Exam 17: Allocation of Support Activity Costs and Joint Costs

Pederson Company has two service departments (Cafeteria and Human Resources) and two production departments (Machining and Assembly). The number of employees in each department follows. Cafeteria 40 Human Resources 60 Machining 200 Assembly 300 Pederson uses the direct method of cost allocation and allocates cost on the basis of employees. If Human Resources cost amounts to $1,800,000, how much of the department's cost would be allocated to Assembly?

Which of the following methods should be selected if a company terminates all processing at the split-off point and desires to use a cost-allocation approach that considers the "revenue-producing ability" of each product?

The process of allocating fixed and variable costs separately is called:

When allocating service department costs, companies should use:

Ricardo Corporation has two service departments (Maintenance and Human Resources) and three production departments (Machining, Assembly, and Finishing). The two service departments service each other, and studies have shown that Maintenance provides the greater amount of service. Given the various cost allocation methods, which of the following choices correctly denotes whether Maintenance cost would be allocated to Human Resources? direct step-down reciprocal A. Yes No Yes B. Yes No No C. Yes Yes Yes D. No Yes No E. No Yes Yes

Douglas Company, a new firm, manufactures two products, J and K, in a common process. The joint costs amount to $80,000 per batch of finished goods. Each batch results in 20,000 liters of output, of which 80% are J and 20% are K. The two products are processed beyond the split-off point, with Douglas incurring the following separable costs: J, $2 per liter; K, $5 per liter. After the additional processing, the selling price of J is $12 per liter, and the selling price of K is $15 per liter. Required: A. Determine the proper allocation of joint costs if the company uses the net-realizable-value method. B. Assume that Douglas sold all of its production of K during the current accounting period. Compute K's sales revenue, cost of goods sold, and gross margin. C. Is the firm's cost-of-goods-sold figure influenced by the choice of a joint-cost allocation method? Briefly explain.

When allocating joint costs, Weinberg calculates the final sales value of the various products manufactured and subtracts appropriate separable costs. The company is using the:

Westside Hospital has two service departments (Patient Records and Accounting) and two "production" departments (Internal Medicine and Surgery). Which of the following allocations would not take place under the reciprocal-services method of cost allocation?

Consider the following statements about dual-cost allocation: I. Dual-cost allocation prevents a change in the short-run activity of one department from affecting the cost allocated to another department. II. Dual-cost allocations create an incentive for user department managers to understate their expected long-run service needs. III. Dual-cost allocations are generally preferred over lump-sum allocations, or those that combine variable and fixed costs together. Which of the above statements is (are) true?

The Gross Margin at Split-Off method should be selected if a company terminates all processing at the split-off point and desires to use a cost-allocation approach that considers the "revenue-producing ability" of each product.

Martina, Inc. has two service departments (Human Resources and Building Maintenance) and two production departments (Machining and Assembly). The company allocates Building Maintenance cost on the basis of square footage and believes that Building Maintenance provides more service than Human Resources. The square footage occupied by each department follows. Human Resources 6,000 Building Maintenance 13,000 Machining 18,000 Assembly 26,000 Assuming use of the direct method, over how many square feet would the Building Maintenance cost be allocated (i.e., spread)?

Madrid has two service departments (General Factory and Human Resources) and two production departments (Machining and Assembly). The company uses the direct method of service-department cost allocation, allocating General Factory cost on the basis of square feet and Human Resources cost on the basis of employees. Budgeted allocation-base and operating data for the four departments follow. Square feet Employees Machine hours Labor hours General 7,000 50 200 45,000 Human 3,000 30 --- 25,000 90,000 120 80,000 100,000 30,000 180 20,000 150,000 Additional information: • Budgeted costs of General Factory and Human Resources respectively amount to $1,560,000 and $950,000. • The anticipated overhead costs incurred directly in the Machining and Assembly Departments respectively total $3,650,000 and $2,340,000. • The manufacturing overhead application bases used by Madrid's production departments are: Machining, machine hours; Assembly, labor hours. • Company policy holds that a department's overhead application rate is based on a department's own overhead plus an allocated share of service-department cost. Required: A. Allocate the company's service-department costs to the producing departments. B. Compute the overhead application rates for Machining and Assembly.

Ovation Corporation has two service departments (S1 and S2) and two production departments (P1 and P2). S1 and S2 both use the number of employees as an allocation base. The following data are available: Number of S1 40 \ 172,000 S2 60 250,000 1 300 660,000 2 500 840,000 Required: A. Assuming use of the direct method: 1. Over how many employees would S1's budgeted cost be allocated? 2. How much of S2's cost would be allocated to P1? 3. How much of P1's cost would be allocated to S1? B. Assuming use of the step-down method: 1. How much of S1's cost would be allocated to S2? Ovation allocates S1's costs prior to allocating those of S2. 2. How much of S2's total cost would be allocated to P2? 3. How much of S2's total cost would be allocated to S1?

The Metropolitan 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 greater amount of service. Which of the following choices correctly denotes an allocation that would not occur under (1) the direct method and (2) the step-down method of cost allocation? A. S1's cost would be allocated to P1. S1's cost would be allocated to P1 B. P1's cost would be allocated to P2. P1's cost would be allocated to P2 C. S2's cost would be allocated to S1. S2's cost would be allocated to S1. D. P1's cost would be allocated to S1 P1's cost would be allocated to S1. E. None of the other answers are correct.

Mercury Corporation allocates joint costs by using the net-realizable-value method. In the company's Michigan plant, products D and E emerge from a joint process that costs $250,000. E is then processed at a cost of $220,000 into products F and A. Allocate the $220,000 processing cost between products F and B. From a profitability perspective, should product E be processed into products F and G? Show your calculations. C. Assume that the net realizable value associated with E is zero. How would you allocate the joint cost of $250,000? G. G. Data pertaining to D, F, and G follow. D E G Costs beyond split-off \ 50,000 \ 27,000 \ 25,000 Selling price 40 38 50 Pounds produced 10,000 4,000 2,000 Required:

Rocky Mountain Company produces two products (X and Y) from a joint process. Each product may be sold at the split-off point or processed further. Additional processing requires no special facilities, and production costs of further processing are entirely variable and traceable to the products involved. Joint manufacturing costs for the year were $60,000. Sales values and costs were as follows: Units 9,000 6,000 Sales Value \ 40,000 80,000 If Processed Further Sales Separable \ 78,000 \ 10,500 90,000 7,500 If the joint production costs are allocated based on the physical-units method, the amount of joint cost assigned to product X would be:

Apex Metallurgy, Inc. has two service departments (Human Resources and Building Maintenance) and two production departments (Machining and Assembly). The company allocates Building Maintenance cost on the basis of square footage and Human Resources cost on the basis of employees. It believes that Building Maintenance provides more service than Human Resources. The square footage and employees in each department follow. Square Footage employees Human Resources 4,000 10 Building Maintenance 10,000 15 Machining 15,000 40 Assembly 21,000 60 Assuming use of the step-down method, which of the following choices correctly denotes the number of square feet and employees over which the Building Maintenance cost and Human Resources cost would be allocated (i.e., spread)? Building Human A. 36,000 100 B. 40,000 100 C. 46,000 110 D. 50,000 110 E. None of the other answers are correct.

Rocky Mountain Company produces two products (X and Y) from a joint process. Each product may be sold at the split-off point or processed further. Additional processing requires no special facilities, and production costs of further processing are entirely variable and traceable to the products involved. Joint manufacturing costs for the year were $60,000. Sales values and costs were as follows: Units 9,000 6,000 Sales Value \ 40,000 80,000 If Processed Further Sales Separable \ 78,000 \ 10,500 90,000 7,500 If the joint production costs are allocated based on the relative-sales-value method, the amount of joint cost assigned to product X would be:

Nash 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. 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 Nash uses dual-cost accounting procedures, the total amount of administrative cost to allocate to Department 2 would be:

Consider the following statements about joint product cost allocation: I. Joint product cost is allocated because it is necessary for inventory valuation. II. Joint product cost is allocated because it is necessary for making economic decisions about individual products (e.g., sell at split-off or process further). III. Joint cost may be allocated to products by using several different methods. Which of the above statements is (are) correct?