The Parvis Paramount Pigsty (PPP) raises pigs, from which a variety of pork products are processed. The herd features the Danish Yorkshire, which typically reaches 105 kgs at maturity. The following table summarizes the production process of producing Porktry, Porfekt, and Porkatoo from one pig. \[\begin{array} { | l | r | r | r | } \hline & \text { Porktry } & \text { Porfekt } & \text { Porkatoo } \\ \hline \text { Weight, in kgs } & 45 & 20 & 35 \\ \hline \text { Sale price, kg } & € 22.50 & € 84.00 & € 28.00 \\ \hline \text { Processing costs per kg } & 60.30 & € 2.52 & € 0.40 \\ \hline \end{array}\] Previous research has indicated that raising a Danish Yorkshire from breeding to disposition costs an average of €3 per kg. The ratio of pig parts to products is relatively inflexible; as yet, bio-engineering has failed to produce pigs with other than four legs. Of the statements below, which is true of the allocation of the joint costs?

A) By weight, Porktry is allocated € 81.41 B) By relative sales value, Porkatoo is allocated € 80.05 C) Since Porktry is the least profitable product, it should be discontinued and resources devoted to Porfekt D) By relative net realizable values, Porfekt is allocated € 135.09 E) None of the above A) By weight, Porktry is allocated € 81.41 B) By relative sales value, Porkatoo is allocated € 80.05 C) Since Porktry is the least profitable product, it should be discontinued and resources devoted to Porfekt D) By relative net realizable values, Porfekt is allocated € 135.09 E) None of the above D

When considering the purchase of a large central system, such as power generation or computer networks, firms have to decide how big a system to acquire and whether, and, if so, how to charge users for it subsequently. Which is true? $\begin{array}{|l|l|l|} \hline &\text { Charge } & \text { Likely consequence } \\ \hline \text { a. } & \text { Done } & \begin{array}{l} \text { Firm acquires more capacity than } \\ \text { needed } \end{array} \\ \hline\text { b. } & \text { Full cost } & \begin{array}{l} \text { Demand for resource equals } \\ \text { capacity } \end{array} \\ \hline\text { c. } & \text { Depreciation } & \begin{array}{l} \text { Firm acquires less capacity than } \\ \text { needed } \end{array} \\ \hline \text { d. } & \begin{array}{l} \text { Depreciation } \\ \text { only } \end{array} & \begin{array}{l} \text { Demand for resource equals } \\ \text { capacity } \end{array} \\ \hline \text { e. } & \begin{array}{l} \text { None of the } \\ \text { above } \end{array} & \\ \hline \end{array}$

A) Option A B) Option B C) Option C D) Option D E) Option E A) Option A B) Option B C) Option C D) Option D E) Option E

Williams manufactures a variety of iron products, made to customer specifications, in small batches. Willie Williams, owner, is concerned that he does not have an accurate understanding of the costs of production. You, a newly-minted MBA, have researched his business and identified various costs and cost drivers. $\begin{array}{|c|c|c|c|c|c|c|} \hline& \text { Janitorial } & \text { Welding } & \text { DR } & \text { Data } & \text { Assembly }& \text { Total }\\ \hline \text { Own costs } & \$ 12,000 & \$ 90,000 & \$ 37,200 \$ & 32,400 & \$ 54,000 & 225,600 \\ \hline \text { Square feet } & 500 & 3.000 & 1.500 & 2,000 & 4,500 & 11 \\ \hline\#\\ \text { employees } & 7 & 25 & 8 & 10 & 75 & \\ \hline\#\\ \text { transactions } \\ \text { (thou) } & 30 & 100 & 180 & 600 & 140 & 1,050 \\ \hline\text { Power } \\ \text { usage } & 22 & 730 & 11 & 17 & 220 & 1,000\\ \hline \end{array}$ The service departments (Janitorial, HR, and Data Services) are allocated to the two production departments (Welding and Assembly). Janitorial costs are allocated using square feet, HR using number of employees, and Data Services using number of transactions. You recall that there are several approaches to the allocation of service department costs, direct, step-down and reciprocal methods. If the direct method is used, which of the following is true?

A) The amount of Welding costs allocated to Assembly is $37,500 B) The amount of HR allocated to Janitorial is $2,604 C) The amount of Data Services costs allocated to Welding is $13,500 D) The amount of Janitorial costs allocated to Assembly is $4,909 E) None of the above A) The amount of Welding costs allocated to Assembly is $37,500 B) The amount of HR allocated to Janitorial is $2,604 C) The amount of Data Services costs allocated to Welding is $13,500 D) The amount of Janitorial costs allocated to Assembly is $4,909 E) None of the above

Each week Walters Company produces 15,000 pounds of Product A and 30,000 pounds of Product B by incurring a joint cost of $400,000. These two products can be sold as is or processed further. Further processing of either product does not delay the production of subsequent batches of the joint product. Data regarding these two products are as follows: \[\begin{array} { | l | r | r | } \hline & \begin{array} { r } \text { Product } \end{array} & \text { Product } \\ & \text {A}& \text {B}\\ \hline \begin{array} { l } \text { Selling price per pound without } \\ \text { further processing } \end{array} & \$ 12.00 & \$ 9.00 \\ \hline \begin{array} { l } \text { Selling price per pound with } \\ \text { further processing } \end{array} & \$ 15.00 & \$ 11.00 \\ \hline \begin{array} { l } \text { Total separate weekly variable } \\ \text { costs of further processing } \end{array} & \$ 50,000 & \$ 45,000 \\ \hline \end{array}\] Required: To maximize Walters Company's manufacturing contribution margin, how much total separate variable costs of further processing should be incurred each week?

The incremental cost of processing furth

Williams manufactures a variety of iron products, made to customer specifications, in small batches. Willie Williams, owner, is concerned that he does not have an accurate understanding of the costs of production. You, a newly-minted MBA, have researched his business and identified various costs and cost drivers. $\begin{array}{|c|c|c|c|c|c|c|} \hline& \text { Janitorial } & \text { Welding } & \text { DR } & \text { Data } & \text { Assembly }& \text { Total }\\ \hline \text { Own costs } & \$ 12,000 & \$ 90,000 & \$ 37,200 \$ & 32,400 & \$ 54,000 & 225,600 \\ \hline \text { Square feet } & 500 & 3.000 & 1.500 & 2,000 & 4,500 & 11 \\ \hline\#\\ \text { employees } & 7 & 25 & 8 & 10 & 75 & \\ \hline\#\\ \text { transactions } \\ \text { (thou) } & 30 & 100 & 180 & 600 & 140 & 1,050 \\ \hline\text { Power } \\ \text { usage } & 22 & 730 & 11 & 17 & 220 & 1,000\\ \hline \end{array}$ The service departments (Janitorial, HR, and Data Services) are allocated to the two production departments (Welding and Assembly). Janitorial costs are allocated using square feet, HR using number of employees, and Data Services using number of transactions. You recall that there are several approaches to the allocation of service department costs, direct, step-down and reciprocal methods. If the step-down method is applied, allocating the most costly department first, which is true?

A) Welding's fractional use of HR is 25/125 B) Assembly's fractional use of Janitorial is 4500/7500 C) Janitorial's fractional use of Data Svcs is 22/1000 D) HR's fractional use of Data Svcs is 180/450 E) None of the above A) Welding's fractional use of HR is 25/125 B) Assembly's fractional use of Janitorial is 4500/7500 C) Janitorial's fractional use of Data Svcs is 22/1000 D) HR's fractional use of Data Svcs is 180/450 E) None of the above

An insurance company has the following profitability analysis of its services: \[\begin{array} { | l | r | r | r | } \hline & \begin{array} { r } \text { Life } \\ \text { Insurance } \end{array} & \begin{array} { r } \text { Auto } \\ \text { Insurance } \end{array} & \begin{array} { r } \text { Home } \\ \text { Insurance } \end{array} \\ \hline \text { Revenues } & \$ 5,000,000 & \$ 10,000,000 & \$ 3,000,000 \\ \hline \text { Commissions } & ( 1,000,000 ) & ( 2,000,000 ) & ( 600,000 ) \\ \hline \text { Payments } & ( 3,000,000 ) & ( 7,300,000 ) & ( 2,000,000 ) \\ \hline \text { Common } & ( 500,000 ) & ( 500,000 ) & ( 500,000 ) \\ \text { Costs } & & & \\ \hline \text { Profit } & \$ 500,000 & \$ 200,000 & ( \$ 100,000 ) \\ \hline \end{array}\] The common costs are fixed, are distributed equally among the services, and are not avoidable if one of the services is dropped. Required: What is the profitability of the remaining services if all services with losses are dropped?

If home insurance is dropped because of

Williams manufactures a variety of iron products, made to customer specifications, in small batches. Willie Williams, owner, is concerned that he does not have an accurate understanding of the costs of production. You, a newly-minted MBA, have researched his business and identified various costs and cost drivers. $\begin{array}{|c|c|c|c|c|c|c|} \hline& \text { Janitorial } & \text { Welding } & \text { DR } & \text { Data } & \text { Assembly }& \text { Total }\\ \hline \text { Own costs } & \$ 12,000 & \$ 90,000 & \$ 37,200 \$ & 32,400 & \$ 54,000 & 225,600 \\ \hline \text { Square feet } & 500 & 3.000 & 1.500 & 2,000 & 4,500 & 11 \\ \hline\#\\ \text { employees } & 7 & 25 & 8 & 10 & 75 & \\ \hline\#\\ \text { transactions } \\ \text { (thou) } & 30 & 100 & 180 & 600 & 140 & 1,050 \\ \hline\text { Power } \\ \text { usage } & 22 & 730 & 11 & 17 & 220 & 1,000\\ \hline \end{array}$ The service departments (Janitorial, HR, and Data Services) are allocated to the two production departments (Welding and Assembly). Janitorial costs are allocated using square feet, HR using number of employees, and Data Services using number of transactions. You recall that there are several approaches to the allocation of service department costs, direct, step-down and reciprocal methods. If the step-down method is used in this case, which sequence of allocations is not valid?

A) Data, Janitorial, HR B) HR, Data, Janitorial C) Data, HR, Janitorial D) Janitorial, Welding, HR, Data Svcs, Assembly E) All sequences above are acceptable A) Data, Janitorial, HR B) HR, Data, Janitorial C) Data, HR, Janitorial D) Janitorial, Welding, HR, Data Svcs, Assembly E) All sequences above are acceptable

Williams manufactures a variety of iron products, made to customer specifications, in small batches. Willie Williams, owner, is concerned that he does not have an accurate understanding of the costs of production. You, a newly-minted MBA, have researched his business and identified various costs and cost drivers. $\begin{array}{|c|c|c|c|c|c|c|} \hline& \text { Janitorial } & \text { Welding } & \text { DR } & \text { Data } & \text { Assembly }& \text { Total }\\ \hline \text { Own costs } & \$ 12,000 & \$ 90,000 & \$ 37,200 \$ & 32,400 & \$ 54,000 & 225,600 \\ \hline \text { Square feet } & 500 & 3.000 & 1.500 & 2,000 & 4,500 & 11 \\ \hline\#\\ \text { employees } & 7 & 25 & 8 & 10 & 75 & \\ \hline\#\\ \text { transactions } \\ \text { (thou) } & 30 & 100 & 180 & 600 & 140 & 1,050 \\ \hline\text { Power } \\ \text { usage } & 22 & 730 & 11 & 17 & 220 & 1,000\\ \hline \end{array}$ The service departments (Janitorial, HR, and Data Services) are allocated to the two production departments (Welding and Assembly). Janitorial costs are allocated using square feet, HR using number of employees, and Data Services using number of transactions. You recall that there are several approaches to the allocation of service department costs, direct, step-down and reciprocal methods. If the step-down method is applied, allocating the most costly department first, which is true?

A) Janitorial's total costs after allocation are $18,036.48 B) Assembly's total costs after allocation are less than $100,000 C) Janitorial is allocated $3,953.28 from Data Svcs D) HR's total costs after allocation are $50,160 E) None of the above A) Janitorial's total costs after allocation are $18,036.48 B) Assembly's total costs after allocation are less than $100,000 C) Janitorial is allocated $3,953.28 from Data Svcs D) HR's total costs after allocation are $50,160 E) None of the above

Exam 8: Cost Allocation: Practices

Mistical Herbals processes exotic plant materials into various fragrances and biological pastes used by perfume and cosmetic firms. One particular plant material, Xubonic root from the rain forest in Australia, is processed yielding four joint products: QV3, VX7, HM4, and LZ9. Each of these joint products can be sold as is after the joint production process or processed further. The following table describes the yield of each joint product from one batch, the selling prices of the intermediate and further processed products, and the costs of further processing each joint product. The joint cost of processing one batch of Xubonic root is $30,000. 3 \times7 HM4 LZ9 Number of ounces per batch 100 80 125 195 Cost of further processing \ 2,400 \ 400 \ 2,500 \ 2,800 Selling price of unprocessed intermediate \ 62 \ 49 \ 102 \ 47 product per ounce Selling price of final product after further \ 85 \ 57 \ 127 \ 61 processing per ounce Required: a. Allocate the $30,000 joint cost per batch to each of the joint products based on the number of ounces in each joint product. b. To maximize firm value, which of the joint products should be processed further and which should be sold without further processing? c. Based on your analysis in part (b) regarding the decisions to process further or not, should Mistical Herbals process batches of Xubonic root into the four joint products? Support your decision with a quantitative analysis and indicate how much profit or loss Mistical Herbals makes per batch. d. Suppose the joint cost of $30,000 is allocated using the net realizable value of each joint product. Calculate the profits (loss) per joint product after allocating the joint cost using net realizable value. e. Explain how the use of joint cost allocations enhances or harms the decision to process joint products.

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Question 1

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a. Allocated joint cost is $60 per ounce ($30,000 ÷ 500 ounces): $\begin{array} { | l | r | r | r | r | r | } \hline & Q W 3 & \mathrm {~V} 7 & \mathrm { HM } 4 & \mathrm { LZ9 } & \text { Total } \\\hline \begin{array} { l } \text { \% of batch by } \\\text { ounce }\end{array} & 20 \% & 16 \% & 25 \% & 39 \% & 100 \% \\\hline \begin{array} { l } \text { Allocated joint } \\\text { cost }\end{array} & \$ 6,000 & \$ 4,800 & \$ 7,500 & \$ 11,700 & \$ 30,000 \\\hline\end{array}$ b. Decisions to process further: $\begin{array}{|l|r|r|r|r|}\hline& \mathrm{QV} 3 & \mathrm{~V} \times 7 & \text { HM4 } & \text { LZ9 }\\ \hline \text { Number of ounces per } \\\text { Incremental revenue per } \\\text { ounce from further } & \$ 23 & \$ 8 & \$ 25 & \$ 14\\\text { processing }\\\hline\text { Number of ounces per } \\\text { batch } & 100 & 80 & 125 & 195 \\\hline\text { Incremental revenue from } \\\text { further processing }& \$ 2,300 & \$ 640 & \$ 3.125 & \$ 2.730 \\\hline\text { Cost of further processing } \\\text { Decision to process further } & \$ 2.400 & \$ 400 & \$ 2.500 & \$ 2,800 \\\hline \text { Decision to process further } & \text { NO } & \text { YES }& \text { YES } & \text { NO }\\\hline \end{array}$ c. Batches of Xubonic root should be produced because each batch yields profits of $3,200. $\begin{array}{|c|c|c|c|c|c|}\hline& \mathrm{QV} 3 & \mathrm{~V} \times 7 & \text { HM4 } & \text { LZ9 }&\text { Total }\\\hline \text { Revenue from } \\\text { further } & \$ 6,200 & \$ 4,560 & \$ 15,875 & \$ 9.165 &\\\text { processing or } \\\text { immediate sale } \\\hline \text { Cost of further } \\\text { processing }& 0 & 400 & \$ 2,500 & 0 & \\\hline \text { Net realizable } \\\text { value } & \$ 6.200 & \$ 4.160 & \$ 13,375 & \$ 9.165 & \$ 32,900 \\\hline \text { Joint cost of } \\\text { processing a } \\\text { batch }& & & & & \$ 30,000 \\\hline \text { Profit per batch } & & & & & \$ 2,900 \\\hline\end{array}$
d. Profit after allocating joint cost using net realizable value: $\begin{array} { | l | r | r | r | r | r | } \hline & \text { QV3 } & \text { VX7 } & \text { HM4 } & \text { LZ9 } & \text { Total } \\\hline \text { NRV } & \$ 6.200 & \$ 4.160 & \$ 13.375 & \$ 9.165 & \$ 32,900 \\\hline \text { \$ of NRV } & 18.84 \% & 12.64 \% & 40.65 \% & 27.86 \% & 100 \% \\\hline \begin{array} { l } \text { Allocated } \\\text { joint cost }\end{array} & \$ 5,653 & \$ 3.793 & \$ 12,196 & \$ 8,357 & \$ 30,000 \\\hline \begin{array} { l } \text { Net income } \\\text { per batch }\end{array} & \$ 547 & \$ 367 & \$ 1.179 & \$ 808 & \$ 2,900 \\\hline\end{array}$ e. Joint cost allocations do not enhance the decision of whether to further process joint products or not. Joint cost allocations based on net realizable value does not harm the decision process, but it does not add anything. The decisions in part (b) to process each joint product further or sell after the split off point were made without any joint cost allocations.

Joint costs in different industries may be allocated using any of the following methods, except:

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Question 2

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C

The Parvis Paramount Pigsty (PPP) raises pigs, from which a variety of pork products are processed. The herd features the Danish Yorkshire, which typically reaches 105 kgs at maturity. The following table summarizes the production process of producing Porktry, Porfekt, and Porkatoo from one pig. Porktry Porfekt Porkatoo Weight, in kgs 45 20 35 Sale price, kg 22.50 84.00 28.00 Processing costs per kg 60.30 2.52 0.40 Previous research has indicated that raising a Danish Yorkshire from breeding to disposition costs an average of €3 per kg. The ratio of pig parts to products is relatively inflexible; as yet, bio-engineering has failed to produce pigs with other than four legs. Of the statements below, which is true of the allocation of the joint costs?

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D

Magellan Bank has five service departments (telecom, information management, building occupancy, training, and human resources). The bank uses a step-down method of allocating service department costs to its three lines of business (retail banking, commercial banking, and credit cards). The following table contains the utilization rates of the five service departments and three lines of business. Also included in this table are the direct operating expenses of the service departments (in millions of dollars). Direct operating expenses of each service department do not contain any allocated service costs from the other service departments. For example, telecom spent $3.5 million dollars and provided services to other units within Magellan Bank. Information management consumed 15 percent of telecom's services. The order in which the service departments are allocated is also indicated in the table. The telecom department costs are allocated first, followed by information management, and the costs of the human resources department are allocated last. Required: a. Using the step-down method and the order of departments specified in the table, what is the total allocated cost from information management to credit cards, including all the costs allocated to information management? b. Information management costs are allocated based on terabytes of storage used by the other service departments and lines of business. If, instead of being second in the step-down sequence, information management became fifth in the sequence, would the allocated cost per terabyte increase or decrease? Explain precisely why it increases or decreases. c. If instead of using the step-down method of allocating service department costs, Magellan uses the direct allocation method, what is the total allocated cost from information management to credit cards, including all the costs allocated to information management? (Note: Information management remains second in the list.)

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Question 4

Somimad Sawmill manufactures two lumber products from a joint milling process. The two products developed are mine support braces (MSBs) and unseasoned commercial building lumber (CBL). A standard production run incurs joint costs of $300,000 and results in 60,000 units of MSB and 90,000 units of CBL. Each unprocessed unit of MSB sells for $2 per unit and each unprocessed unit of CBL sells for $4 per unit. If the CBL is processed further at a cost of $200,000, it can be sold at $10 per unit but 10,000 units are unavoidably lost (with no discernible value). The MSB units can be coated with a preservative at a cost of $100,000 per production run and then sold for $3.50 each. Required: a. If no further work is done after the initial milling process, calculate the cost of CBL using physical quantities to allocate the joint cost. b. If no further work is done after the initial milling process, calculate the cost of MSB using relative sales value to allocate the joint cost. c. Should MSB and CBL be processed further or sold immediately after initial milling? d. Given your decision in (c), prepare a schedule computing the completed cost assigned to each unit of MSB and CBL as charged to finished goods inventory. Use net realizable value for allocating joint costs. Answer

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Question 5

When considering the purchase of a large central system, such as power generation or computer networks, firms have to decide how big a system to acquire and whether, and, if so, how to charge users for it subsequently. Which is true? Charge Likely consequence a. Done Firm acquires more capacity than needed b. Full cost Demand for resource equals capacity c. Depreciation Firm acquires less capacity than needed d. Depreciation only Demand for resource equals capacity e. None of the above

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Question 6

Williams manufactures a variety of iron products, made to customer specifications, in small batches. Willie Williams, owner, is concerned that he does not have an accurate understanding of the costs of production. You, a newly-minted MBA, have researched his business and identified various costs and cost drivers. Janitorial Welding DR Data Assembly Total Own costs \ 12,000 \ 90,000 \ 37,200\ 32,400 \ 54,000 225,600 Square feet 500 3.000 1.500 2,000 4,500 11 \# employees 7 25 8 10 75 \# transactions (thou) 30 100 180 600 140 1,050 Power usage 22 730 11 17 220 1,000 The service departments (Janitorial, HR, and Data Services) are allocated to the two production departments (Welding and Assembly). Janitorial costs are allocated using square feet, HR using number of employees, and Data Services using number of transactions. You recall that there are several approaches to the allocation of service department costs, direct, step-down and reciprocal methods. If the direct method is used, which of the following is true?

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Question 7

At the Hilton Apple Fest and Trade Expo, James Jones, owner of Jones Orchard, saw a sign displayed in front of a vendor's booth: i can get you pesticides at $10.00 a gallon-guaranteed in writing! Over a one-year period, the vendor guarantees delivery of between 350,000 and 500,000 gallons of pesticide at a maximum price of $10 per gallon. Since Jones Orchard is currently paying $11.30 per gallon, the offer is appealing. However, Jones uses only 25,000 gallons and the annual management fee for this service is a whopping $275,000. The only way Jones can see to make the offer work is to form a buying consortium with other farmers. As long as all of the farmers are located within 10 square miles, the vendor is willing to allow the formation of a consortium. Including Jones Orchard, five farms are within this area. Their pesticide needs and anticipated costs are as follows: Gallons Price per Gallon Jones 25.000 \ 11.30 Gilbert 35.000 11.20 Santos 50.000 11.12 Singh 100.000 10.90 Chen 150.000 10.70 Total 360.000 All of the farmers are willing to participate in the buying consortium as long as there is an anticipated cost savings for each farmer. Everyone agrees that each farmer should pay the same amount for materials. But allocation of the management fee is left entirely up to Jones. Required: a. Based upon the numbers provided, demonstrate that this consortium could work. b. Jones initially considers allocating the management fee either (1) equally between all members or (2) based upon each farmer's percentage of total gallons needed. Would either method work? Show allocation by each method. c. Jones believes it would make sense to allocate the management fee on an ability-to-pay basis. As the chapter allocates joint costs based upon net realizable value, allocate the management fee based upon the potential dollar savings opportunity of each farm. Is this method feasible? d. Consider the issue of private versus public information as it relates to the cost allocation schemes presented in this problem. Address whether the information required to implement each scheme is essentially held in common by all of the farmers in the consortium or privately held by each individual farmer. In particular, given that the consortium will allocate the management fee by ability to pay, how might each farmer's privately held cost information serve to undermine the consortium's future existence?

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Question 8

Each week Walters Company produces 15,000 pounds of Product A and 30,000 pounds of Product B by incurring a joint cost of $400,000. These two products can be sold as is or processed further. Further processing of either product does not delay the production of subsequent batches of the joint product. Data regarding these two products are as follows: Product Product A B Selling price per pound without further processing \ 12.00 \ 9.00 Selling price per pound with further processing \ 15.00 \ 11.00 Total separate weekly variable costs of further processing \ 50,000 \ 45,000 Required: To maximize Walters Company's manufacturing contribution margin, how much total separate variable costs of further processing should be incurred each week?

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Question 9

IFLAX manufactures commercial brushes in two operating divisions (O1 and O2) and has two service departments (Human Resources and Janitorial/Maintenance). The two service departments' costs are allocated to the two operating departments. Human Resources' costs of $600,000 are allocated based on the number of employees, and Janitorial/Maintenance costs of $800,000 are allocated based on square footage. The following table summarizes the number of employees and the square footage in each division and department. Required: a. Allocate the costs of the two service departments to the two operating divisions using the direct allocation method. b. Allocate the costs of the two service departments to the two operating divisions using the step-down allocation method where Human Resources is allocated first and Janitorial/Maintenance is allocated second. c. Allocate the costs of the two service departments to the two operating divisions using the step-down allocation method where Janitorial/Maintenance is allocated first and Human Resources is allocated second. d. Compute the Human Resource Department cost per employee under the three allocation methods (direct allocation, step-down allocations where Human Resources is first, and the step-down method where Janitorial/Maintenance is first). e. Compute the Janitorial/Maintenance cost per square foot under the three allocation methods (direct allocation, step-down allocations where Human Resources is first, and the step-down method where Janitorial/Maintenance is first). f. Briefly discuss the various factors IFLAX management should consider in choosing how to allocate the two service department costs to the two operating divisions.

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Question 10

Williams manufactures a variety of iron products, made to customer specifications, in small batches. Willie Williams, owner, is concerned that he does not have an accurate understanding of the costs of production. You, a newly-minted MBA, have researched his business and identified various costs and cost drivers. Janitorial Welding DR Data Assembly Total Own costs \ 12,000 \ 90,000 \ 37,200\ 32,400 \ 54,000 225,600 Square feet 500 3.000 1.500 2,000 4,500 11 \# employees 7 25 8 10 75 \# transactions (thou) 30 100 180 600 140 1,050 Power usage 22 730 11 17 220 1,000 The service departments (Janitorial, HR, and Data Services) are allocated to the two production departments (Welding and Assembly). Janitorial costs are allocated using square feet, HR using number of employees, and Data Services using number of transactions. You recall that there are several approaches to the allocation of service department costs, direct, step-down and reciprocal methods. If the step-down method is applied, allocating the most costly department first, which is true?

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Question 11

Internal resources, such as the legal department, training department, information technology, tend to be under-utilized, leading to a death spiral, when:

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Question 12

An insurance company has the following profitability analysis of its services: Life Insurance Auto Insurance Home Insurance Revenues \ 5,000,000 \ 10,000,000 \ 3,000,000 Commissions (1,000,000) (2,000,000) (600,000) Payments (3,000,000) (7,300,000) (2,000,000) Common (500,000) (500,000) (500,000) Costs Profit \ 500,000 \ 200,000 (\ 100,000) The common costs are fixed, are distributed equally among the services, and are not avoidable if one of the services is dropped. Required: What is the profitability of the remaining services if all services with losses are dropped?

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Question 13

Cosmo Inc. operates two retail novelty stores: the Mall Store and the Town Store. Condensed monthly operating income data for Cosmo Inc. for November are presented in the accompanying table. Additional information regarding Cosmo's operations follows the statement. Total Mall Store Town Store Sales \ 200,000 \ 80,000 \ 120,000 Less variable costs 116,000 32,000 84,000 Contribution margin \ 84,000 \ 48,000 \ 36,000 Less direct fixed expenses 60,000 20,000 40,000 Store segment margin \ 24,000 \ 28,000 \langle\ 4,000) Less com mon fixed expenses 10,000 4,000 6,000 Operating income \ 14,000 \ 24,000 \langle\ 10,000) • One-fourth of each store's direct fixed expenses would continue through December of next year if either store were closed. • Cosmo allocates common fixed expenses to each store on the basis of sales dollars. • Management estimates that closing the Town Store would result in a 10 percent decrease in Mall Store sales, while closing the Mall Store would not affect Town Store sales. • The operating results for November are representative of all months. Required: a. A decision by Cosmo Inc. to close the Town Store would result in a monthly increase (decrease) in Cosmo's operating income during next year of how much? b. Cosmo is considering a promotional campaign at the Town Store that would not affect the Mall Store. Increasing monthly promotional expenses at the Town Store by $5,000 in order to increase Town Store sales by 10 percent would result in a monthly increase (decrease) in Cosmo's operating income during next year of how much? c. Half of Town Store's dollar sales are from items sold at variable cost to attract customers to the store. Cosmo is considering deleting these items, a move that would reduce the Town Store's direct fixed expenses by 15 percent and result in the loss of 20 percent of Town Store's remaining sales volume. This change would not affect the Mall Store. A decision to eliminate the items sold at cost would result in a monthly increase (decrease) in Cosmo's operating income during next year of how much?

(Essay)

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Question 14

Which is not true of the various methods of allocating service department costs?

(Multiple Choice)

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Question 15

What is the difference between joint costs and common costs?

(Essay)

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Question 16

Williams manufactures a variety of iron products, made to customer specifications, in small batches. Willie Williams, owner, is concerned that he does not have an accurate understanding of the costs of production. You, a newly-minted MBA, have researched his business and identified various costs and cost drivers. Janitorial Welding DR Data Assembly Total Own costs \ 12,000 \ 90,000 \ 37,200\ 32,400 \ 54,000 225,600 Square feet 500 3.000 1.500 2,000 4,500 11 \# employees 7 25 8 10 75 \# transactions (thou) 30 100 180 600 140 1,050 Power usage 22 730 11 17 220 1,000 The service departments (Janitorial, HR, and Data Services) are allocated to the two production departments (Welding and Assembly). Janitorial costs are allocated using square feet, HR using number of employees, and Data Services using number of transactions. You recall that there are several approaches to the allocation of service department costs, direct, step-down and reciprocal methods. If the step-down method is used in this case, which sequence of allocations is not valid?

(Multiple Choice)

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Question 17

Of the following statements, which is true?

(Multiple Choice)

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Question 18

Beware of Unit Costs, Costs Beyond the Split-off Point Are Not Necessarily All Variable Table 8-12 in the text allocates joint costs using net realizable value as the allocation base. What critical assumptions underlie the analysis in Table 8-12? That is, under what circumstances can the data in this table be used to assess product line profitability?

(Essay)

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Question 19

Williams manufactures a variety of iron products, made to customer specifications, in small batches. Willie Williams, owner, is concerned that he does not have an accurate understanding of the costs of production. You, a newly-minted MBA, have researched his business and identified various costs and cost drivers. Janitorial Welding DR Data Assembly Total Own costs \ 12,000 \ 90,000 \ 37,200\ 32,400 \ 54,000 225,600 Square feet 500 3.000 1.500 2,000 4,500 11 \# employees 7 25 8 10 75 \# transactions (thou) 30 100 180 600 140 1,050 Power usage 22 730 11 17 220 1,000 The service departments (Janitorial, HR, and Data Services) are allocated to the two production departments (Welding and Assembly). Janitorial costs are allocated using square feet, HR using number of employees, and Data Services using number of transactions. You recall that there are several approaches to the allocation of service department costs, direct, step-down and reciprocal methods. If the step-down method is applied, allocating the most costly department first, which is true?

(Multiple Choice)

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Question 20

Joint costs in different industries may be allocated using any of the following methods, except:

Internal resources, such as the legal department, training department, information technology, tend to be under-utilized, leading to a death spiral, when:

Which is not true of the various methods of allocating service department costs?

What is the difference between joint costs and common costs?

Of the following statements, which is true?

Introduction

The Nature of Costs

Opportunity Cost of Capital and Capital Budgeting

Organizational Architecture

Responsibility Accounting and Transfer Pricing

Budgeting

Cost Allocation: Theory

Absorption Cost System

Criticisms of Absorption Cost Systems: Incentives to Overproduce

Criticisms of Absorption Cost Systems: Inaccurate Product Costs

Standard Costs: Direct Labor and Materials

Overhead and Marketing Variances

Management Accounting in a Changing Environment

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