Question 1

Ransall Auto Parts has two service departments-maintenance and personnel, and three production departments-fabrication, assembly, and packaging.Service costs are allocated to producing departments using the direct method.Information on overhead in each department and possible allocation bases appear below: $\begin{array}{lrrrrr}&\text { Maintenance}&\text { Personnel }&\text {fabrication }&\text {Assembly }&\text {Packaging }\
\text { Cost } & \$ 90,000 & \$ 130,000 & & & \
\text { Machine hours } & & & 12,000 & 30,000 & 18,000 \
\text { Employees } & 4 & 16 & 24 & 30 & 26
\end{array}$ Using the most logical activity base, how much personnel cost will be allocated to the packaging department?

Accepted Answer

A) $7,150 
B) $39,000 
C) $33,800 
D) $42,250

Question 2

ABC allocates cost pools to cost objectives using cost drivers as the allocation base.

Accepted Answer

A) True 
 B)False

Question 3

The process of assigning indirect costs is called

Accepted Answer

A) benchmarking. 
B) tracing. 
C) cost allocation. 
D) cost unitizing.

Question 4

Rather Bedding makes two types of pillow-down and foam.It is currently implementing an activity-based costing system.In the past, all overhead had been applied on the basis of machine hours.The company produces 6,000 down pillows and 18,000 foam pillows per year. \(\begin{array}{|l|c|c|c|c|}
\hline{\text { Cost Pool }} & \begin{array}{c}
\text { Driver and } \
\text { Level }
\end{array} & \begin{array}{c}
\text { Estim ated } \
\text { Costs }
\end{array} & \begin{array}{c}
\text { Use of Driver by } \
\text { Down Pillows }
\end{array} & \begin{array}{c}
\text { Use of Driver by } \
\text { Foam Pillows }
\end{array} \
\hline \text { Equipment setup } & 360 \text { setups } & \$ 216,000 & 120 \text { setups } & 240 \text { setups } \
\hline \begin{array}{l}
\text { Materials } \
\text { ordering }
\end{array} & 6,000 \text { orders } & \$ 60,000 & 2,400 \text { orders } & 3,600 \text { orders } \
\hline \text { Quality control } & \begin{array}{c}
2,000 \
\text { inspections }
\end{array} & \$ 36,000 & 800 \text { inspections } & 1,200 \text { inspections } \
\hline \text { Machining } & \begin{array}{c}
8,000 \
\text { machine } \
\text { hours }
\end{array} & \$ 86,800 & \begin{array}{c}
4,200 \text { machine } \
\text { hours }
\end{array} & \begin{array}{c}
3,800 \text { machine } \
\text { hours }
\end{array} \
\hline
\end{array}\) What is the overhead cost for each foam pillow when all overhead is applied based on machine hours?

Accepted Answer

A) $10.52 per foam pillow 
B) $638.85 per foam pillow 
C) $49.85 per foam pillow 
D) $20.67 per foam pillow

Question 5

The law firm of Barnes & Cohen purchased a new $17,600 copier.Copying costs will be shared by the purchasing, accounting, and information technology departments since those are the only departments that will have access to the machine.The company has decided to allocate the copying cost based on the number of copies made by each department.The sales person who sold the copier to the attorneys expects it will generate 1,000,000 copies.The manager of each department has estimated the number of copies that his or her department will make over the life of the copier: $\begin{array}{ll}
\text { Department } & \text { Copies } \
\hline \text { Purchasing } & 150,000 \
\text { Accounting } & 450,000 \
\text { Information Technology } & 200,000
\end{array}$ If the purchasing department makes 23,000 copies this quarter, how much copying cost will Barnes & Cohen allocate to purchasing?

Accepted Answer

A) $405 
B) $2,699 
C) $506 
D) None of these answer choices are correct.

Question 6

Fox Hunting Gear manufactures two products: camouflage jackets and camouflage hats.The company makes 50,000 jackets and 20,000 hats each year.Information for overhead costs and for the two products appears below. \(\begin{array}{|l|c|c|c|c|}
\hline{\text { Activity }} & \text { Driver } & \begin{array}{c}
\text { Estimated } \
\text { Total } \
\text { Overhead } \
\text { Cost }
\end{array} & \text { Jackets } & \text { Hats } \
\hline \text { Setups } & \text { \# of setups } & \$ 200,000 & 500 \text { setups } & 1,500 \text { setups } \\hline \begin{array}{l}
\text { Ordering } \
\text { parts }
\end{array} & \text { \# of parts } & 300,000 & 60,000 \text { parts } & 40,000 \text { parts } \
\hline \text { Machining } & \begin{array}{c}
\text { \# of machine } \
\text { hours }
\end{array} & 600,000 & \begin{array}{c}
12,000 \text { machine } \
\text { hrs. }
\end{array} & \begin{array}{c}
6,000 \text { machine } \
\text { hrs. }
\end{array} \\hline \text { Inspections } & \text { \# of inspections } & 400,000 & 10,000 \text { inspections } & 40,000 \text { inspections } \
\hline \text { Shipping } & \text { \# of shipments } & 300,000 & 10,000 \text { shipments } & 10,000 \text { shipments } \\hline \begin{array}{l}
\text { Total } \
\text { overhead }
\end{array} &&{\underline{\$ 1,800,000}} \
\hline
\end{array}\) Assume that all overhead is assigned to products using machine hours.How much overhead will be assigned to each jacket?

Accepted Answer

A) $100,000 per jacket 
B) $24 per jacket 
C) $150 per jacket 
D) $17.20 per jacket

Question 7

An allocation of a predetermined amount that is not affected by changes in the activity level of the organizational unit receiving the allocation is called a(n)

Accepted Answer

A) allocation base. 
B) unitized cost. 
C) lump-sum allocation. 
D) cost driver.

Question 8

Unique Finds sells fine collectible statues and has implemented activity-based costing.Costs in the shipping department have been divided into three cost pools.The first cost pool contains costs that are related to packaging and shipping.Unique has determined that the number of boxes shipped is an appropriate cost driver for these costs.The second cost pool is made up of costs related to the final inspection of each item before it is shipped and the cost driver for this pool is the number of individual items that are inspected.The final cost pool is used for general operations of the department and the cost driver is the number of orders.Information about the activities is summarized below: $$\begin{array} { | l | c | c | c | } 
\hline { \text { Cost Pool } } & \begin{array} { c } 
\text { Estimated } \
\text { Total } \
\text { Costs }
\end{array} & \text { Cost Driver } & \begin{array} { c } 
\text { Estimated } \
\text { Annual } \
\text { Activity }
\end{array} \
\hline \begin{array} { l } 
\text { Packaging and } \
\text { shipping }
\end{array} & \$ 67,200 & \text { Number of boxes shipped } & 16,000 \text { boxes } \
\hline \text { Final inspection } & 200,000 & \begin{array} { c } 
\text { Number of individual items } \
\text { inspected }
\end{array} & 100,000 \text { items } \
\hline \text { General operations } & 85,000 & \text { Number of orders } & 10,000 \text { orders } \
\hline
\end{array}$$ During June, 2,100 boxes were packed and shipped.How much is the packaging and shipping cost for each box shipped?

Accepted Answer

A) $0.24 
B) $7.62 
C) $4.20 
D) $32.00

Question 9

Random House uses activity-based costing.The company produces soft and hardcover books.The estimated costs and expected activity for each of the overhead activity pools follow: $\begin{array}{lllrr}\text { Activity } & \text { Estimated } & \text { Expected }&\text { Activity } \
\text { Cost Pool } & \text { Cost } & \text { Hard-Cover }&\text { Soft-Cover }&\text { Total } \\hline
\text { Activity } 1 & \$ 15,000 & 800 & 700 & 1,500 \
\text { Activity } 2 & \$ 14,900 & 500 & 1,500 & 2,000 \
\text { Activity } 3 & \$ 27,600 & 800 & 400 & 1,200
\end{array}$ How much are total overhead costs to be charged to hardcover books?

Accepted Answer

A) $30,125 
B) $8,000 
C) $84,945 
D) $25,691

Question 10

From the perspective of a manager of a producing department, which of the following is a desired feature of a cost allocation received from a service department?

Accepted Answer

A) The amount of the allocation should be based solely on the usage of the service by the producing department and not a function of the usage of the service by other departments. 
B) The budgeted cost should be allocated rather than actual service department costs. 
C) The allocation should force the production manager to pay for fluctuating demands that the production manager is creating. 
D) All of these answer choices are correct.

Question 11

Which of the following allocations would not occur when the direct method is used in a manufacturing company?

Accepted Answer

A) Personnel department costs are allocated to the maintenance department. 
B) Maintenance department costs are allocated to the mixing department. 
C) Security department costs are allocated to the packaging department. 
D) Payroll department costs are allocated to the assembly department.

Question 12

Rather Bedding makes two types of pillow-down and foam.It is currently implementing an activity-based costing system.In the past, all overhead had been applied on the basis of machine hours.The company produces 6,000 down pillows and 18,000 foam pillows per year. \(\begin{array}{|l|c|c|c|c|}
\hline{\text { Cost Pool }} & \begin{array}{c}
\text { Driver and } \
\text { Level }
\end{array} & \begin{array}{c}
\text { Estim ated } \
\text { Costs }
\end{array} & \begin{array}{c}
\text { Use of Driver by } \
\text { Down Pillows }
\end{array} & \begin{array}{c}
\text { Use of Driver by } \
\text { Foam Pillows }
\end{array} \
\hline \text { Equipment setup } & 360 \text { setups } & \$ 216,000 & 120 \text { setups } & 240 \text { setups } \
\hline \begin{array}{l}
\text { Materials } \
\text { ordering }
\end{array} & 6,000 \text { orders } & \$ 60,000 & 2,400 \text { orders } & 3,600 \text { orders } \
\hline \text { Quality control } & \begin{array}{c}
2,000 \
\text { inspections }
\end{array} & \$ 36,000 & 800 \text { inspections } & 1,200 \text { inspections } \
\hline \text { Machining } & \begin{array}{c}
8,000 \
\text { machine } \
\text { hours }
\end{array} & \$ 86,800 & \begin{array}{c}
4,200 \text { machine } \
\text { hours }
\end{array} & \begin{array}{c}
3,800 \text { machine } \
\text { hours }
\end{array} \
\hline
\end{array}\) Using ABC, what is the cost per setup to be assigned to down pillows?

Accepted Answer

A) $600 per setup 
B) $0.10 per setup 
C) $3.02 per setup 
D) None of these answer choices are correct.

Question 13

Activity-based costing uses benchmarking to compare the cost of an activity in one organization to the cost for a similar activity in another organization.

Accepted Answer

A) True 
 B)False

Question 14

Retirement Planning is a consulting firm with clients across the nation.Within the company is a travel group that arranges flights and hotel accommodations for its 250 consultants.The overhead cost of operating the travel group amounts to approximately $204,000 annually.Recently the company conducted an ABM study that has determined the following:
-Each consultant completed approximately 15 business trips per year.
-On average, 17 trips are scheduled, with 2 trips cancelled and rescheduled.
-Benchmarking with a Retirement Planning's client indicates that the client incurs a cost of $60 per scheduled trip to book travel.
How much overhead cost should be allocated to each completed trip?

Accepted Answer

A) $54.40 
B) $48.00 
C) $60.00 
D) None of these answer choices are correct.

Question 15

Dragon Fire Hot Sauce makes two types of hot sauces-meek and mild.Budgeted information for the two flavors appears below: $\begin{array}{lrr}&\text { Meek }&\text { Mild }\
\text { Sales } & \$ 600,000 & \$ 400,000 \
\text { Direct materials } & \$ 100,000 & \$ 120,000 \
\text { Direct labor cost } & \$ 108,000 & \$ 180,000 \
\text { Labor hourly cost } & \$ 12,00 & \$ 12,00
\end{array}$ The company estimates it will incur $345,600 in overhead costs for the period.Dragon Fire allocates overhead cost to products based on the labor hours worked on each product.How much is the total overhead applied to Meek?

Accepted Answer

A) $130,500 
B) $129,600 
C) $1,566 
D) $348,000

Question 16

Vystar Credit Union has six service departments (human resources, duplicating, janitorial, accounting, graphic design, and food services) whose fixed costs are allocated to the company's two subsidiaries (Vystar Personal Banking and Vystar Business Banking) on the basis of their relative revenue.What type of costs will the president of Vystar Business Banking subsidiary perceive the allocated service department costs to be?

Accepted Answer

A) Fixed costs 
B) Opportunity costs 
C) Direct costs 
D) Variable costs

Question 17

ZanaTech has an on-site cafeteria in which it provides free meals for employees.The company allocates the cost of the cafeteria to production departments using the direct method based on the number of employees in each department.The four production departments in the company have the following number of employees: molding, 15; polishing, 20; engraving, 10; and packaging, 15.There are 20 employees in the cafeteria.The cafeteria's costs are budgeted at $144,000 for the year.The actual cafeteria costs totaled $147,000 for the year.What is the total amount of the cafeteria's costs that will be allocated to the production departments?

Accepted Answer

A) $108,000 
B) $144,000 
C) $147,000 
D) None of these answer choices are correct.

Question 18

VelCraft allocates costs from its payroll department and the maintenance department to its production departments using the direct method of allocation.Payroll department costs are allocated based on the number of employees in the department and maintenance department costs are allocated based on the number of square feet that the production department occupies within the factory.Information about the departments is presented below: $\begin{array}{lrrr}&&\text { Number of } & \text { Number of Square } \
\text { Department } & \text { Costs } &\text { Emplovees }&\text { feet Occupied }\
\text { Payroll } & \$ 150,000 & 2 & 2,000 \
\text { Maintenance } & \$ 220,000 & 8 & 64,000 \
\text { Molding } & & 75 & 100,000 \
\text { Finishing } & & 50 & 60,000 \
\text { Packaging } & & 25 & 40,000
\end{array}$ What amount of the payroll department costs will be allocated to the molding department?

Accepted Answer

A) $70,313 
B) $185,000 
C) $75,000 
D) $132,353

Question 19

If managers are not charged for centrally administered services, what may managers likely do?

Accepted Answer

A) Seek outside suppliers 
B) Limit their frivolous use of these services 
C) Consider the services as free 
D) Evaluate and consider lower-cost alternatives for the services

Question 20

Ransall Auto Parts has two service departments-maintenance and personnel, and three production departments-fabrication, assembly, and packaging.Service costs are allocated to producing departments using the direct method.Information on overhead in each department and possible allocation bases appear below: $\begin{array}{lrrrrr}&\text { Maintenance}&\text { Personnel }&\text {fabrication }&\text {Assembly }&\text {Packaging }\
\text { Cost } & \$ 90,000 & \$ 130,000 & & & \
\text { Machine hours } & & & 12,000 & 30,000 & 18,000 \
\text { Employees } & 4 & 16 & 24 & 30 & 26
\end{array}$ Using the most logical activity base, how much maintenance cost will be allocated to the personnel department?

Accepted Answer

A) $26,000 
B) $39,000 
C) $18,000 
D) $0

Exam 6: Cost Allocation and Activity-Based Costing