Exam 17: Allocation of Support Activity Costs and Joint Costs

Consider the following statements about the step-down method of service department cost allocation: I. Under the step-down method, all service department costs are eventually allocated to production departments. II. The order in which service department costs are allocated is important. III. After a service department's costs have been allocated to other departments, no costs are re-circulated back to that service department. Which of the above statements is (are) correct?

The Dollar Store has a Human Resources Department and a Janitorial Department that provide service to three sales departments. The Human Resources Department cost is allocated on the basis of employees, and the Janitorial Department cost is allocated on the basis of space. The following information is available: Budgeted cost Space in square feet Number of employees Human \ 45,000 4,000 5 \ 30,000 1,000 10 20,000 15 30,000 45 50,000 30 Using the step-down method and assuming the Human Resources Department is allocated first, the amount of Janitorial cost allocated to Sales Department no. 2 is:

Which of the following methods would be of little use when allocating service department costs to production departments?

Haggins Corporation manufactures two chemicals (Flextra and Hydro) in a joint process. Data from a recent month follow. Direct materials used: $360,000 Direct labor: $150,000 Manufacturing overhead: $690,000 Manufacturing output: Flextra: 40,000 gallons Hydro: 120,000 gallons Flextra sells for $15 per gallon and Hydro sells for $20 per gallon. Required: A. Compute the total joint costs to be allocated to Flextra and Hydro. B. Compute the joint costs that would be allocated to Flextra by using the physical-units method. C. Compute the joint costs that would be allocated to Hydro by using the relative-sales-value method. D. Assume that Hydro can be converted into a more refined product, Hydro-R, in a totally separable process at an additional cost of $4 per gallon. If the refined product can be sold in the marketplace for $26 per gallon, compute the net realizable value of Hydro-R.

Consider the following statements about service department costs: I. The costs of the Human Resources Department in a manufacturing organization must be allocated to production departments in order to achieve a correct costing of inventory. II. The allocation of service department costs requires that an organization select both an allocation base and an allocation method. III. Service department cost allocations are more relevant for firms involved in service industries (e.g., repair, health care) than for those involved with manufacturing. Which of the above statements is (are) correct?

Dunwoody Corporation has two service departments (Maintenance and Human Resources) and three production departments (Machining, Assembly, and Finishing). The two service departments service the production departments as well as each other, and studies have shown that Maintenance provides the greater amount of service. On the basis of this information, which of the following cost allocations would likely occur under the step-down method?

When the step-down method is used, the service department whose costs are allocated first is often the department that:

The Dopler Manufacturing Company has two production departments (Assembly and Finishing) and two service departments (Human Resources and Janitorial). The projected usage of the two service departments is as follows: Use of Human Resources Use of Janitorial Human Resources \@cdots 5\% Janitorial 10\% - Assembly 60\% 40\% Finishing 30\% 55\% The budgeted costs in the service departments are: Human Resources, $90,000 and Janitorial, $50,000. Using the step-down method and assuming the Human Resources Department is allocated first, the amount of Human Resources cost allocated to the Assembly Department is:

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 step-down method, over how many square feet would the Building Maintenance cost be allocated (i.e., spread)?

Romano 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) 80,000 120,000 200,000 Long-run usage (hours) 90,000 110,000 200,000 If Romano 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:

Eastside Hospital has two service departments (Patient Records and Accounting) and two "production" departments (Internal Medicine and Surgery). It uses the reciprocal-services method of cost allocation and should allocate Internal Medicine cost to Surgery.

The Hearts and Hands 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 greater amount of service. Which of the following allocations would not occur if Hearts uses the step-down method of cost allocation?

Zena Company manufactures two products (A and B) from a joint process that cost $200,000 for the year just ended. 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. Further information follows. Pounds 20,000 30,000 Per-Pound \ 12 8 \ 350,000 \ 90,000 300,000 60,000 ..... ..... If the joint costs are allocated based on the physical-units method, the amount of joint cost assigned to product A 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?

Hreck, 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 7,000 Building Maintenance 11,000 Machining 20,000 Assembly 28,000 Assuming use of the step-down method, over how many square feet would the Building Maintenance cost be allocated (i.e., spread)?

Consider the following statements about the direct method of service department cost allocation: I. Under the direct method, all service department costs are eventually allocated to production departments. II. The order in which service department costs are allocated to production departments is important. III. Once a service department's costs have been allocated, no costs are re-circulated back to that department. Which of the above statements is (are) correct?

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 Machining?

Ojai Chemical manufactures two industrial chemicals in a joint process. In October, $200,000 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.

Western Kentucky State College has two service departments, the Library and Computing Services, that assist the School of Business and the School of Health. Budgeted costs of the Library and Computing Services are $800,000 and $1,800,000, respectively. Usage of the service departments' output during the year is anticipated to be: Provider of Service User of Service Library Computing Services Library \@cdots 10\% Computing Services \@cdots \@cdots School of Business 20\% 60\% School of Health 80\% 30\% Required: A. Use the direct method to allocate the costs of the Library and Computing Services to the School of Business and the School of Health. B. Repeat requirement "A" using the step-down method. Western allocates the cost of Computing Services first.

Which of the following methods ignores the fact that some service departments provide service to other service departments?