Chapter 15   

Allocation of Support-Department Costs, Common Costs, and Revenues

1)

The dual cost-allocation method classifies costs into two pools, a budgeted cost pool and an actual cost pool.
2)

The single-rate method makes a distinction between fixed and variable costs.
3)

Using the single-rate method transforms the fixed costs per hour into a variable cost to users of that facility..
4)

The single-rate cost-allocation method provides better information for decision making than the dual-rate method.
5)

An advantage of the single-rate method is that it is easier and always the most accurate cost-allocation choice.
6)

When budgeted cost-allocation rates are used, user-division managers face uncertainty about the allocation rates for that budget period.
7)

When budgeted cost-allocation rates are used, managers of the supplier division are motivated to improve efficiency..
8)

When budgeted cost-allocation rates are used, variations in actual usage by one division affect the costs allocated to other divisions.
9)

The only choices that a firm has for support department cost allocation rates are to use either a budgeted rate or an actual rate.
10)

The most common method to allocate support department costs is to employ actual rates based on the costs realized during the period.
11)

The direct allocation method highlights recognition of services rendered by support departments to other support departments.
12)

The direct method allocates each support department's costs to operating departments only..
13)

The reciprocal allocation method incorporates mutual services provided among all support departments..
14)

Budgeted amounts for a support department will always exceed complete reciprocated costs for that department.
15)

The direct allocation method provides key information for outsourcing decisions regarding support services.
16)

The incremental method of allocating common costs often creates the incentive to be the first-ranked user.
17)

The direct method allocates each support department's costs to operating departments and to support departments.
18)

The step-down method allocates support department costs to other support departments and to operating departments in a sequential manner..
19)

The reciprocal method of support department cost allocation is the most precise method and therefore is used most often.
20)

The stand-alone method of allocating common costs emphasizes fairness and equity among users..
21)

Under the incremental method, the first incremental user usually receives the highest allocation of the common costs.
22)

A common cost is a cost of operating a facility or activity that is shared by two or more users..
23)

Allocating common costs is clear-cut and can best be achieved by using the stand-alone cost-allocation method.
24)

The stand-alone cost allocation method ranks the individual users of a cost object in order of users most responsible for a common cost and then uses these rankings to allocate the costs among the users..
25)

The Shapley value method of allocating common costs considers each party as first the primary party and then the incremental party and computes an average allocation..
26)

All contracts with U.S. government agencies must comply with the cost accounting standards issued by the Cost Accounting Standards Board..
27)

Without explicit written cost-plus contracts, producer costs can be passed on to the buyer..
28)

If the government wants to contract a very large scale project with significant uncertainty about what the final cost will be; often a cost-plus contract is awarded to attract qualified contractors who may otherwise not be willing to accept the risks inherent in a guaranteed bid price..
29)

The issue of "allowable costs" is not applicable in government cost-plus contracts.
30)

An example of a bundled product is when a resort hotel charges a single price for lodging, food, and recreational activities..
31)

Revenue allocation is required to determine the profitability of individual items within a bundled product..
32)

The stand-alone method may use selling price or unit costs to allocate revenues..
33)

Under the incremental revenue-allocation method, there is an incentive to be the first-ranked user..
34)

It is most appropriate to base revenue allocation on the number of physical units when individual products in the bundle are of unequal value.
35)

When allocating the revenues between a bundled product offering, there are only two methods which can be used: 1) the stand-alone revenue-method and 2) the incremental revenue-allocation method.
36)

The method that allocates costs in each cost pool using the same rate per unit is known as the:
C)

single-rate cost allocation method
37)

The dual-rate cost-allocation method classifies costs in each cost pool into a:
B)

variable-cost pool and a fixed-cost pool
38)

The single-rate cost-allocation method may base the denominator choice on:
A)

master-budget capacity utilization
B)

normal capacity utilization
C)

practical capacity
39)

When using the single-rate method, fixed cost allocation may be based on:
A)

actual usage
B)

budgeted usage
40)

Benefits of the single-rate method include:
A)

the low cost of implementation
41)

Benefits of the dual-rate method include:
D)

information that leads to outsourcing decisions that benefit the organization as a whole
42)

The advantage of using practical capacity to allocate costs:
B)

is that it focuses management's attention on managing unused capacity
Answer the following questions using the information below:

The Bonawitz Corporation has a central copying facility. The copying facility has only two users, the Marketing Department and the Operations Department. The following data apply to the coming budget year:

Budgeted costs of operating the copying facility
for 200,000 to 300,000 copies:
Fixed costs per year $30,000
Variable costs 3 cents (.03) per copy
Budgeted long-run usage in copies per year:
Marketing Department 60,000 copies
Operations Department 190,000 copies

Budgeted amounts are used to calculate the allocation rates.

Actual usage for the year by the Marketing Department was 40,000 copies and by the Operations Department was 180,000 copies.

43)

If a single-rate cost-allocation method is used, what amount of copying facility costs will be budgeted for the Marketing Department?
A)

$9,000
44)

If a single-rate cost-allocation method is used, what amount of copying facility costs will be allocated to the Marketing Department? Assume actual usage is used to allocate copying costs.
C)

$6,000
45)

If a dual-rate cost-allocation method is used, what amount of copying facility costs will be budgeted for the Operations Department?
A)

$28,500
46)

If a dual-rate cost-allocation method is used, what amount of copying facility costs will be allocated to the Operations Department? Assume budgeted usage is used to allocate fixed copying costs and actual usage is used to allocate variable copying costs.
D)

$28,200
Answer the following questions using the information below:

The Fancy Flier Airplane Corporation has a central materials laboratory. The laboratory has only two users, the Large Plane Department and the Small Plane Department. The following data apply to the coming budget year:

Budgeted costs of operating the materials laboratory
for 10,000 to 20,000 technician hours per year:
Fixed costs per year $600,000
Variable costs $80 per technician hour
Budgeted long-run usage in hours per year:
Large Plane Department 9,000 technician hours
Small Plane Department 7,000 technician hours

Budgeted amounts are used to calculate the allocation rates.

Actual usage for the year by the Large Plane Department was 6,000 technician hours and by the Small Plane Department was 6,500 technician hours.

47)

If a single-rate cost-allocation method is used, what is the allocation rate per hour used?
B)

$117.50
48)

If a dual-rate cost-allocation method is used, what amount of materials laboratory costs will be budgeted for the Large Plane Department?
A)

$1,057,500
49)

If a single-rate cost-allocation method is used, what amount of materials laboratory costs will be allocated to the Large Plane Department? Assume actual usage is used to allocate copying costs.
D)

$705,000
50)

If a dual-rate cost-allocation method is used, what amount of materials laboratory costs will be allocated to the Large Plane Department? Assume budgeted usage is used to allocate fixed materials laboratory costs and actual usage is used to allocate variable materials laboratory costs.
B)

$817,500
51)

If a dual-rate cost-allocation method is used, what amount of materials laboratory costs will be budgeted for the Small Plane Department?
D)

$822,500
52)

If a dual-rate cost-allocation method is used, what amount of materials laboratory costs will be allocated to the Small Plane Department? Assume budgeted usage is used to allocate materials laboratory costs and actual usage is used to allocate variable materials laboratory costs.
B)

$782,500
Answer the following questions using the information below:

The Borders Corporation operates one central plant that has two divisions, the Flashlight Division and the Night Light Division. The following data apply to the coming budget year:

Budgeted costs of operating the plant for 2,000 to 3,000 hours:
Fixed operating costs per year $900,000
Variable operating costs $1,200 per hour
Budgeted long-run usage per year:
Flashlight Division 2,000 hours
Night Light Division 500 hours
Practical capacity 3,000 hours

Assume that practical capacity is used to calculate the allocation rates.

Actual usage for the year by the Flashlight Division was 1,400 hours and by the Night Light Division was 600 hours.

53)

If a single-rate cost-allocation method is used, what amount of operating costs will be budgeted for the Flashlight Division?
A)

$3,000,000
54)

If a single-rate cost-allocation method is used, what amount of cost will be allocated to the Flashlight Division? Assume actual usage is used to allocate operating costs.
D)

$2,100,000
55)

If a dual-rate cost-allocation method is used, what amount of operating costs will be budgeted for the Night Light Division?
C)

$750,000
56)

If a dual-rate cost-allocation method is used, what amount of cost will be allocated to the Night Light Division? Assume budgeted usage is used to allocate fixed operating costs and actual usage is used to allocate variable operating costs.
B)

$870,000
57)

When budgeted cost-allocations rates are used:
B)

the manager of the supplier division bears the risk of unfavorable cost variances
58)

When actual cost-allocations rates are used:
C)

user divisions do not know allocated amounts until the end of the accounting period
59)

Under the dual-rate cost-allocation method, when fixed costs are allocated based on actual usage then:
D)

variations in one division's usage affect another division's allocation
60)

The costs of unused capacity are highlighted when:
C)

practical capacity-based allocations are used
61)

To discourage unnecessary use of a support department, management might:
B)

allocate support department costs based upon user department usage
62)

The biggest advantage of using practical capacity to allocate costs is that it:
D)

focuses management's attention on unused capacity
63)

The practical capacity method of allocating costs is:
C)

based on the practical capacity supplied.
64)

Special cost-allocation problems arise when:
C)

support departments provide reciprocal services to other support departments
65)

Which of the following departments is NOT a support department for a boat manufacturing company?
B)

Molding and assembly
66)

The support department allocation method that is the most widely used because of its simplicity is the:
C)

direct allocation method
67)

The method that allocates costs by explicitly including all the services rendered among all support departments is the:
C)

reciprocal method
68)

Under which allocation method are one-way reciprocal support services recognized?
D)

step-down method
69)

The direct allocation method:
D)

results in allocating only the support costs used by operating departments
70)

The step-down allocation method:
A)

typically begins with the support department that provides the highest percentage of its total services to other support departments
71)

The reciprocal allocation method:
C)

is conceptually the most precise
72)

Complete reciprocated costs:
B)

include the support department's costs plus any interdepartmental cost allocations
Answer the following questions using the information below:

Jake's Battery Company has two service departments, Maintenance and Personnel. Maintenance Department costs of $160,000 are allocated on the basis of budgeted maintenance-hours. Personnel Department costs of $40,000 are allocated based on the number of employees. The costs of operating departments A and B are $80,000 and $120,000, respectively. Data on budgeted maintenance-hours and number of employees are as follows:

Support Departments Production Departments
Maintenance Department Personnel Department A B
Budgeted costs $160,000 $40,000 $80,000 $120,000
Budgeted maintenance-hours NA 400 480 320
Number of employees 20 NA 80 240

73)

Using the direct method, what amount of Maintenance Department costs will be allocated to Department B?
B)

$64,000
74)

Using the direct method, what amount of Personnel Department costs will be allocated to Department B?
D)

$30,000
75)

Using the step-down method, what amount of Maintenance Department cost will be allocated to Department B if the service department with the highest percentage of interdepartmental support service is allocated first? (Round up)
B)

$42,667
Answer the following questions using the information below:

Jake's Battery Company has two service departments, Maintenance and Personnel. Maintenance Department costs of $160,000 are allocated on the basis of budgeted maintenance-hours. Personnel Department costs of $40,000 are allocated based on the number of employees. The costs of operating departments A and B are $80,000 and $120,000, respectively. Data on budgeted maintenance-hours and number of employees are as follows:

Support Departments Production Departments
Maintenance Department Personnel Department A B
Budgeted costs $160,000 $40,000 $80,000 $120,000
Budgeted maintenance-hours NA 400 480 320
Number of employees 20 NA 80 240

76)

Using the direct method, what amount of Maintenance Department costs will be allocated to Department A?
D)

$96,000
77)

Using the direct method, what amount of Personnel Department costs will be allocated to Department A?
A)

$10,000
78)

Using the step-down method, what amount of Maintenance Department cost will be allocated to Department A if the service department with the highest percentage of interdepartmental support service is allocated first? (Round up)
D)

$64,000
Answer the following questions using the information below:

Betty's Book and Music Store has two service departments, Warehouse and Data Center. Warehouse Department costs of $175,000 are allocated on the basis of budgeted warehouse-hours. Data Center Department costs of $75,000 are allocated based on the number of computer log-on hours. The costs of operating departments Music and Books are $125,000 and $150,000, respectively. Data on budgeted warehouse-hours and number of computer log-on hours are as follows:

Support Departments Production Departments
Warehouse Department Data Center Department Music Books
Budgeted costs $175,000 $75,000 $125,000 $150,000
Budgeted warehouse-hours NA 250 500 750
Number of computer hours 100 NA 400 500

79)

Using the direct method, what amount of Warehouse Department costs will be allocated to Department Books?
B)

$105,000
80)

Using the direct method, what amount of Data Center Department costs will be allocated to Department Music?
B)

$33,333
81)

Using the step-down method, what amount of Data Center Department cost will be allocated to the Warehouse Department if the service department with the highest percentage of interdepartmental support service is allocated first? (Round up)
D)

$0
82)

Using the step-down method, what amount of Warehouse Department cost will be allocated to Department Music if the service department with the highest percentage of interdepartmental support service is allocated first? (Round up)
A)

$58,333
83)

Using the step-down method, what amount of Data Center Department cost will be allocated to Department Music if the service department with the highest percentage of interdepartmental support service is allocated first? (Round up)
C)

$46,296
Answer the following questions using the information below:

Alfred, owner of Hi-Tech Fiberglass Fabricators, Inc., is interested in using the reciprocal allocation method. The following data from operations were collected for analysis:

Budgeted manufacturing overhead costs:
Plant Maintenance PM (Support Dept) $350,000
Data Processing DP (Support Dept) $ 75,000
Machining M (Operating Dept) $225,000
Capping C (Operating Dept) $125,000

Services furnished:
By Plant Maintenance (budgeted labor-hours):
to Data Processing 3,500
to Machining 5,000
to Capping 8,200
By Data Processing (budgeted computer time):
to Plant Maintenance 600
to Machining 3,500
to Capping 600

84)

Which of the following linear equations represents the complete reciprocated cost of the Data Processing Department?
B)

DP= $75,000 + (3,500/16,700) PM
85)

What is the complete reciprocated cost of the Plant Maintenance Department?
B)

$369,459
86)

What is the complete reciprocated cost of the Data Processing Department?
D)

$152,432
Answer the following questions using the information below:

Joanne, owner of Automated Fabric, Inc., is interested in using the reciprocal allocation method. The following data from operations were collected for analysis:

Budgeted manufacturing overhead costs:
Maintenance M (Support Dept) $150,000
Personnel P (Support Dept) $ 80,000
Weaving W (Weaving Dept) $325,000
Colorizing C (Colorizing Dept) $175,000

Services furnished:
By Maintenance (budgeted labor-hours):
to Personnel 500
to Weaving 3,500
to Colorizing 2,000
By Personnel (Number of employees serviced):
Plant Maintenance 5
Weaving 15
Colorizing 10

87)

Which of the following linear equations represents the complete reciprocated cost of the Personnel Department?
C)

P= $80,000 + (500/6,000) M
88)

What is the complete reciprocated cost of the Maintenance Department?
A)

$165,634
89)

What is the complete reciprocated cost of the Personnel Department?
B)

$93,803
90)

Which of the following departments is not an operating (or value added) department?
B)

Accounting
91)

Which of the following is NOT one of the three methods of allocating support department costs to operating departments?
B)

incremental method
92)

The cost-allocation method that allocates support department costs only to production departments is the:
A)

direct method
93)

A cost of operating a facility, department, activity area, or like cost object that is shared by two or more users is called a:
D)

common cost
94)

Under the stand-alone method of allocating common costs:
C)

each party bears a proportionate share of the total costs in relation to their individual stand-alone costs
95)

Under the incremental method of allocating common costs:
D)

there is a disincentive to be titled the primary user
Answer the following questions using the information below:

The Sturgeon Bay Corporation currently uses a manufacturing facility costing $400,000 per year; 80% of the facility's capacity is currently being used. A start-up business has proposed a plan that would utilize the other 20% of the facility and increase the overall costs of maintaining the space by 5%.

96)

If the stand-alone method were used, what amount of cost would be allocated to the start-up business?
D)

$84,000
97)

If the incremental method were used, what amount of cost would be allocated to the start-up business?
A)

$20,000
Answer the following questions using the information below:

The Egg Harbor Corporation currently leases a corporate suite in an office building for a cost of $90,000 a year. Only 70% of the corporate suite is currently being used. A start-up business has proposed a plan that would use the other 30% of the suite and increase the overall costs of maintaining the space by $10,000.

98)

If the stand-alone method were used, what amount of cost would be allocated to the start-up business?
C)

$30,000
99)

If the incremental method were used, what amount of cost would be allocated to the start-up business?
A)

$10,000
100)

All contracts with U.S. government agencies must comply with cost accounting standards issued by the:
D)

CASB
101)

Contract disputes regarding cost allocation can be reduced by defining:
A)

the cost items allowed
B)

the terms used, such as what constitutes direct labor
C)

permissible cost-allocation bases
102)

Cost-based prices:
C)

pass the majority of risk to the buyer
103)

________ is a cost that the contract parties agree to include in the costs to be reimbursed.
A)

An allowable cost
104)

In certain high-cost defense contracts involving new weapons and equipment, contracts are rarely subject to competitive bidding because:
A)

the government is concerned that one firm might monopolize defense contracts
B)

there is an implicit agreement among defense contractors to "share contracts"
C)

all defense contractors have essentially the same cost structure
D)

None of these answers is correct.
105)

________ occurs where revenues, related but not traceable to individual products, are assigned to those individual products.
B)

Revenue allocation
106)

An example of a revenue object is a:
A)

customer
B)

specific product
C)

division of a company
107)

AAA offers towing services, auto routing, travel brochures, and other travel services for one annual fee. This is an example of:
C)

a bundled product
108)

Businesses offer bundled products to:
A)

increase customer exposure
B)

increase overall company profitability
109)

________ is a package of two or more products (or services) that is sold for a single price but whose individual components may be sold as separate items at their own "stand-alone" prices.
C)

A bundled product
110)

The method LEAST likely to cause disputes among product managers is:
A)

stand-alone revenue-allocation method
111)

The method that ranks individual products in a bundle for revenue allocation is the:
B)

incremental revenue-allocation method
112)

Approaches used to rank products for revenue allocation might include:
A)

surveying customers on the importance of each product
B)

using recent data on stand-alone sales performance
C)

having managers use their knowledge and intuition
113)

To give more weight to the product that most likely drives the sales of the bundled product, the revenue allocation should be weighted using:
D)

stand-alone product revenues
114)

The revenue allocation may be weighted using physical units when:
A)

the individual products within the bundle have approximately the same value
B)

selling prices are unstable and unit costs are difficult to calculate
C)

other methods cannot be used for various reasons
Answer the following questions using the information below:

Elmo's Educational Software Outlet sells two or more of the video games as a single package. Managers are keenly interested in individual product-profitability figures. Information pertaining to three bundled products and the stand-alone prices is as follows:

Stand-Alone Selling Price Cost Package Packaged
Price
Reading Fun $50 $7.20 1. Reading Fun & Math Fun $88
Math Fun $60 $8.00 2. Reading Fun & Analysis $112
Analysis $90 $10.00 3. All three $152

115)

Using the stand-alone method with selling price as the weight for revenue allocation, what amount of revenue will be allocated to Reading Fun in the first package (Reading Fun & Math Fun)?
A)

$40
116)

Using the incremental method for revenue allocation, what amount of revenue will be allocated to Reading Fun in the first package (Reading Fun & Math Fun)? Assume Reading Fun is the primary product, followed by Math Fun, and then Analysis.
D)

$50
117)

Using the stand-alone method with selling price as the weight for revenue allocation, what amount of revenue will be allocated to Math Fun in the package that contains all three products?
C)

$45.60
118)

Using the incremental method, what amount of revenue will be allocated to Math Fun in the package that contains all three products?
B)

$60.00
Answer the following questions using the information below:

The Appliance Store sells a refrigerator and a freezer as a single package for $1,000. Other data are in the chart below.

Refrigerator Full-size Freezer Packaged Price
Selling price $825 $375 $1,000
Manufacturing cost per unit $620 $180
Stand-alone product revenues $1,225,000 $775,000

119)

Using the stand-alone method with selling price as the weight for revenue allocation, what amount will be allocated to the refrigerator?
C)

$687.50
120)

Using the stand-alone method with stand-alone product revenues as the weight for revenue allocation, what amount will be allocated to the refrigerator?
B)

$612.50
121)

Using the stand-alone method with manufacturing cost per unit as the weight for revenue allocation, what amount will be allocated to the refrigerator?
D)

$775.00
122)

Using the stand-alone method with physical units as the weight for revenue allocation, what amount will be allocated to the refrigerator?
A)

$500