Deck 7: Cost Allocation: Theory

Question 1

Pluton makes particular plastics for sale to the public and the government.Basic cost data for a 100-pound drum of one particular product called Xentra appears below: Variable factory overhead is estimated to be $1,200,000 per month,when 1,000,000 pounds of various products are produced.The plant employs 20 chemical workers who typically work 175 hours each per month and are paid $24 per hour.Other workers are classified as indirect and are included in fixed overhead.The highly automated plant typically runs 21,000 machine hours per month.The preparation of one 100-pound batch of Xentra needs ten minutes of direct labor and 75 minutes of machine time.Fixed manufacturing overhead totals $3,500,000 per month.Forty percent of the fixed manufacturing overhead is labor-related costs and the balance is machine-related costs.
Assuming normal production levels,what is the full cost per drum?

A)$1,725.00
B)$1,700.73
C)$1,625.00
D)$1,609.00
E)None of the choices are correct

Answer 1

A

Question 2

You are going to dinner with three friends,one who likes steak,another who is a wine connoisseur,and the third who is a vegetarian (which is assumed to be the least expensive).Which is true?

A)How the bill is shared has no effect on what and how much people choose to eat
B)Equal sharing of the bill ensures that people order a similar dollar amount of food
C)The wine-drinker will argue for equal shares,and will drink as fast (and/or as much)as possible
D)The vegetarian will be better off with equal shares
E)None of the choices are correct

Answer 2

C

Question 3

King Khan Corporation (KKC)manufactures kongs and kangs,the production of which requires considerable energy.Power generation department costs amounted to $4 million this month,for a total of 50 million kilowatt hours (kwh)supplied to the plant.Analysis shows that 40% of power generation costs are fixed.This month the Kong Dept.made 5 million kongs,each using 4 kwh,and the Kang Dept.made 4 million kangs,each using 6 kwh. In the following month,the power generation department costs amounted to $4.3 million for 51 million kwh.Kong Dept.'s usage was the same,but the Kang Dept.increased output to 4.1 million kangs,each using the standard power allowance.If KKC employs an insulating cost allocation mechanism,and fixed costs are shared equally,which is true?

A)Kang will be charged $2.37 million
B)Kong will be charged $1.93 million
C)Kang will be charged $2.48 million
D)Kang will be charged $2.29 million
E)None of the choices are correct

Answer 3

D

Question 4

Pluton makes particular plastics for sale to the public and the government.Basic cost data for a 100-pound drum of one particular product called Xentra appears below: Variable factory overhead is estimated to be $1,200,000 per month,when 1,000,000 pounds of various products are produced.The plant employs 20 chemical workers who typically work 175 hours each per month and are paid $24 per hour.Other workers are classified as indirect and are included in fixed overhead.The highly automated plant typically runs 21,000 machine hours per month.The preparation of one 100-pound batch of Xentra needs ten minutes of direct labor and 75 minutes of machine time.Fixed manufacturing overhead totals $3,500,000 per month.Forty percent of the fixed manufacturing overhead is labor-related costs and the balance is machine-related costs.
Assuming Pluton selects the cost allocation method as per pound,how much will profits increase on this order compared with allocating overhead per drum (the current system)?

A)No change
B)Change by $31,666
C)Change by $17,571
D)Change by $6,381
E)None of the choices are correct

Question 5

Pluton makes particular plastics for sale to the public and the government.Basic cost data for a 100-pound drum of one particular product called Xentra appears below: Variable factory overhead is estimated to be $1,200,000 per month,when 1,000,000 pounds of various products are produced.The plant employs 20 chemical workers who typically work 175 hours each per month and are paid $24 per hour.Other workers are classified as indirect and are included in fixed overhead.The highly automated plant typically runs 21,000 machine hours per month.The preparation of one 100-pound batch of Xentra needs ten minutes of direct labor and 75 minutes of machine time.Fixed manufacturing overhead totals $3,500,000 per month.Forty percent of the fixed manufacturing overhead is labor-related costs and the balance is machine-related costs.
A government agency wants to purchase 200 drums of Xentra at cost plus a flat fee.Which allocation method gives the profit-maximizing result?

A)Allocating overhead per 100-pound drum
B)Allocating overhead per machine hour
C)Allocating overhead per direct labor hour
D)Allocating overhead per pound
E)None of the choices are correct

Question 6

10. King Khan Corporation (KKC)manufactures kongs and kangs,the production of which requires considerable energy.Power generation department costs amounted to $4 million this month,for a total of 50 million kilowatt hours (kwh)supplied to the plant.Analysis shows that 40% of power generation costs are fixed.This month the Kong Dept.made 5 million kongs,each using 4 kwh,and the Kang Dept.made 4 million kangs,each using 6 kwh. If KKC uses the simplest algorithm to allocate power costs,which is true?

A)Kong will be charged $1.6 million
B)Kang will be charged $2.18 million
C)Kang's charge does not depend on Kong's usage
D)The simplest algorithm to allocate power costs will be insulating
E)All are true

Question 7

Carla Book is a tax attorney specializing in representing clients during an IRS audit.Carla's clients can pay either an hourly fee or a flat fee.The hourly fee is based on profit for Carla (her desired hourly pay)plus a portion of overhead.The flat fee is a one-time charge regardless of the hours of work required of Carla.Some clients choose the hourly rate because they don't want to run the risk of overpaying,while other clients select the flat fee which is a one-time charge to complete the service and locks in the cost of hiring a tax attorney.Carla has two different flat-fee rates: IRS audit (simple)$3,500 and IRS audit (complex)$6,000.Carla expects to work 2,200 hours during the coming year of which 1,400 will be billable to clients at the hourly rate.The remainder of her working hours will be devoted to clients who selected the flat fee.Carla wants her billing rate to reflect $70 per hour worked plus a fee to recover the expected overhead spread over 2,200 hours.Carla expects to have $220,000 in overhead during the year.Carla completed 40 simple audits and 22 complex audits for clients who paid the flat fee.She worked and billed clients for 1,300 hours.Her actual overhead was $200,000. What did Carla earn during the year after expenses (if necessary,round all amounts to the nearest dollar)?

A)$174,000
B)$293,000
C)$273,000
D)$347,100
E)$292,800

Question 8

Pluton makes particular plastics for sale to the public and the government.Basic cost data for a 100-pound drum of one particular product called Xentra appears below: Variable factory overhead is estimated to be $1,200,000 per month,when 1,000,000 pounds of various products are produced.The plant employs 20 chemical workers who typically work 175 hours each per month and are paid $24 per hour.Other workers are classified as indirect and are included in fixed overhead.The highly automated plant typically runs 21,000 machine hours per month.The preparation of one 100-pound batch of Xentra needs ten minutes of direct labor and 75 minutes of machine time.Fixed manufacturing overhead totals $3,500,000 per month.Forty percent of the fixed manufacturing overhead is labor-related costs and the balance is machine-related costs.
Assuming normal production levels,what is the amount of direct labor and overhead per drum?

A)$191.67
B)$287.40
C)$311.67
D)$315.67
E)None of the choices are correct

Question 9

Which of the following is not true about cost allocation?

A)Insulating allocations cause one manager's performance to be distorted by another manager's performance.
B)When a noninsulating allocation base is used to allocate common costs,the allocation base will not fluctuate with other subunits' performance.
C)Noninsulating cost allocations can reduce the risk managers bear.
D)Whenever interaction is unimportant,common costs should be allocated using a base that does not insulate subunits.
E)If the marginal cost of a common resource is less than the resource's reported average cost,common costs should be allocated using a noninsulating allocation base.

Question 10

Pluton makes particular plastics for sale to the public and the government.Basic cost data for a 100-pound drum of one particular product called Xentra appears below: Variable factory overhead is estimated to be $1,200,000 per month,when 1,000,000 pounds of various products are produced.The plant employs 20 chemical workers who typically work 175 hours each per month and are paid $24 per hour.Other workers are classified as indirect and are included in fixed overhead.The highly automated plant typically runs 21,000 machine hours per month.The preparation of one 100-pound batch of Xentra needs ten minutes of direct labor and 75 minutes of machine time.Fixed manufacturing overhead totals $3,500,000 per month.Forty percent of the fixed manufacturing overhead is labor-related costs and the balance is machine-related costs.
Assuming normal production levels,what is the direct materials and direct labor cost per drum?

A)$1,433.33
B)$1,413.33
C)$1,313.33
D)$1,293.33
E)None of the choices are correct

Question 11

Which of the following is true about cost allocation?

A)Cost allocation is a form of transfer pricing for indirect costs
B)Cost allocation is an internal tax on services
C)Cost allocation distorts choices that managers would make otherwise
D)Cost allocation should be imposed when marginal cost exceeds average cost of an internal resource
E)All of the choices are correct

Question 12

Which is not a reason for allocating internal costs to cost objects?

A)Managers should be charged for benefits received by departments (or products)under their control
B)External financial reporting rules require allocation of factory overhead
C)To determine the selling price of products
D)To determine the amount to be reimbursed under a cost-reimbursement contract
E)All of the above are reasons for allocating internal costs to cost objects

Question 13

A sound allocation system should:

A)be cheap and easy to administer
B)provide incentives for cost control
C)charge in proportion to amount used or benefit received
D)be perceived as equitable by those who are charged
E)All of the choices are correct