Deck 9: Cost Allocations

Question 1

When firms use allocated costs to make decisions, the quality of their decisions depend on how well the allocation estimates the capacity cost associated with the various options.

Answer 1

True

Question 2

Accounting for fixed manufacturing overhead is the only difference between variable and absorption costing.

Answer 2

True

Question 3

Profit margin equals:

A)Sales less contribution margin.
B)Revenue less fixed costs.
C)Contribution margin less variable costs.
D)Contribution margin less allocated capacity costs.

Answer 3

D

Question 4

The budget analyst for Tire Town determined that the volume of tires sold for each product line is the best cost driver for the fixed marketing and administrative costs related to its two tire models.How would you determine the total allocated cost to each of two models of tires for marketing and administrative costs?

A)Divide the total overhead by the total number of tires produced.
B)Calculate the allocation rate per tire.Then multiply the rate by the fixed marketing and administrative costs for each type of tire.Then divide by the fixed marketing and administrative cost pool.
C)Calculate the allocation rate per tire by dividing the fixed marketing and administrative cost pool by the direct labor dollar amount.Then multiply the rate by the fixed marketing and administrative costs for each model of tire.
D)Calculate the allocation rate per tire by dividing the fixed marketing and administrative cost pool by the number of tires.Then multiply the rate by the fixed marketing and administrative costs for each model of tire.

Question 5

A driver that is appropriate for some resources may not be appropriate for other resources.The solution to the problem is:

A)Use capacity resources in different proportions.
B)Do not allocate the resources.
C)Allocate the resources only if they are variable.
D)Use a separate cost pool for each class of similar resources.
E)None of the above are solutions to the problem.

Question 6

Capacity costs are controllable over the long-term.

Question 7

At the end of the accounting period, the cost of goods sold account and the finished goods inventory account will include fixed manufacturing costs.

Question 8

Cost allocations provide subtle, ineffective means to achieve change.

Question 9

The allocation rate is calculated by:

A)Dividing the costs in the cost pool by the denominator volume.
B)Dividing the costs in the cost pool by the overhead costs.
C)Dividing the volume by the costs in the cost pool.
D)Dividing the overhead costs by the unit contribution margin.
E)Dividing the overhead costs by the profit margin.

Question 10

By discouraging wasteful use, cost allocations can induce efficient utilization of resources shared by multiple users.

Question 11

Some firms refer to the overhead rate as the burden because they charge, or burden, each product with this amount.

Question 12

Suppliers often prefer cost-plus contracts when there is uncertainty about the final cost or project success, as it allows them to share the risk of cost overruns with the customer.

Question 13

Firms must prepare income statements and balance sheets in accordance with Generally Accepted Accounting Principles, which requires firms to use variable costing.

Question 14

Under absorption costing, the value of a unit of a product includes all product costs.

Question 15

Which of the following is not an example of a long-term decision?

A)Changing product mix.
B)Dropping products.
C)Expanding operations.
D)Purchasing inventory.
E)All of the above are examples of long-term decisions.

Question 16

An example of allocations to justify costs and reimbursements is when government entities contract to compensate their suppliers on a fixed negotiated contract amount.

Question 17

While profit margin is the appropriate measure of value for short-term decisions, contribution margin is the appropriate measure for long-term decisions.

Question 18

Because indirect manufacturing costs are not traceable to individual products, their cost is allocated only to period expenditures.

Question 19

An example of organizations using allocated costs to justify prices is when a hospital negotiates rates with insurance companies and other payers.

Question 20

Changing a product mix is an example of a short-term decision.

Question 21

Which of the following is not a common reason to use allocations:

A)To justify costs and reimbursements.
B)To increase net income.
C)To justify prices.
D)If there is uncertainty about a project's success.
E)All of the above are reasons to use allocations.

Question 22

Tire Town has two product lines of tires currently on the manufacturing floor.The product line managers provided the following information concerning the fixed overhead cost and production:
Total fixed costs to be allocated: $4,322,500
Standard Tire: 20,000 tires produced with $975,000 of direct labor cost
Deluxe Tire: 15,000 tires produced with $1,300,000 of direct labor cost
Which one of the following is a correct amount to be allocated to one of the two types of tires?

A)Standard tire at $92.63 per tire
B)Deluxe tire at $123.50 per tire
C)Standard tire at $1.90 per tire
D)Deluxe tire at $288.17 per tire

Question 23

The amount of cost allocated to a particular cost object depends on:

A)What costs we allocate.
B)How we group them into cost pools.
C)The drivers we choose.
D)A and B only.
E)A, B and C

Question 24

At the end of an accounting period, using absorption costing, the cost of goods sold account will include:

A)Direct material, direct labor, variable manufacturing overhead.
B)Direct material, direct labor, variable manufacturing overhead, and variable marketing and sales.
C)Direct material, direct labor, variable manufacturing overhead, and fixed manufacturing overhead.
D)Direct material, direct labor, variable manufacturing overhead, fixed manufacturing overhead, and variable marketing and sales.
E)Direct material, direct labor, variable manufacturing overhead, fixed manufacturing overhead, variable marketing and sales, and fixed marketing and sales.

Question 25

On an absorption costing income statement, which of the following correctly determines gross margin?

A)Revenue - (direct materials + direct labor + fixed marketing and sales).
B)Revenue - (direct materials + direct labor + variable marketing and sales).
C)Revenue - (direct materials + direct labor + manufacturing overhead).
D)Revenue - (direct materials + direct labor).

Question 26

Marquez, Inc.noted that its sales volume was less than its production volume for the month of March.Which one of the following is correct when comparing absorption costing and variable costing?

A)With variable costing, fixed manufacturing overhead is fully expensed on the income statement in the period the units are sold.
B)With absorption costing, a portion of the fixed manufacturing overhead incurred is included in inventory cost.
C)Variable costing requires that a portion of the fixed manufacturing overhead cost be reported as inventory cost on the balance sheet.
D)Absorption costing requires that fixed manufacturing overhead cost be allocated to all units produced using the number of units sold as the cost driver.

Question 27

Why do managers care about the costs allocated to their individual departments?

A)Managers' performance evaluations frequently depend on their unit's performance more than overall firm performance.
B)The cost allocated is an integral part of the department's reported profit.
C)Carefully chosen allocation methods can induce desired behavior.
D)Carefully chosen allocation methods can dissuade undesired behavior.
E)All of the above are reasons managers care about the costs allocated to their individual departments.

Question 28

Grey Corporation produces mattresses.If grey produces more units than it sells during a period, then reported income using absorption costing will be:

A)Equal to reported income using variable costing.
B)Greater than reported income using variable costing.
C)Less than reported income using variable costing.
D)Less than reported income using variable costing plus total fixed production costs.
E)None of the above.

Question 29

When allocating costs to value inventory, what is the underlying reason why firms allocate rather than directly measure capacity costs?

A)Traceability.
B)Profitability.
C)Responsibility.
D)Reliability.
E)None of the above.

Question 30

Brown Corporation produced 2,200 units during the most recent period.Brown's costs were as follows: $\begin{array}{lr}\text { Direct material } & \$ 1,000 \\\text { Direct labor } & 2,000 \\\text { Variable manufacturing overhead } & 500 \\\text { Variable marketing and sales } & 300 \\\text { Fixed manufacturing overhead } & 900 \\\text { Fixed marketing and sales } & 400\end{array}$ If Brown uses absorption costing, what amount per unit would be included in ending inventory?

A)$2.32
B)$1.73
C)$2.00
D)$1.36
E)$2.14

Question 31

Brown Corporation produced 2,200 units during the most recent period.Brown's costs were as follows: $$\begin{array} { l r } \text { Direct material } & \$ 1,000 \\\text { Direct labor } & 2,000 \\\text { Variable manufacturing overhead } & 500 \\\text { Variable marketing and sales } & 300 \\\text { Fixed manufacturing overhead } & 900 \\\text { Fixed marketing and sales } & 400\end{array}$$ Sales totaled 1,800 units ($10,800).If Brown uses absorption costing, the ending inventory would be valued at:

A)$0
B)$928
C)$544
D)$800
E)$856

Question 32

Firms must prepare income statements and balance sheets in accordance with Generally Accepted Accounting Principles which requires firms to use:

A)Variable costing.
B)Absorption costing.
C)Cost-based reporting.
D)Variance analysis.
E)None of the above.

Question 33

Administrative costs are currently split equally among 4 different product lines at WDT Company.To encourage the managers of each of the product lines to implement a new material waste policy aimed at reducing materials used in manufacturing, which of the following would best achieve this goal?

A)Allocating administrative costs based on the cost per unit of materials used in production.
B)Allocating administrative costs based on the number of labor hours used in manufacturing.
C)Allocating administrative costs based on the amount of scrap produced from manufacturing.
D)Allocating administrative costs based on the speed of production.

Question 34

Allocated costs equals:

A)The number of cost pools used multiplied by the driver units.
B)The number of cost pools used divided by the driver units.
C)The number of driver units used multiplied by the cost per driver unit.
D)The number of driver units used divided by the cost per driver unit.
E)None of the above.