp Division each month? For the Flashlight Division each month? b. For the month of June, if a single-rate cost-allocation method is used, what amount of cost will be allocated to the Lamp Division? To the Flashlight Division? Assume actual usage is used to allocate operating costs. c. If a dual-rate cost-allocation method is used, what amount of operating costs will be budgeted for the Lamp Division each month? For the Flashlight Division each month? d. For the month of June, if a dual-rate cost-allocation method is used, what amount of cost will be allocated to the Lamp Division? To the Flashlight Division? Assume budgeted usage is used to allocate fixed operating costs and actual usage is used to allocate variable operating costs.

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Question 11

The dual-rate method makes no distinction between fixed and variable costs.

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Question 12

The stand-alone cost allocation method ranks the individual users of a cost object in order of users most responsible for a common cost and then uses these rankings to allocate the costs among the users.

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Question 13

All contracts with U.S. government agencies must comply with cost accounting standards issued by the:

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Question 14

AAA offers towing services, auto routing, travel brochures, and other travel services for one annual fee. This is an example of:

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Question 15

A common cost is a cost of operating a facility or activity that is shared by two or more users.

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Question 16

Budgeted amounts for a support department will always exceed complete reciprocated costs for that department.

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Question 17

Answer the following questions using the information below: 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: Budgeted manufacturing overhead costs: Answer the following questions using the information below: 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: Budgeted manufacturing overhead costs: Services furnished: By Plant Maintenance (budgeted labor-hours): By Data Processing (budgeted computer time): -What is the complete reciprocated cost of the Data Processing Department? Services furnished: By Plant Maintenance (budgeted labor-hours): Answer the following questions using the information below: 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: Budgeted manufacturing overhead costs: Services furnished: By Plant Maintenance (budgeted labor-hours): By Data Processing (budgeted computer time): -What is the complete reciprocated cost of the Data Processing Department? By Data Processing (budgeted computer time): Answer the following questions using the information below: 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: Budgeted manufacturing overhead costs: Services furnished: By Plant Maintenance (budgeted labor-hours): By Data Processing (budgeted computer time): -What is the complete reciprocated cost of the Data Processing Department? -What is the complete reciprocated cost of the Data Processing Department?

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Question 18

Businesses offer bundled products to:

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Question 19

Answer the following questions using the information below: The Appliance Store sells a refrigerator and a freezer as a single package for $1,000. Other data are in the chart below. Answer the following questions using the information below: The Appliance Store 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 selling price as the weight for revenue allocation, what amount will be allocated to the refrigerator? -Using the stand-alone method with selling price as the weight for revenue allocation, what amount will be allocated to the refrigerator?

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