Deck 8: Cost Allocation: Practices

Question 1

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 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 choices are correct

Answer 1

D

Question 2

The reciprocal allocation method is the most precise yet infrequently used.Which of the following is not true?

A)The reciprocal method requires the significant computing power of large computers to solve simultaneous equations,thus putting it out of reach of most companies.
B)The reciprocal method appears as a "black box" to managers,thus making managers responsible for costs they may not know how to compute or understand.
C)Employed carefully,the step-down method can produce results very similar to those produced by the reciprocal method.
D)Cost allocations are used primarily for decision control and financial reporting rather than for decision making.
E)Few accountants were trained in solving systems of equations and how to formulate the problem.

Answer 2

A

Question 3

Eldorado Emerald (EE)mines and processes emeralds in its mines throughout the world.Large rocks are mined,these large rocks are gently crushed and any emeralds are sifted out.The emeralds are then sorted,graded,cut,and polished.The joint cost per ton of rock is $18,000.The following table summarizes the number of emeralds per ton of mined rock,the additional costs to package and sell each emerald after it's polished and graded,and the selling price for each grade of emerald. Which of the following is true?

A)Using allocation by relative sales value will allocate identical amounts to Grade A and Grade AA emeralds.
B)The manager for Grade AAA emeralds would be indifferent to the allocation method because each allocation method allocates the smallest amount of joint costs to Grade AAA emeralds.
C)EE management should select the allocation method for each grade of emerald that maximizes the profitability for each grade of emerald.
D)The manager responsible for Grade A emeralds will select the allocation by relative sales value method.
E)None of the choices are correct

Answer 3

D

Question 4

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. 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 4,500/7,500
C)Janitorial's fractional use of Data Svcs is 22/1,000
D)HR's fractional use of Data Svcs is 180/450
E)None of the choices are correct

Question 5

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. 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 choices are correct

Question 6

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

A)managers may choose whether to purchase the service internally or externally
B)the internal pricing system seeks to recover sunk costs
C)managers may decide to reduce the quantity of services used
D)the internal pricing system utilizes full costs
E)all of the choices are correct

Question 7

Of the following statements,which is true?

A)Real estate taxes are an example of joint costs
B)The costs of harvesting a pineapple plantation are additional processing costs
C)Common costs are incurred only in disassembly
D)Joint cost allocations are helpful in assessing a product's profitability
E)None of the choices are correct

Question 8

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. 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 choices are correct

Question 9

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. 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

Question 10

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

A)Application of the reciprocal method in a complex corporation usually requires the use of a computer
B)The direct method is quick to compute,accurate,and has low information requirements
C)There are multiple sequence possibilities for the step-down method
D)The choice of method affects the optimal allocation of resources
E)All of the choices are true

Question 11

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

A)relative cubic footage of gases from a gas exploration process
B)relative sales values of fresh tomatoes,pulp tomatoes and tomato juice at the split-off point
C)relative sales value of maple wood planks,plywood,and chips (for smoking meat)at the split-off point
D)relative net realizable values at the split-off point of gold,silver,copper found in 100 tons of mining ore
E)All of the choices are correct

Question 12

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?

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