Allocation Support Costs

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Chapter 18: Allocation of Support Activity Costs and Joint Costs

MULTIPL C!"IC #USTI"$S

1. Which of the following would be considered a service department for an airline?A. Maintenance.B. Information Systems.. !urchasing.". #light atering.$. All of the above.

Answer% $ &'% 1 (ype% )

*. Which of the following would not be considered a service department in a hospital?A. Security.B. ardiac are.

. !atient +ecords.". Accounting.$. ,uman +esources.

Answer% B &'% 1 (ype% +

-. onsider the following statements about service department costs%

I.(he costs of the ,uman +esources "epartment in a manufacturing organiation must beallocated to production departments in order to achieve a correct costing of inventory.

II.(he allocation of service department costs re/uires that an organiation select both anallocation base and an allocation method.

III.Service department cost allocations are more relevant for firms involved in serviceindustries 0e.g. repair health care2 than for those involved with manufacturing.

Which of the above statements is 0are2 correct?A. I only.B. II only.. I and II.". II and III.$. I II and III.

Answer% &'% 1 (ype% + )

3. Which of the following methods ignores the fact that some service departments provideservice to other service departments?A. "irect method.B. Indirect method.. Step4down method.". +eciprocal method.$. "ual4cost allocation method.

Answer% A &'% 1 (ype% +

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5. onsider the following statements about the direct method of service department costallocation%

I.6nder the direct method all service department costs are eventually allocated to production

departments.II.(he order in which service department costs are allocated to production departments is

important.

III.'nce a service department7s costs have been allocated no costs are re4circulated bac8 tothat department.

Which of the above statements is 0are2 correct?A. I only.B. II only.. I and II.". I and III.$. I II and III.

Answer% " &'% 1 (ype% +

9. (he Milrose linic has two service departments 0,uman +esources and Information+esources2 and two :production: departments 0In4patient (reatment and 'ut4patient(reatment2. (he service departments service each other and studies have shown thatInformation +esources provides the greater amount of service. Which of the followingallocations would occur if Milrose uses the direct method of cost allocation?A. Information +esources cost would be allocated to In4patient (reatment.B. Information +esources cost would be allocated to ,uman +esources.. ,uman +esources cost would be allocated to Information +esources.". In4patient (reatment cost would be allocated to 'ut4patient (reatment.

$. 'ut4patient (reatment cost would be allocated to Information +esources.

Answer% A &'% 1 (ype% )

;. (rac8ster orporation has two service departments 0Maintenance and ,uman +esources2 andthree production departments 0Machining Assembly and #inishing2. Maintenance is thelargest service department and Assembly is the largest production department. (he twoservice departments service each other as well as the three producing departments. 'n thebasis of this information which of the following cost allocations would not occur under thedirect method?A. Machining cost would be allocated to Assembly.B. Maintenance cost would be allocated to #inishing.

. Maintenance cost would be allocated to ,uman +esources.". ,uman +esources cost would be allocated to #inishing.$. Allocations :A: and :: would not occur.

Answer% $ &'% 1 (ype% )

45 Hilton, Managerial Accounting, Seventh Edition


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11. "uluth orporation has two service departments 0Maintenance and ,uman +esources2 andthree production departments 0Machining Assembly and #inishing2. (he two servicedepartments service each other and studies have shown that Maintenance provides thegreatest amount of service. 'n the basis of this information which of the following cost

allocations would li8ely occur under the step4down method?A. Machining cost would be allocated to Assembly.B. Maintenance cost would be allocated to #inishing.. Maintenance cost would be allocated to ,uman +esources.". ,uman +esources cost would be allocated to Maintenance.$. Allocations :B: and :: above.

Answer% $ &'% 1 (ype% )

1*. (he ,opwood linic has two service departments 0,uman +esources and InformationSystems2 and two :production: departments 0In4patient (reatment and 'ut4patient (reatment2.(he service departments service each other and studies have shown that Information Systems

provides the greatest amount of service. Which of the following allocations would not occurif ,opwood uses the step4down method of cost allocation?A. Information Systems cost would be allocated to ,uman +esources.B. ,uman +esources cost would be allocated to Information Systems.. ,uman +esources cost would be allocated to In4patient (reatment.". In4patient (reatment cost would be allocated to 'ut4patient (reatment.$. Allocations :B: and :": above.

Answer% $ &'% 1 (ype% )

1-. Which of the following methods accounts for 1>> of the services that occur between servicedepartments?

A. "irect method.B. Indirect method.. +eciprocal method.". Step4down method.$. "ual4cost allocation method.

Answer% &'% 1 9 (ype% +

13. +eno orporation has two service departments 0Maintenance and ,uman +esources2 andthree production departments 0Machining Assembly and #inishing2. (he two servicedepartments service each other and studies have shown that Maintenance provides thegreatest amount of service. @iven the various cost allocation methods which of the following

choices correctly denotes whether Maintenance cost would be allocated to ,uman +esources?"irect Step4"own +eciprocal

A. es )o esB. es )o )o. es es es". )o es )o$. )o es es

Answer% $ &'% 1 9 (ype% )



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15. Which of the following methods would be of little use when allocating service departmentcosts to production departments?A. (he direct method.B. (he reciprocal method.

. (he step4down method.". (he net4realiable4value method.$. (he dual4cost allocation method.

Answer% " &'% 1 * 3 (ype% )

19. +yan Inc. has two service departments 0,uman +esources and Building Maintenance2 andtwo production departments 0Machining and Assembly2. (he company allocates BuildingMaintenance cost on the basis of s/uare footage and believes that Building Maintenanceprovides more service than ,uman +esources. (he s/uare footage occupied by eachdepartment follows.

,uman +esources 3>>>Building Maintenance 11>>>Machining 19>>>Assembly **>>>

Assuming use of the direct method over how many s/uare feet would the BuildingMaintenance cost be allocated 0i.e. spread2?A. 15>>>.B. ->>.. 3*>>>.". 5->>>.$. More information is needed to udge.

Answer% B &'% 1 (ype% A

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1;. !eterson ompany has two service departments 0afeteria and ,uman +esources2 and twoproduction departments 0Machining and Assembly2. (he number of employees in eachdepartment follows.

afeteria 3>,uman +esources 9>Machining *>>Assembly ->>

!eterson uses the direct method of cost allocation and allocates cost on the basis of employees.If ,uman +esources cost amounts to C1>>>> how much of the department7s cost would beallocated to Machining?A. C9>>>>>.B. C;*>>>>.. C=>>>>>.". C1*>>>>>.

$. Some other amount.


1>>.$. More information is needed to udge.

Answer% &'% 1 (ype% A



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1=. Anniston Inc. has two service departments 0,uman +esources and Building Maintenance2 andtwo production departments 0Machining and Assembly2. (he company allocates BuildingMaintenance cost on the basis of s/uare footage and ,uman +esources cost on the basis of employeesand believes that Building Maintenance provides more service than ,uman +esources. (he s/uare

footage and employees in each department follow.

S/uare#ootage $mployees

,uman +esources 3>>> 1>Building Maintenance 1>>>> 15Machining 15>>> 3>Assembly *1>>> 9>

Assuming use of the step4down method which of the following choices correctly denotes thenumber of s/uare feet and employees over which the Building Maintenance cost and ,uman+esources cost would be allocated 0i.e. spread2?

BuildingMaintenance

,uman+esources

A. -9>>> 1>>B. 3>>>> 1>>. 39>>> 11>". 5>>>> 11>$. Some other combination of figures not listed above.


*>. Western Inc. has two service departments 0,uman +esources and Building Maintenance2 andtwo production departments 0Machining and Assembly2. (he company allocates Building

Maintenance cost on the basis of s/uare footage and believes that Building Maintenanceprovides more service than ,uman +esources. (he s/uare footage occupied by eachdepartment follows.

,uman +esources -5>>Building Maintenance >Machining ==>>Assembly 15>>>

'ver how many s/uare feet would the Building Maintenance cost be allocated 0i.e. spread2with the direct method and the step4down method?

"irect

Method

Step4"own

MethodA. *3=>> *>B. *3=>> -;1>>. *> *3=>>". -;1>> *3=>>$. Some other combination of figures not listed above.

Answer% A &'% 1 (ype% A

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*1. Saunders ompany has two service departments 0afeteria and ,uman +esources2 and twoproduction departments 0Machining and Assembly2. (he number of employees in eachdepartment follows.

afeteria *>,uman +esources ->Machining 1>>Assembly 15>

Saunders uses the step4down method of cost allocation and allocates cost on the basis ofemployees. ,uman +esources cost amounts to C1*>>>>> and the department provides moreservice to the firm than afeteria. ,ow much ,uman +esources cost would be allocated toMachining?A. C>.B. C3*S* *>!1 5>!* ;>

Which of the following statements is 0are2 true if S1 and S* have respective operating costs ofC*>>> and C-5>>>>?A. S* should allocate a portion of its C-5>>>> cost to S1.

B. S17s cost should be allocated 0i.e. spread2 over 13> employees.. S17s cost should be allocated 0i.e. spread2 over 15> employees.". S* should allocate a total of C-=>>>> to !1 and !*.

$. Statements :B: and :": are both correct.

Answer% $ &'% 1 (ype% A



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6se the following to answer /uestions *-4*5%

(he "ollar Store has a ,uman +esources "epartment and a Danitorial "epartment that provide serviceto three sales departments. (he ,uman +esources "epartment cost is allocated on the basis of

employees and the Danitorial "epartment cost is allocated on the basis of space. (he followinginformation is available%

,uman+esources Danitorial Sales E1 Sales E* Sales E-

Budgeted cost C35>>> C->>>>Space in s/uare feet 3>>> 1>>> *>>>> ->>>> 5>>>>)umber of employees 5 1> 15 35 ->

*-. 6sing the direct method the amount of Danitorial "epartment cost allocated to Sales"epartment no. * is%A. C>.". C1>-5>.$. C13*1>.


*3. 6sing the step4down method and assuming that ,uman +esources is allocated first theamount of ,uman +esources cost allocated to Sales "epartment no. - is%A. C1*>>>.B. C1*>.

". C15>>>.$. C**5>>.


*5. 6sing the step4down method and assuming ,uman +esources is allocated first the amount ofDanitorial cost allocated to Sales "epartment no. * is%A. C>>.. C=


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6se the following to answer /uestions *94*>>>.$. C;


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*=. (he process of allocating fiFed and variable costs separately is called%A. the separate allocation procedure 0SA!2.B. diverse allocation.. reciprocal4cost allocation.

". common4cost allocation.$. dual4cost allocation.

Answer% $ &'% * (ype% +

->. 6nder dual4cost allocation fiFed costs are allocated on the basis of a user department7s%A. long4run usage of a service department7s output.B. short4run usage of a service department7s output.. long4run usage and short4run usage of a service department7s output.". neither long4run usage nor short4run usage of a service department7s output.$. either long4run usage or short4run usage of a service department7s output.

Answer% A &'% * (ype% +

-1. onsider the following statements about dual4cost allocation%

I."ual4cost allocation prevents a change in the short4run activity of one department fromaffecting the cost allocated to another department.

II."ual4cost allocations create an incentive for user department managers to understate theireFpected long4run service needs.

III."ual4cost allocations are generally preferred over lump4sum allocations or those thatcombine variable and fiFed costs together.

Which of the above statements is 0are2 true?

A. I only.B. III only.. I and II.". II and III.$. I II and III.

Answer% $ &'% * (ype% +

-*. When allocating service department costs companies should use%A. actual costs rather than budgeted costs and separate rates for variable and fiFed costs.B. budgeted costs rather than actual costs and separate rates for variable and fiFed costs.. budgeted costs rather than actual costs and a rate that combines variable and fiFed costs.

". actual costs rather than budgeted costs and a rate that combines variable and fiFed costs.$. a rate that is based on matriF theory.

Answer% B &'% * (ype% +

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--. @annon orporation allocates administrative costs on the basis of staff hours. Short4runmonthly usage and anticipated long4run monthly usage of staff hours for 'perating"epartments 1 and * follow.

"ept. 1 "ept. * (otalShort4run usage 0hours2 3>>>> 9>>>> 1>>>>>&ong4run usage 0hours2 35>>> 55>>> 1>>>>>

If @annon uses dual4cost accounting procedures and variable administrative costs totalC*>>>>> the amount of variable administrative cost to allocate to "epartment 1 would be%A. C>>>.B. C>>.. C=>>>>.". C1>>>>>.$. some other amount.

Answer% A &'% * (ype% A

-3. +onan orporation allocates administrative costs on the basis of staff hours. Short4runmonthly usage and anticipated long4run monthly usage of staff hours for 'perating"epartments 1 and * follow.

"ept. 1 "ept. * (otalShort4run usage 0hours2 >>> 1*>>>> *>>>>>&ong4run usage 0hours2 =>>>> 11>>>> *>>>>>

If +onan uses dual4cost accounting procedures and fiFed administrative costs total C1>>>>>>the amount of fiFed administrative cost to allocate to "epartment 1 would be%

A. C3>>>>>.B. C35>>>>.. C5>>>>>.". C>>>.$. some other amount.

Answer% B &'% * (ype% A



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-5. )ashville orporation allocates administrative costs on the basis of staff hours. Short4runmonthly usage and anticipated long4run monthly usage of staff hours for 'perating"epartments 1 and * follow.

"ept. 1 "ept. * (otalShort4run usage 0hours2 35>>> 55>>> 1>>>>>&ong4run usage 0hours2 3>> 5*>>> 1>>>>>

Gariable and fiFed administrative costs total C1>>> and C3>>>>> respectively. If)ashville uses dual4cost accounting procedures the total amount of administrative cost toallocate to "epartment * would be%A. C->19>>.B. C->;>>>.. C-1-9>>.". C-1=>>>.$. some other amount.

Answer% B &'% * (ype% A

-9. A company that uses activity4based costing would li8ely allocate costs from%A. service departments to production departments.B. service departments to products and services.. service departments to production departments and then to products and services.". activity4cost pools to production departments.$. activity4cost pools to products and services.

Answer% $ &'% - (ype% +

-;. (he point in a oint production process where each individual product becomes separatelyidentifiable is commonly called the%A. decision point.B. separation point.. individual product point.". split4off point.$. oint product point.

Answer% " &'% 3 (ype% +

-


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-=. Which of the following methods should be selected if a company terminates all processing atthe split4off point and desires to use a cost4allocation approach that considers the :revenue4producing ability: of each product?A. @ross margin at split4off method.

B. +eciprocal4accounting method.. +elative4sales4value method.". !hysical4units method.$. )et4realiable4value method.

Answer% &'% 3 (ype% )

3>. Which of the following choices correctly denotes the data needed to allocate oint costs underthe relative4sales4value method?

Sales Galueof !roductat Split4'ff

Separableost

Sales Galue of !roductAfter !rocessingBeyond Split4'ff

A. es es )oB. es es es. es )o )o". )o es es$. )o )o es

Answer% &'% 3 (ype% +

31. When allocating oint costs Wolstein calculates the final sales value of the various productsmanufactured and subtracts appropriate separable costs. (he company is using the%A. gross margin at split4off method.B. reciprocal4accounting method.

. relative4sales4value method.". physical4units method.$. net4realiable4value method.

Answer% $ &'% 3 (ype% +

3*. Webster manufactures A B and all of which are oint products and " which is classifiedas a by4product. If oint manufacturing costs amount to C35>>>> and the company is using apopular accounting method the firm will%A. allocate C35>>>> among A B and .B. allocate C35>>>> among A B and ".. increase C35>>>> by the net realiable value of " and then allocate the total among A B

and .". decrease C35>>>> by the net realiable value of " and then allocate the total among A B

and .$. decrease C35>>>> by the net realiable value of " and then allocate the total among A B

and ".

Answer% " &'% 3 (ype% +



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3-. Ithaca orporation uses the physical4units method to allocate costs among its three ointproducts% H and . (he following data are available for the period ust ended%

Doint processing cost% C>>>>

(otal production% 15>>>> poundsShare of oint cost allocated to H% C19>>>>Share of oint cost allocated to % C3>>>>>

Which of the following statements is true?A. (he company would have relied on the sales value of each product when allocating oint

costs to H and .B. Ithaca produced ->>>> pounds of during the period.. Ithaca produced 35>>> pounds of during the period.". Ithaca produced 1>5>>> pounds of during the period.

$. Based on the data presented it is not possible to determine Ithaca7s production of duringthe period.

Answer% &'% 3 (ype% + A

33. @arvin orporation manufactures oint products ! and J. "uring a recent period oint costsamounted to C>>> in the production of *>>>> gallons of ! and 9>>>> gallons of J.@arvin can sell ! and J at split4off for C*.*> per gallon and C*.9> per gallon respectively.Alternatively both products can be processed beyond the split4off point as follows%

! JSeparable processing costs C15>>> C-5>>>Sales price 0per gallon2 if processed beyond split4off C- C3

(he oint cost allocated to J under the relative4sales4value method would be%A. C3>>>>.B. C9*3>>.. C93>>>.". C959>>.$. some other amount.


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35. @unniston orporation manufactures oint products W and H. "uring a recent period ointcosts amounted to C->>>>> in the production of *>>>> gallons of W and 9>>>> gallons of H. Bothproducts will be processed beyond the split4off point giving rise to the following data%

W HSeparable processing costs C3>>>> C19>>>>Sales price 0per gallon2 if processed beyond split4off C13 C1*

(he oint cost allocated to W under the net4realiable4value method would be%A. C;5>>>.B. C>>>.. C>>.". C=>>>>.$. some other amount.

Answer% " &'% 3 (ype% A

6se the following to answer /uestions 3943>>>. Sales values and costs were as follows%

If !rocessed #urther6nits Sales Galue Sales Separable

!roduct Made at Split4off Galue ostsH =>>> C3>>>> C;>> C1>5>>

9>>> >>> =>>>> ;5>>

39. If the oint production costs are allocated based on the physical4units method the amount ofoint cost assigned to product H would be%A. C*>>>>.B. C*3>>>.. C->>>>.". C-9>>>.$. C3>>>>.

Answer% " &'% 3 (ype% A

3;. If the oint production costs are allocated based on the relative4sales4value method the amountof oint cost assigned to product H would be%A. C*>>>>.B. C*;>>>.. C-->>>.". C3>>>>.$. some other amount.

Answer% A &'% 3 (ype% A



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3>>>.B. C*;>>>.

. C-->>>.". C3>>>>.$. some other amount.


3=. Which of the following statements about oint4cost allocation is false?A. Doint4cost allocation is useful in deciding whether to further process a product after split4

off.B. Doint4cost allocation is useful in ma8ing a profit determination about individual oint

products.. Doint4cost allocation is helpful in inventory valuation.

". Doint4cost allocation can be based on the number of units produced.$. Doint4cost allocation can be accomplished by using several different methods that focus on

sales value and product :worth.:

Answer% A &'% 5 (ype% )

5>. onsider the following statements about oint product cost allocation%

I.Doint product cost is allocated because it is necessary for inventory valuation.II.Doint product cost is allocated because it is necessary for ma8ing economic decisions about

individual products 0e.g. sell at split4off or process further2.

III.Doint cost may be allocated to products by using several different methods.

Which of the above statements is 0are2 correct?A. I only.B. III only.. I and II.". I and III.$. I II and III.

Answer% " &'% 5 (ype% +

51. $astside ,ospital has two service departments 0!atient +ecords and Accounting2 and two:production: departments 0Internal Medicine and Surgery2. Which of the following

allocations would li8ely ta8e place under the reciprocal4services method of cost allocation?A. Allocation of Accounting cost to !atient +ecords.B. Allocation of !atient +ecords cost to Internal Medicine.. Allocation of Surgery cost to Accounting.". Allocation of Internal Medicine cost to Surgery.$. Allocations :A: and :B: above.

Answer% $ &'% 1 (ype% )

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5*. Westside ,ospital has two service departments 0!atient +ecords and Accounting2 and two:production: departments 0Internal Medicine and Surgery2. Which of the followingallocations would not ta8e place under the reciprocal4services method of cost allocation?A. Allocation of Accounting cost to !atient +ecords.

B. Allocation of !atient +ecords cost to Internal Medicine.. Allocation of Surgery cost to Accounting.". Allocation of Internal Medicine cost to Surgery.$. Allocations :: and :": above.

Answer% $ &'% 1 (ype% )



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%&CISS

'unda(entals of )irect and Step*)o+n Methods

5-. )ovaturn orporation has three service departments 0S1 and S*2 and two productiondepartments 0!1 and !*2. S1 and S* both use the number of employees as an allocation base. (hefollowing data are available%

)umber of$mployees Budgeted ost

S1 3> C1;*>>>S* 9> *5>>>>!1 ->> 99>>>>!* 5>> >>>

+e/uired%

A. Assuming use of the direct method%1. 'ver how many employees would S17s budgeted cost be allocated?*. ,ow much of S*7s cost would be allocated to !1?-. ,ow much of !17s cost would be allocated to S1?

B. Assuming use of the step4down method%

1. ,ow much of S17s cost would be allocated to S*? )ovaturn allocates S17s costsprior to allocating those of S*.

*. ,ow much of S*7s total cost would be allocated to !*?-. ,ow much of S*7s total cost would be allocated to S1?

&'% 1 (ype% A

Answer%A. 1. > 0->> K 5>>2

*. C=-;5> LC*5>>>> F 0->>>2N-. )one because production department costs are not allocated to service departments.

B. 1. S17s costs are allocated over employees 09> K ->> K 5>>2. (hus C1*>>> will beallocated to S* LC1;*>>> F 09>2N.

*. S*7s costs total C*9*>>> 0C*5>>>> K C1*>>>2 resulting in C19-;5> being allocatedto !* LC*9*>>> F 05>>>2.

-. )one because S17s costs are allocated prior to those of S*. 'nce a department isclosed no costs are allocated bac8 to it.

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)irect and Step*)o+n Methods of Service )epart(ent Cost Allocation

53. Wyoming State ollege has two service departments the &ibrary and omputing Servicesthat assist the School of Business and the School of ,ealth. Budgeted costs of the &ibrary and

omputing Services are C>>>> and C1>>>> respectively. 6sage of the service departments7output during the year is anticipated to be%

!rovider of Service

6ser of Service &ibraryomputing

Services&ibrary 444 1>omputing Services 444 444School of Business *> 9>School of ,ealth ->

+e/uired%

A. 6se the direct method to allocate the costs of the &ibrary and omputing Services to theSchool of Business and the School of ,ealth.

B. +epeat re/uirement :A: using the step4down method. Wyoming allocates the cost ofomputing Services first.

&'% 1 (ype% A

Answer%A. School of Business School of ,ealth

#raction Amount #raction Amount&ibrary C >>>> *1> C 19>>>> C 93>>>>omputing Services 1>>>> 9= 1*>>>>> -= 9>>>>>(otal C*9>>>>> C1-9>>>> C1*3>>>>

B. omputing services 0C1>>>>2%&ibrary 01>2 C 1>>>School of Business 09>2 1>>>>School of ,ealth 0->2 53>>>>

&ibrary 0C>>>> K C1>>> O C=>>>2%School of Business 0*>2 C 1=9>>>School of ,ealth 02 ;>>

6" Hilton, Managerial Accounting, Seventh Edition


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55. hicago Inc. manufactures gauges for automobile dashboards. (he company has twoproduction departments Molding and Assembly. (here are three service departments% ,uman

+esources Maintenance and $ngineering. 6sage of services by the various departmentsfollows.

,uman+esources Maintenance $ngineering

,uman +esources 44 44 44Maintenance 5 44 44$ngineering 5 1> 44Molding 3> 3> ;5Assembly 5> 5> *5

(he budgeted costs in hicago7s service departments are% ,uman +esources C1>>>P

Maintenance C*;>>>>P and $ngineering C*>>>>>. (he company rounds all calculations tothe nearest dollar.

+e/uired%

A. 6se the direct method to allocate hicago7s service department costs to the productiondepartments.

B. "etermine the proper departmental se/uence to use in allocating the firm7s service costsby the step4down method.

. Ignoring your answer in part :B: assume that ,uman +esources costs are allocated firstMaintenance costs second and $ngineering costs third. 6se the step4down method toallocate hicago7s service department costs.

&'% 1 (ype% A +

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Answer%A. Molding Assembly

#raction Amount #raction Amount,uman +esources C1>>> 3>=> C >>> 5>=> C1>>>>>

Maintenance *;>>>> 3>=> 1*>>>> 5>=> 15>>>>$ngineering *>>>>> ;51>> 15>>>> *51>> 5>>>>(otal C95>>>> C-5>>>> C->>>>>

B. #irst% ,uman +esources 0serves two other service departments2Second% Maintenance 0serves one other service department2(hird% $ngineering 0serves no other service departments2

. ,uman +esources 0C1>>>2%Maintenance 052 C =>>>$ngineering 052 =>>>Molding 03>2 ;*>>>

Assembly 05>2 =>>>>

Maintenance 0C*;>>>> K C=>>> O C*;=>>>2%$ngineering 01>2 C *;=>>Molding 03>2 1119>>Assembly 05>2 1-=5>>

$ngineering 0C*>>>>> K C=>>> K C*;=>> O C*-9=>>2%Molding 0;52 C1;;9;5Assembly 0*52 5=**5

Molding% C;*>>> K C1119>> K C1;;9;5 O C-91*;5

Assembly% C=>>>> K C1-=5>> K C5=**5 O C*


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59. Bec8ers orporation is developing departmental overhead rates based on direct labor hours forits two production departments Molding and Assembly. (he Molding "epartment wor8ed

*>>>> hours during the period ust ended and the Assembly "epartment wor8ed 3>>>>hours. (he overhead costs incurred by Molding and Assembly were C151*5> and C33>;5>respectively.

(wo service departments +epair and !ower directly support the two production departments.(hese service departments have costs of C=>>>> and C*5>>>> respectively. (he followingschedule reflects the use of +epair and !ower7s output by the various departments%

+epair !ower Molding Assembly+epair 0repair hours2 5>> 5>> 3>>>!ower 08ilowatt hours2 1*>>>> 3*>>>> 9>>>>

+e/uired%A. Allocate the company7s service department costs to production departments by using the

direct method.

B. alculate the overhead application rates of the production departments. ,int% onsiderboth directly traceable and allocated overhead when deriving your answer.

. Allocate the company7s service department costs to production departments by using thestep4down method. Begin with the !ower "epartment and round calculations to thenearest dollar.

&'% 1 (ype% A

Answer%

A. Molding Assembly#raction Amount #raction Amount

+epair C =>>>> >.53.5 C 1>>>> 3.>3.5 C >>>!ower *5>>>> 3.*3.< *1 >.93.< -1*5>

C-3>>>> C** C111*5>

B. Molding Assembly

Allocated service department costs C** C111*5>'verhead costs traceable to production departments 151*5> 33>;5>(otal overhead costs C->>> C55*>>>"irect labor hours

*>>>>

3>>>>'verhead rate per hour C1=.>> C1-.

Chapter 18 66


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. !ower 0C*5>>>>2%+epair 01*>9>>2Molding 03*>9>>2Assembly 09>9>>2

C 5>>>>1;5>>>*5>>>

+epair 0C=>>>> K C5>>>> O C13>>>>2%Molding 05>>35>>2Assembly 03>>>35>>2

C 155591*3333

Molding% C1;5>>> K C15559 O C1=>559Assembly% C*5>>> K C1*3333 O C13=333

Understandin, Service )epart(ent Allocations

5;. onsider the following independent cases that relate to service department cost allocations%

Ca#e A% Stric8land ompany has two service departments L,uman +esources 0,+2 andInformation SystemsN and two production departments 0Machining and Assembly2. ,uman+esource cost is allocated by using the direct method based on the number of personnel ineach department. #or the period ust ended there were 1>>> of ,+7s overhead of C*>>>>>. ,ow many employees are in theAssembly "epartment?

Ca#e $% Walter Bur8e controller of AleFander $nterprises wants service departmentmanagers to be aware that their use of other service departments costs the firm a substantialamount of money. Would Bur8e prefer the direct method or the step4down method of costallocation? Why?

Ca#e C% &oc8wood ompany has four service departments 0S1 S* S- and S32 and twoproduction departments 0!1 and !*2. (he costs of S1 are allocated first followed in order bythe costs of S* S- and S3. &oc8wood uses the step4down method and the costs of S* areallocated based on the number of computer hours used. omputer hours logged during theperiod were as follows% S1 39>>P S* ;1>>P S- 1>3>>P S3 1;9>>P !1 -;>>>P and !*3>. 'ver how many hours would S*7s cost be allocated?

Ca#e %% A recently hired staff accountant noted that given the nature of the allocations thetotal cost allocated to production departments is typically less under the step4down methodthan under the direct method. "o you agree with the accountant? Why?

+e/uired%

Answer the /uestions that are raised in ases A B and ".

&'% 1 (ype% A )



25/35

Answer%ase A% Machining has been allocated 35 of ,+7s cost 0C=>>>> Q C*>>>>>2 because it has35 of the employees in the production departments. Since 1 employees in production 01.352. (hus Assembly has *-1 personnel 03*>

4 1> 01>3>> K 1;9>> K -;>>> K 3>2

ase "% )o. 6nder both approaches all service department costs are allocated to productiondepartments. (his process yields e/ual totals for each method.

Chapter 18 68


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)ual*Cost Allocations

5 9>Juarter no. * 3> 9>

omputer "epartment operating costs were%

Gariable0!er ,our2 #iFed

Juarter no. 1 C5> C3>>>>

Juarter no. * 35 ->>

ompany policy currently re/uires that total variable and fiFed costs be combined andallocated as a lump4sum to users based on service hours.

+enaissance has been financially healthy for a number of years but began to eFperienceproblems toward the end of /uarter no. 1. In response to these problems management issueda directive to closely monitor costs and computer usage effective with the start of /uarter no.*.

+e/uired%

A. ompute /uarter no. 17s total computer cost and determine the allocation to "epartment A

and "epartment B.B. ,ow much cost would be allocated to "epartments A and B during /uarter no. * and how

would the heads of these departments li8ely react to the allocations in light ofmanagement7s directive?

. Assume that at the beginning of /uarter no. * the company switched to dual4costallocations with variable costs allocated based on current usage and fiFed costs allocatedbased on long4run average utiliation. An analysis of proected usage found that wor8 for"epartment A was eFpected to consume 55 of the omputer "epartment7s time over theforthcoming year. ,ow much cost would be allocated to A and B in /uarter no. *?

". @iven the use of dual allocations how if at all would a short4term increase or decrease inA7s current usage affect the /uarterly cost allocation that is charged to "epartment B?

&'% * (ype% A )



27/35

Answer%A. Gariable cost% 09> K 9>2 F C5> C

9>>>#iFed cost 3>>>

>(otal cost C39>>

>

Since each department consumed 9> hours of services the cost would be split e/ually%C39>>> Q * O C*->>>.

B. Gariable cost% 03> K 9>2 F C35 C35>>

#iFed cost ->>

(otal cost C3*5>

>

"epartment A% 03> Q 1>>2 F C3*5>> O C1;>>>"epartment B% 09> Q 1>>2 F C3*5>> O C*55>>

(he head of A would be pleased because the department7s decreased usage resulted in aC9>>> reduction in cost 0C*->>> 4 C1;>>>2. In contrast the head of B would li8elybe unhappy. Although unable to reduce usage usage did remain constantRa situationthat produced a C*5>> increase in cost 0C*55>> 4 C*->>>2 despite the fact that overallcost declined.

. A B

Gariable%3> hours F C35 C 1>9> hours F C35 C *;>>

#iFed%C->> F 55 *>=>>C->> F 35 1;1>>

(otal C**;>> C1=>

". (here is no effect on B. (he variable costs charged to "epartment A would increase ordecrease with other allocations remaining the same.

Chapter 18 7


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Joint*Cost Allocations

5=. Suppose that one hog yields ->> pounds of ham *>> pounds of chops and 1>> pounds ofmiscellaneous items. (he sales value of ham is C1.*> per poundP chops C1.5> per poundP and

miscellaneous items C>.=> per pound. (he hog costs C5 and processing costs are C*>.

+e/uired%A. "etermine the proper allocation of oint costs to the three products by using the physical4

units method.

B. +epeat part :B: by using the relative4sales4value method.

&'% 3 (ype% A

Answer%A. Weight at the

Split4'ff !oint+elative

!roportionAllocation ofDoint ost

,am ->> pounds -9 C->>hops *>> pounds *9 *>>Miscellaneous items 1>> pounds 19 1>>

9>> pounds C9>>C5 K C*>

B. Sales Galueat Split4'ff

+elative!roportion

Allocation ofDoint ost

,am 0->> F C1.*>2 C-9> -9;5 C*> F C1.5>2 ->> ->;5 *3>Miscellaneous items 01>> F C>.=>2 => =;5 ;*

C;5> C9>>



29/35

'unda(entals of Joint*Cost Allocations

9>. ,iggins orporation manufactures two chemicals 0#leFtra and ,ydro2 in a oint process. "atafrom a recent month follow.

"irect materials used% C-9>>>>"irect labor% C15>>>>Manufacturing overhead% C9=>>>>Manufacturing output%

#leFtra% 3>>>> gallons,ydro% 1*>>>> gallons

#leFtra sells for C15 per gallon and ,ydro sells for C*> per gallon.

+e/uired%A. ompute the total oint costs to be allocated to #leFtra and ,ydro.

B. ompute the oint costs that would be allocated to #leFtra by using the physical4units method.. ompute the oint costs that would be allocated to ,ydro by using the relative4sales4value method.". Assume that ,ydro can be converted into a more refined product ,ydro4+ in a totally separable

process at an additional cost of C3 per gallon. ,ydro4+ can be sold in the mar8etplace for C*9 pergallon.

1. ompute the net realiable value of ,ydro4+.*. If ,iggins allocated C>>>> of oint cost to ,ydro4+ and sold => of theproduction completed determine the cost of remaining ,ydro4+ that would betransferred to the companyTs month4end balance sheet as finished4goods inventory.

&'% 3 (ype% A

Answer%A. C1*>>>>> 0C-9>>>> K C15>>>> K C9=>>>>2

B. #leFtra constitutes *5 of the productive output L3>>>> Q 03>>>> K 1*>>>>2N andwould therefore absorb C->>>>> of oint cost 0C1*>>>>> F *52.

. (he total sales value of the two products is C->>>>>>% #leFtra 03>>>> gallons F C15O C9>>>>>2 K ,ydro 01*>>>> gallons F C*> O C*3>>>>>2. Since ,ydro has of thesales value 0C*3>>>>> Q C->>>>>>2 the company will allocate C=9>>>> of oint cost0C1*>>>>> F 2.

". 1. Sales value 01*>>>> gallons F C*9 O C-1*>>>>2 4 costs beyond split4off 01*>>>>

gallons F C3 O C3>>>2 O C*93>>>>.

*. (he total cost of production is C1*>>> 0C>>>> K C3>>>2. Since => of theproduction is sold 1> of the cost or C1*>> remains as inventory.

Chapter 18 7!


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Joint*Cost Allocations

91. 'hio hemical manufactures two industrial chemicals in a oint process. In 'ctober directmaterial costing C1*>>>> was processed at a cost of C->>>>> resulting in 19>>> pounds of

!enteF and 3>>> pounds of @laFco. !enteF sells for C-5 per pound and @laFco sells for C9>per pound. Management generally processes each of these chemicals further in separableprocesses to produce more refined products. !enteF is processed separately at a cost of C;.5>per pound with the resulting product !enteF4+ selling for C35 per pound. @laFco isprocessed separately at a cost of C1> per pound and the resulting product @laFco4+ sells forC1>> per pound.

+e/uired%

A. ompute the company7s total oint production costs.B. Assuming that total oint production costs amounted to C5>>>>> allocate these costs by

using%1. (he physical4units method.

*. (he relative4sales4value method.-. (he net4realiable4value method.

&'% 3 (ype% A

Answer%A. Doint production costs total C3*>>>> 0C1*>>>> K C->>>>>2.

B. 1. Weight at theSplit4'ff !oint

+elative!roportion


!enteF 19>>> 19*> C3>>>>>@laFco 3>>> 3*> 1>>>>>

*>>>> C5>>>>>

*. Sales Galueat Split4'ff

+elative!roportion


!enteF 019>>> F C-52 C59>>>> 59 C-5>>>>@laFco 03>>> F C9>2 *3>>>> *3 15>>>>

C>>>> C5>>>>>

-. Sales Galueof #inal!roduct

osts !astSplit4off

)et+ealiable

Galue+elative

!roportionAllocation

of Doint ost!enteF4+ C ;*>>>> C1*>>>> C9>>>>> 9>=9 C-1*5>>

@laFco4+ 3>>>>> 3>>>> -9>>>> -9=9 1>C11*>>>> C19>>>> C=9>>>> C5>>>>>

!enteF4+% 19>>> F C35P @laFco4+% 3>>> F C1>>!enteF4+% 19>>> F C;.5>P @laFco4+% 3>>> F C1>

7" Hilton, Managerial Accounting, Seventh Edition


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$et*&eali-a.le*/alue Method0 ross Mar,in Calculation

9*. "ouglas ompany a new firm manufactures two products D and U in a common process.(he oint costs amount to C>>> per batch of finished goods. $ach batch results in *>>>>liters of output of which are D and *> are U.

(he two products are processed beyond the split4off point with "ouglas incurring thefollowing separable costs% D C* per literP U C5 per liter. After the additional processing theselling price of D is C1* per liter and the selling price of U is C15 per liter.

+e/uired%A. "etermine the proper allocation of oint costs if the company uses the net4realiable4value

method.

B. Assume that "ouglas sold all of its production of U during the current accounting period.ompute U7s sales revenue cost of goods sold and gross margin.

. Is the firm7s cost4of4goods4sold figure influenced by the choice of a oint4cost allocationmethod? Briefly eFplain.

&'% 3 5 (ype% A )

Answer%A. Sales Galue

of #inal!roduct

osts!ast

Split4'ff

)et+ealiable

Galue+elative

!roportion

Allocationof Doint

ostD 019>>> F C1*2 C1=*>>> C-*>>> C19>>>> 19>*>> C93>>>U 03>>> F C152 9>>>> *>>>> 3>>>> 3>*>> 19>>>

C*>>>>> C>>>

B. Doint costs C19>>>

osts beyond split4off *>>>>ost of goods sold C-9>>>

Sales revenue C9>>>>ost of goods sold -9>>>@ross margin C*3>>>

. es. ost of goods sold is based on both separable costs and oint cost. (he choice ofan allocation method will influence the amount of oint cost charged to the product.

Chapter 18 74


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Analysis of Joint Costs: 2or3in, 4ac3+ard

9-. Barry ompany manufactures H4111 H411* and H411- from a oint process. (he followinginformation is available for the period ust ended%

H4111 H411* H411- (otal6nits produced 9>>> 13>>> ->>>> 5>>>>Doint cost allocation ? C1> ? C >>>Sales value at split4off C1>3>>> ? ? C*9>>>>

+e/uired%A. "oes Barry allocate oint costs by using the physical4units method? $Fplain.

B. Assume that Barry does not use the physical4units method but instead allocates oint costsby using the relative4sales4value method. #ind the four un8nowns in the preceding table.

&'% 3 (ype% A )

Answer%A. )o. H411* comprises *>> Q 5>>>>2P however the

product was allocated *- of the total oint cost 0C1> Q C>>>2. Apparently thenanother method is being used.

B. H4111 has 3> of the sales value 0C1>3>>> Q C*9>>>>2 resulting in 3> of the oint cost0C>>> F 3>2 or C-*>>>. (his leaves C*=9>> to be allocated to H411- 0C>>> 4C-*>>> 4 C1>2. (he sales values follow by using the same percentages that are usedin the cost allocation 0C1> Q C>>> O *-P C*9>>>> F *- O C5=>2 and0C*=9>> Q C>>> O -;P C*9>>>> F -; O C=9*>>2.

H4111 H411* H411- (otal6nits produced 9>>> 13>>> ->>>> 5>>>>Doint cost allocation C -*>>> C1> C*=9>> C >>>Sales value at split4off C1>3>>> C5=> C=9*>> C*9>>>>



33/35

Joint Costs5 Analysis of Joint Production Process

93. Mercury orporation allocates oint costs by using the net4realiable4value method. In thecompany7s Michigan plant products " and $ emerge from a oint process that costs C*5>>>>.

$ is then processed at a cost of C**>>>> into products # and @. "ata pertaining to " # and@ follow.

" # @osts beyond split4off C5>>>> C*;>>> C*5>>

>Selling price 3> -< 5>!ounds produced 1>>>> 3>>> *>>>

+e/uired%A. Allocate the C**>>>> processing cost between products # and @.B. #rom a profitability perspective should product $ be processed into products # and @?

Show your calculations.. Assume that the net realiable value associated with $ is ero. ,ow would you allocate

the oint cost of C*5>>>>?

&'% 3 (ype% A )

Answer%

A. Sales Galueof #inal!roduct

osts!ast

Split4'ff

)et+ealiable

Galue+elative

!roportion

Allocationof Doint

ost# 03>>> F C->> C*;>>> C1*5>>> 1*5*>> C1-;5>>

@ 0*>>> F C5>2 1>>>>> *5>>> ;5>>> ;5*>> >C*>>>>> C**>>>>

B. )o the company is losing C*>>>>% )et realiable value 0C*>>>>>2 4 oint costs0C**>>>>2.

. (he C*5>>>> cost is a oint cost between " and $. Since product " has a positive netrealiable value of C-5>>>> L01>>>> pounds F C3>2 4 C5>>>>N and $7s is ero allC*5>>>> would be charged to ".

Chapter 18 76


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)ISCUSSI"$ #USTI"$S

"vervie+ of Service*)epart(ent Cost Allocation Methods

95. ompanies are free to use the direct step4down and reciprocal allocation methods whendealing with service4department costs.

+e/uired%A. ,ow does the direct method wor8? What is its chief limitation?B. Is the step4down method an improvement over the direct method? $Fplain.. Which of the three methods is the most correct from a conceptual viewpoint? Why?

&'% 1 9 (ype% + )

Answer%A. (he direct method allocates oint costs solely to producing departments. (his method

does not allocate costs to other service departments and is based on the erroneousassumption that service departments do not service each other.

B. (he step4down method is an improvement over the direct method as it recognies thatservice departments service both producing departments and other service departments.osts are allocated accordingly. (he step4down method is slightly more compleF than thedirect method re/uiring a determination of the proper order of departmental allocations.

. (he reciprocal method is the most correct approach from a conceptual viewpoint. (hismethod fully recognies all services provided by service departments. (he direct methodcompletely ignores the fact that service departments service each other. (he step4downmethod recognies only some of these services as once a department is closed out no cost

is reallocated bac8 to it.



35/35

)ual &ate /ersus Sin,le &ate

99. Many companies use the dual4rate method of cost allocation.

+e/uired%A. ,ow does the dual4rate method wor8?B. Is there any advantage of the dual4rate method over a method that uses a combined lump4

sum single rate? Briefly eFplain.

&'% * (ype% +

Answer%

A. (he dual4rate method involves creating two overhead rates one for variable costs andanother for fiFed costs. (he variable costs are normally allocated on the basis of short4runusage of the service department7s outputP fiFed costs are allocated on the basis of long4runusage.

B. es. When a single rate is used the cost allocated to a user department may be influencedby the amount of service consumed by another department. #or eFample a userdepartment7s service consumption could remain flatP yet the amount of cost allocated tothat department could increase or decrease over previous amounts based solely on actionsof other users. "ual rates eliminate this problem.

Documents

Allocation Support Costs