Question 1

What is an operating department and how is it different from a support department? Give examples of each.

Accepted Answer

The answer of What is an operating department and how...

Question 2

Illumination 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:

Assume that practical capacity is used to calculate the allocation rates.
Actual usage for the year by the Flashlight Division was 1500 hours and by the Night Light Division was 800 hours. If a dual-rate cost-allocation method is used, what amount of operating costs will be budgeted for the Night Light Division?
A) $930,000
B) $950,000
C) $975,000
D) $780,000

Accepted Answer

Night Light Division cost = [(1000 / 4000) × $500,000] + (1000 × $850) = $975,000

Question 3

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

Accepted Answer

The dual cost-allocation method classifies costs into two pools, a variable cost pool and a fixed cost pool.

Question 4

When actual cost-allocations rates are used, which of the following would be true?
A) user divisions pay for costs that exceed budgeted amounts
B) managers of the supplier division are motivated to improve efficiency
C) user divisions are unaware of the allocated amounts until the end of the budget period
D) managers know with certainty the rates to be used in that budget period

Accepted Answer

The answer of When actual cost-allocations rates are used, which...

Question 5

The costs of unused capacity are highlighted when ________.
A) actual usage based allocations are used
B) budgeted usage allocations are used
C) practical capacity-based allocations are used
D) the dual-rate cost-allocation method allocates fixed costs based on actual usage

Accepted Answer

Unused capacity is highlighted when practical capacity-based allocations are used. Practical capacity is the maximum output that a firm can sustain given its product mix, workforce, and equipment. Allocating fixed costs based on practical capacity shows the amount of costs incurred for unused capacity, revealing the cost of unused capacity. Actual usage-based allocations and the dual-rate cost-allocation method based on actual usage do not reveal the cost of unused capacity. Budgeted usage allocations can show the cost of unused capacity, but only if the budgeted usage is based on practical capacity, not expected or forecasted usage.

Question 6

The Alex Miller 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:
  
Assume that practical capacity is used to calculate the allocation rates. Further assume that actual usage of the Lamp Division was 700 hours and the Flashlight Division was 400 hours for the month of June.
Required:
a.If a single-rate cost-allocation method is used, what amount of operating costs will be budgeted for the Lamp Division each month? For the Flashlight Division each month?
b.For the month of June, if a single-rate cost-allocation method is used, what amount of cost will be allocated to the Lamp Division? To the Flashlight Division? Assume actual usage is used to allocate operating costs.
c.If a dual-rate cost-allocation method is used, what amount of operating costs will be budgeted for the Lamp Division each month? For the Flashlight Division each month?
d.For the month of June, if a dual-rate cost-allocation method is used, what amount of cost will be allocated to the Lamp Division? To the Flashlight Division? Assume budgeted usage is used to allocate fixed operating costs and actual usage is used to allocate variable operating costs.

Accepted Answer

The answer of The Alex Miller Corporation operates one central...

Question 7

Illumination 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:

Assume that practical capacity is used to calculate the allocation rates.
Actual usage for the year by the Flashlight Division was 1500 hours and by the Night Light Division was 800 hours. 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.
A) $2,050,000
B) $1,850,000
C) $1,200,000
D) $1,537,500

Accepted Answer

Flashlight Division cost = [(2000 / 4000) × $500,000] + (2000 × $900) = $2,050,000
($2,050,000 / 2000) × 1500 = $1,537,500

Question 8

The Pitt Corporation has been outsourcing data processing in the belief that such outsourcing would reduce costs and increase corporate profitability. In spite of this, there has been no meaningful increase in corporate profitability.
Previously, Pitt used a single-rate method to allocate data processing costs. A per unit cost for data processing was computed and compared to the price of the outside supplier. The price of the outside supplier was lower and thus, the outside bid was accepted.
Required:
Formulate a possible reason why Pitt's profitability has not shown improvement in terms of the cost allocation method used.

Accepted Answer

The answer of The Pitt Corporation has been outsourcing data...

Question 9

When budgeted cost-allocations rates are used ________.
A) user departments are not informed about the charges until the end of the period which makes decision making during the period difficult
B) user departments can determine the amount of service to request and if allowed, can determine whether to use an internal or external resource
C) user divisions pay for costs that exceed budgeted amounts
D) user divisions pay for inefficiencies of the supplier department

Accepted Answer

Budgeted cost-allocations rates allow user departments to make informed decisions about the amount of service they require and whether to use internal or external resources. It does not involve charging for costs that exceed budgeted amounts, nor does it hold user divisions accountable for the inefficiencies of supplier departments. However, it provides information to user departments so that they can control their costs and make more efficient use of resources.

Question 10

Allocating variable costs on the basis of budgeted usage would provide the user departments with no incentive to control their consumption of support services.

Accepted Answer

Allocating variable costs on the basis of budgeted usage would mean that the departments will be charged a fixed amount based on their estimated usage. This would not provide any incentive for them to control their consumption of support services, as their costs will remain the same regardless of how much they use. In order to incentivize departments to control their consumption, it is better to allocate costs based on actual usage.

Question 11

An advantage of the single-rate method is that it is the most accurate method of cost-allocation.

Accepted Answer

The single-rate method is the easiest cost allocation method, but it is the least accurate cost-allocation choice.

Question 12

The single-rate method transforms the direct costs per hour into indirect costs to users of that facility.

Accepted Answer

The single-rate method transforms the fixed costs per hour into variable costs to users of that facility.

Question 13

The dual-rate cost-allocation method provides better information for decision making than the single-rate method as it differentiates between fixed and variable costs and its allocation.

Accepted Answer

The dual-rate cost-allocation method considers both fixed and variable costs and allocates them separately to provide more accurate information for decision making, whereas the single-rate method lumps all costs together and allocates them based on a single predetermined rate. Therefore, the dual-rate method is more advantageous for decision making as it provides better cost information.

Question 14

The single cost-allocation method makes no distinction between fixed and variable costs.

Accepted Answer

The single cost-allocation method allocates all costs, regardless of whether they are fixed or variable, to the cost object.

Question 15

Illumination Corp 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:

Assume that practical capacity is used to calculate the allocation rates.
Actual usage for the year by the Flashlight Division was 1400 hours and by the Night Light Division was 700 hours. 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.
A) $516,000
B) $586,000
C) $532,000
D) $602,000

Accepted Answer

Night Light Division cost = [(600 / 3000) × $480,000] + (700 × $700) = $586,000

Question 16

Illumination 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:

Assume that practical capacity is used to calculate the allocation rates.
Actual usage for the year by the Flashlight Division was 1400 hours and by the Night Light Division was 700 hours. If a single-rate cost-allocation method is used, what amount of operating costs will be budgeted for the Flashlight Division?
A) $1,440,000
B) $1,344,000
C) $1,424,000
D) $1,360,000

Accepted Answer

Flashlight Division cost = [(1500 / 3000) × $480,000] + (1500 × $800) = $1,440,000

Question 17

The fixed costs of operating the maintenance facility of General Hospital are $4,500,000 annually. Variable costs are incurred at the rate of $30 per maintenance-hour. The facility averages 40,000 maintenance-hours a year. Budgeted and actual hours per user for 2017 are as follows:
  
Assume that budgeted maintenance-hours are used to calculate the allocation rates.
Required:
a.If a single-rate cost-allocation method is used, what amount of maintenance cost will be budgeted for each department?
b.If a single-rate cost-allocation method is used, what amount of maintenance cost will be allocated to each department based on actual usage?
c.If a dual-rate cost-allocation method is used, what amount of maintenance cost will be budgeted for each department?
d.If a dual-rate cost-allocation method is used, what amount of maintenance cost will be allocated to each department based on actual usage? Based on budgeted usage for fixed operating costs and actual usage for variable operating costs?

Accepted Answer

The answer of The fixed costs of operating the maintenance...

Question 18

To discourage unnecessary use of a support department, management might ________.
A) allocate user department costs based upon support department usage
B) allocate support department costs based upon user department usage
C) allocate a fixed amount of support department costs to each and every department
D) allocate a fixed amount of user department costs to each and every department

Accepted Answer

By allocating support department costs based upon user department usage, departments will be more mindful of their use of support services as they will be charged for their usage. This will discourage unnecessary use of support departments and promote cost-conscious behavior among the user departments. Allocating user department costs or allocating a fixed amount of support department costs to each department does not effectively address the issue of unnecessary use of support departments.

Question 19

Under the dual-rate cost-allocation method, when fixed costs are allocated based on actual usage then ________.
A) user-division managers are motivated to make accurate long-run usage forecasts
B) user-division managers can better plan for the short-run and for the long-run
C) the costs of unused capacity are highlighted
D) variations in one division's usage affect another division's allocation

Accepted Answer

When fixed costs are allocated based on actual usage, variations in one division's usage can affect the allocation of costs to other divisions, as the total fixed costs are distributed based on the actual usage proportions.

Question 20

Van Meter Fig Company has substantial fluctuations in its production costs because of the seasonality of figs.
Would you recommend an actual or budgeted allocation base? Why? Would you recommend calculating monthly, seasonal, or annual allocation rates? Why?

Accepted Answer

The answer of Van Meter Fig Company has substantial fluctuations...

Quiz 15: Allocation of Support-Department Costs, Common Costs, and Revenues

What is an operating department and how is it different from a support department? Give examples of each.

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

When actual cost-allocations rates are used, which of the following would be true?

The costs of unused capacity are highlighted when ________.

When budgeted cost-allocations rates are used ________.

Allocating variable costs on the basis of budgeted usage would provide the user departments with no incentive to control their consumption of support services.

An advantage of the single-rate method is that it is the most accurate method of cost-allocation.

The single-rate method transforms the direct costs per hour into indirect costs to users of that facility.

The dual-rate cost-allocation method provides better information for decision making than the single-rate method as it differentiates between fixed and variable costs and its allocation.

The single cost-allocation method makes no distinction between fixed and variable costs.

To discourage unnecessary use of a support department, management might ________.

Under the dual-rate cost-allocation method, when fixed costs are allocated based on actual usage then ________.

Van Meter Fig Company has substantial fluctuations in its production costs because of the seasonality of figs. Would you recommend an actual or budgeted allocation base? Why? Would you recommend calculating monthly, seasonal, or annual allocation rates? Why?