Exam 7: Cost Allocation and Responsibility Accounting

Activity-based costing refines the cost allocation process even more than the traditional allocation costing.

A company in which major planning and controlling decisions are made by top management is considered as a centralized company.

One of the advantages of decentralization is that it allows top management to concentrate on long-term strategic planning.

WAX-D Inc. has a division that manufactures a component that sells for $150 and has a variable cost of $45. Another division of the company wants to purchase the component. Fixed cost per unit of component is $25. What is the maximum transfer price if the division is operating below its capacity?

Companies with diverse products can obtain better costing information by using a single plant wide rate.

Managers of investment centers are responsible not only for generating profits, but also for ensuring efficient use of assets of the investment center.

Pitt Jones Company had the following activities, allocated costs, and allocation bases: Activities Allocated Costs Allocation Base Account inquiry (hours) \ 60,000 2,000 hours Account billing (lines) \ 30,000 20,000 lines Account verification (accounts) \ 15,000 20,000 accounts Correspondence (letters) \ 10,000 1,000 letters The above activities are carried out at two of their regional offices. Northeast Office Midwest Office Account inquiry (hours) 100 hours 200 hours Account billing (lines) 10,000 lines 7,000 lines Account verification (accounts) 1,000 accounts 600 accounts Correspondence (letters) 50 letters 100 letters - What is the cost per account for the account verification activity?

Cost center responsibility reports generally focus on the static budget variance.

Recreation Equipment Company has several divisions which are investment centers. Data for the Boat Division and the Trailer Division are shown here: Boat Division Trailer Division Operating income \ 90,000 \ 36,000 Total assets at Jan 1 \ 670,000 \ 230,000 Total assets at Dec 31 \ 710,000 \ 220,000 Which of the following statements would be the most meaningful interpretation of this data?

Alpha Company manufactures breadboxes and uses an activity-based costing system. The following information is provided for the month of May: Activity Estimated Indirect Activity Costs Allocation Base Estimated Quantity of Allocation Base Materials handling \ 3,500 Number of parts 5,000 parts Assembling \ 12,000 Number of parts 5,000 parts Packaging \ 5,750 Number of bread boxes 1,250 bread boxes Each breadbox consists of 4 parts, and the direct materials cost per breadbox is $7.00. There is no direct labor. What is the total manufacturing cost per breadbox?

When a division is operating at full capacity, the transfer price can be any of variable cost, full cost or cost plus a mark-up.

Which of the following would most likely be evaluated using residual income?

Huntswell Corporation has two major divisions: Agricultural Products and Industrial Products. It provides the following information for the year 2014 Agriculture Division Industrial Division Sales revenue \ 140,000 \ 1,040,000 Operating income \ 46,400 \ 220,000 Average total assets \ 300,000 \ 5,540,000 Target rate of return 14,0\% 14,0\% Calculate the residual income for the Agriculture division.

Pitt Jones Company had the following activities, allocated costs, and allocation bases: Activities Allocated Costs Allocation Base Account inquiry (hours) \ 60,000 2,000 hours Account billing (lines) \ 30,000 20,000 lines Account verification (accounts) \ 15,000 20,000 accounts Correspondence (letters) \ 10,000 1,000 letters The above activities are carried out at two of their regional offices. Northeast Office Midwest Office Account inquiry (hours) 100 hours 200 hours Account billing (lines) 10,000 lines 7,000 lines Account verification (accounts) 1,000 accounts 600 accounts Correspondence (letters) 50 letters 100 letters - How much of the account inquiry cost will be assigned to the Midwest Office?

Management by exception directs management's attention to important differences between actual and budgeted amounts.

Responsibility reports for a profit center includes:

Performance evaluation systems provide top management with a framework for maintaining control over the entire organization.

The responsibility report of Keith Paul, a manager of one of the divisions of a manufacturing company, includes profits as well as return on investment and residual income. Keith is most likely to the manager of a(n):

Pitt Jones Company had the following activities, allocated costs, and allocation bases: Activities Allocated Costs Allocation Base Account inquiry (hours) \ 60,000 2,000 hours Account billing (lines) \ 30,000 20,000 lines Account verification (accounts) \ 15,000 20,000 accounts Correspondence (letters) \ 10,000 1,000 letters The above activities are carried out at two of their regional offices. Northeast Office Midwest Office Account inquiry (hours) 100 hours 200 hours Account billing (lines) 10,000 lines 7,000 lines Account verification (accounts) 1,000 accounts 600 accounts Correspondence (letters) 50 letters 100 letters -What is the cost per line for the account billing activity?

A company may prefer to use residual income over return on investment for performance evaluation because: