Deck 16: Support Activity and Dual Rate Allocations

Question 1

A support activity:

A) Is needed to run the business.
B) Is directly related to making or selling a product or service.
C) Must have all its costs allocated to a line activity.
D) Must have all its costs allocated to a line activity or another support activity.
E) None of the above is a correct statement relating to a support activity.

Answer 1

A

Question 2

The direct and step-down methods of allocating support activity costs differ from the reciprocal method in that the reciprocal method uses a dual-rate allocation.

Answer 2

False

Question 3

One answer to the problem of using a single cost driver to allocate support activity costs is to use a dual-rate allocation.

Answer 3

True

Question 4

Which of the following is not a method used to allocate support activity costs?

A) Direct method.
B) Reciprocal method.
C) Step-down method.
D) Self-consumption method.
E) All of the above are methods used to allocate support activity costs.

Question 5

In decentralized firms, it is likely that different managers oversee the activities connected with the different cost pools.

Question 6

All three methods of allocating support activity costs (direct, step-down, reciprocal) employ a single cost driver to allocate costs.

Question 7

In a consulting company specializing in designing multi-story office complexes, which of the following activities would not be classified as support activity?

A) Shipping.
B) Purchasing.
C) Structural engineering.
D) Human resources.
E) All of the above would be support departments.

Question 8

Electrical engineering is an example of a line activity that is fully traceable to contracts undertaken at a Design Specialist Consulting Firm designing a multi-story office complex.

Question 9

The salary expense of which of the following positions would not be considered a support activity cost? a. Payroll clerk
B) Project manager
C) Receptionist
D) Human resource director

Question 10

The step-down method of allocating support activity costs begins by rank-ordering support activity cost pools according to some criterion.

Question 11

A line activity:

A) Generally has its costs allocated to support activities.
B) Directly relates to producing services or products.
C) Must be allocated costs from all support activities, whether or not the line activity consumed costs of the support activity.
D) Must be allocated costs from all support activities for which it consumed costs.
E) None of the above is a correct statement relating to a line activity.

Question 12

It may be more appropriate for firms to employ long-term expected demand to allocate fixed capacity costs, and actual demand to allocate short-term variable costs.

Question 13

A key step in performing a step-down allocation is to rank the line cost pools according to an absolute criterion.

Question 14

Cost allocation rates serve as the explicit "price" for the services line managers obtain from other line activities.

Question 15

A line activity relates indirectly to producing services or products.

Question 16

The step-down method of allocating support activity costs is also referred to as the rank-ordering method.

Question 17

The reciprocal method of allocating support activity costs is conceptually the most appealing method because it takes into account all of the reciprocity in consumption.

Question 18

The cost driver used to allocate costs of support activities should bear an economic relation to the revenue generated.

Question 19

Under the direct method of allocating support activity costs, any consumption by other support departments are allocated to both support and line activities.

Question 20

The purchasing department is an example of a support activity for a manufacturing company.

Question 21

The costs of the Purchasing department ($140,625) are allocated based on the number of purchase orders. In December, 2,400 purchase orders are issued in support of the following departments: Using the direct method, what will be the cost per purchase order? a. $58.59
B) $62.50
C) $51.06
D) $52.17

Question 22

When using the step-down method what is an appropriate method to rank the cost pools? a. From the cost pool with the lowest budgeted costs to the cost pool with the highest budgeted costs
B) From management's intuitive determination which can be based on a variety of factors
C) From the cost pool with the fewest employees to the cost pool with the most employees
D) All of these are acceptable methods as long as they are applied consistently

Question 23

Assume Potter's Manufacturing has a Janitorial Department that supports the Maintenance Department and two line activity departments, Department A and Department
B) Janitorial and Maintenance are allocated to other departments on the basis of square footage of space used. The amount of space used by each department is listed below:

The expected cost for the Janitorial Department is expected to be $9,000. Using the step-down method, what is the amount of janitorial costs will be allocated to Maintenance?

A) $0
B) $540
C) $562.50
D) $5,400
E) None of the above.

Question 24

It has been determined that Administrative costs of $6,300 have been consumed on a percentage basis by the following departments: Using the direct method, how much of the administrative costs will be allocated to the Engineering department (rounded)? a. $5,040
B) $1,890
C) $2,363
D) $3,938

Question 25

For the month of October, the Accounting and IT departments incurred costs of $180,000 and $260,000, respectively. The company uses the step-down method to allocate support costs with the accounting costs being allocated first followed by the IT costs. Costs are being consumed in the following manner: Using the step-down method, how much of the total support activity costs (Accounting and IT) will be allocated to the Fabrication department? a. $119,000
B) $104,200
C) $97,000
D) $99,900

Question 26

The Peterson Company maintains a gym for its employees use. In August, the cost of operations was budgeted at $12 per employee based on an average of 400 employees. During the month 380 employees worked in departments outside of the gym and actual costs totaled $6,000. How much of the cost of the gym should be allocated to other departments at the end of the month? a. $6,316
B) $6,000
C) $4,800
D) $4,560

Question 27

The XYZ Manufacturing Company has two support activity pools, Accounting (A) and Human Resources (H). Costs for each totaled $420,000 and $270,000 respectively. 20% of the Human Resource costs are consumed by the Accounting department and 10% of the Accounting department costs are consumed by the human resource department. If the company is using the reciprocal method of allocating support costs, the total costs for the Accounting department can be stated as: a. $420,000 + .10 x ($270,000 + .20 x H)
B) $420,000 + .20 x ($270,000 +.10 x A)
C) $420,000 + .10 x ($420,000 + .10 x A)
D) $420,000 x .20 x ($270,000 + .10 x A)

Question 28

When a support department's activities are not fully consumed by other departments (that is, the support department self-consumes some costs):

A) We ignore such self-consumption.
B) Not allocating the self-consumption negatively affects the accuracy of allocations.
C) We must allocate the self-consumption costs to line activities.
D) A and B only.
E) None of the above.

Question 29

In a home construction company, support costs accumulated by the IT department can be allocated to all except which of the following departments when using the direct method? a. Design
B) Electrical
C) Masonry
D) Purchasing

Question 30

The Wilson Manufacturing Company uses the step-down method for allocating support costs and the company has three support departments, Maintenance, Human Resources, and Cafeteria. Assuming that the company allocates costs in that same order, the costs allocated from the cafeteria to line departments and final projects will include: a. Maintenance, cafeteria and human resource costs
B) Only cafeteria costs
C) Only cafeteria and human resource costs
D) Only human resource and maintenance costs

Question 31

The step-down method of allocation improves the direct method by: a. Considering the reciprocity in consumption partially.
B) Simplifying the allocation approach.
C) Allocating more of the total cost of the service activity.
D) Using a statistical approach to allocation.
E) None of the above.

Question 32

Westminster Manufacturing Company has two support activities and two line activities. The following data pertain to usage patterns for the support and line activities: The costs of Maintenance are allocated based on square footage used. Human Resources costs are allocated based on number of employees. Activity A and B costs are overhead costs with predetermined overhead rates computed based on direct labor hours. If the company uses the direct method of allocating support activities to line activities, what fraction of Maintenance will be allocated to Activity A?

A) 1/4
B) 1/4.7
C) 1.7/4.7
D) 3/7
E) None of the above.

Question 33

Westminster Manufacturing Company has two support activities and two line activities. The following data pertain to usage patterns for the support and line activities: The costs of Maintenance are allocated based on square footage used. Human Resources costs are allocated based on number of employees. Activity A and B costs are overhead costs with predetermined overhead rates computed based on direct labor hours. If the company uses the direct method of allocating support activities to line activities, what is the predetermined overhead rate for Activity B?

A) $50
B) $60
C) $60.50
D) $10
E) None of the above.

Question 34

Assume Porter's Consulting uses the number of purchase orders as the cost driver for allocating purchasing costs of $285,000. If Porter issues 1,000 purchase orders, including 300 used by line activity one, 400 used by line activity two, 50 for supplies used by purchasing itself, and 250 used by administration, how much of the cost will be allocated to line activity two using the direct method of allocation?

A) $199,500
B) $114,000
C) $162,857
D) $195,000
E) None of the above.

Question 35

The XYZ Manufacturing Company has two support activity pools, Accounting and Human Resources. Costs for each are $380,000 and $190,000 respectively. 10% of the Human Resource costs are consumed by Accounting and 15% of the Accounting costs are consumed by Human Resources. The company uses the reciprocal method of allocating support costs. The total costs for the Human Resources department which will be allocated to line activities and cost objects will be: a. $250,761
B) $252,208
C) $247,000
D) $249,850

Question 36

The reciprocal method of allocating support costs is considered superior to other methods because: a. It is the easiest method to implement
B) It spreads support costs among cost pools based on the current number of employees
C) It takes into account all of the reciprocity in consumption between various departments
D) It ignores administrative costs because they are assumed to be shared equally by all departments

Question 37

The XYZ Manufacturing Company has two support activity pools, Accounting and Human Resources. Costs for each totaled $380,000 and $190,000 respectively. 10% of the Human Resource costs are consumed by the Accounting department and 15% of the Accounting costs are consumed by the human resource department. The company uses the reciprocal method of allocating support costs. The total costs for the Accounting department which will be allocated to line activities and cost objects will be: a. $399,000
B) $405,076
C) $414,721
D) $231,472

Question 38

When using the direct method why would companies choose to perform the allocation with predetermined rates? a. To better communicate the often-forgotten cost of support services to department managers
B) To make the budgeting process easier for managers
C) To influence a department manager's hiring policies
D) To persuade company executives to cut costs

Question 39

The costs of the Purchasing department are allocated based on the number of purchase orders. In December, 1,350 purchase orders are issued for the following departments: What is the consumption percentage for the Accounting department? a. 20%
B) 25.9%
C) 18.5%
D) 71.4%

Question 40

Westminster Manufacturing Company has two support activities and two line activities. The following data pertain to usage patterns for the support and line activities: The costs of Maintenance are allocated based on square footage used. Human Resources costs are allocated based on number of employees. Activity A and B costs are overhead costs with predetermined overhead rates computed based on direct labor hours. If the company uses the step-down method of allocating support activities to line activities and allocates the cost of Maintenance first, what fraction of Human Resources costs will be allocated to Activity B?

A) 5/6
B) 1/4
C) 3/5
D) 1/3
E) None of the above.

Question 41

Westminster Manufacturing Company has two support activities and two line activities. The following data pertain to usage patterns for the support and line activities: The costs of Maintenance are allocated based on square footage used. Human Resources costs are allocated based on number of employees. Activity A and B costs are overhead costs with predetermined overhead rates computed based on direct labor hours. If the company uses the step-down method of allocating support activities to line activities and allocates the cost of Maintenance first, what amount of Human Resources costs will be allocated to Activity A?

A) $8,000
B) $9,454
C) $20,000
D) $4,545
E) None of the above.

Question 42

Westminster Manufacturing Company has two support activities and two line activities. The following data pertain to usage patterns for the support and line activities: The costs of Maintenance are allocated based on square footage used. Human Resources costs are allocated based on number of employees. Activity A and B costs are overhead costs with predetermined overhead rates computed based on direct labor hours. If the company uses the step-down method of allocating support activities to line activities and allocates the cost of Maintenance first, what amount of total support activity costs will be allocated to Line Activities?

A) $60,000
B) $20,000
C) $40,000
D) $48,000
E) None of the above.