Question 1

Indicate whether each of the following statements is true or false.
1. When a company can identify more than one cost driver for a particular cost, it should use the cost driver with the strongest cause-and-effect relationship to the cost.
2. Availability and cost of information are likely to influence a company's choice of cost drivers.
3. A company should never use a cost driver unless there is a strong causal relationship between the cost and the cost driver.
4. Different cost drivers almost always give about the same results when a cost is allocated to cost objects.
5. In allocating costs among departments, a company must consider how department managers are likely to respond.

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Question 2

Indicate whether each of the following statements is true or false.
1.A predetermined overhead rate should not be used to allocate overhead costs when volume varies during the year.
2. A predetermined overhead rate is calculated using estimated cost and volume data.
3. A predetermined overhead rate is calculated by dividing costs by volume, using a measure of volume such as direct labor hours or direct materials cost.
4. A company may need to allocate overhead costs to products to make pricing decisions for the products.
5. Accounting reports at the end of the fiscal year are based on estimated costs rather than actual costs.

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Question 3

Indicate whether each of the following statements is true or false.
1. Information prepared using allocated costs often is used in evaluating the performance of managers.
2. Information prepared using allocated costs should not be used in budgeting and resource allocation decisions within a company.
3. A cost that is indirect with respect to one cost object may be direct with respect to other cost objects.
4. Fixed costs generally are direct costs, and variable costs generally are indirect.
5. An allocation base causes a cost to be incurred.

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Question 4

Jefferson Company expects to incur $450,000 in manufacturing overhead costs during 2014. Other budget information follows: $$\begin{array} { | l | r | r | r | } 
\hline & \text { Department A } & \text { Department B } & \text { Department C } \
\hline \text { Direct labor hours } & 15,000 & 5,000 & 20,000 \
\hline \text { Machine hours } & 8,000 & 10,000 & 12,000 \
\hline
\end{array}$$ 
Required:
1) Use direct labor hours as the cost driver to compute the allocation rate. Determine the amount of budgeted overhead cost for each department.
2) Use machine hours as the cost driver to compute the allocation. Determine the amount of budgeted overhead cost for each department.
3) Assume that Department A manufactured a product that required 160 direct labor hours and 85 machine hours. If overhead is allocated based on direct labor hours, how much overhead would be allocated to this product?
4) Assume that Department A manufactured a product that required 160 direct labor hours and 85 machine hours. If overhead is allocated based on machine hours, how much overhead would be allocated to this product?

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Question 5

Biden Department Store has four departments: men's, women's, children's, and electronics. The following information is provided: $$\begin{array} { | l | l | l | l | l | } 
\hline & \text { Men's } & \text { Women's } & \text { Children's } & \text { Electronics } \
\hline \text { Floor space } & 10,000 \text { sq. ft. } & 20,000 \text { sq. ft. } & 8,000 \text { sq. ft. } & 2,000 \text { sq. ft. } \
\hline \text { Sales } & \$ 35,000 & \$ 75,000 & \$ 20,000 & \$ 12,000 \
\hline
\end{array}$$ 
The company's accountant needs to allocate the store's annual rent of $160,000.
Required:
1) Compute the allocation rate that should be used to allocate the rent cost to the four departments.
2) Compute the amount of rent that should be allocated to each of the four departments.
3) Currently, the managers are paid a bonus based on sales. As you can see from the above table, the women's department manager will receive the largest bonus. Do you believe this bonus plan is fair to all four department managers? Why or why not?

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Question 6

Indicate whether each of the following statements is true or false.
1. Companies group several individual overhead costs into cost pools to simplify the allocation process.
2. A cost pool should include costs that will all be allocated to a single cost object.
3. When a cost pool is used, costs are allocated individually to the cost object.
4. Using cost pools to group costs generally does not reduce the usefulness of the resulting product costs.

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Question 7

Indicate whether each of the following statements is true or false.
1. Indirect costs cannot be traced to a cost object in a cost-effective manner.
2. For a factory with several departments, each department could be treated as a cost object.
3. Depreciation on a factory building is a direct cost for the departments in the factory.
4. For a factory with several departments, depreciation on equipment used in one department would be a direct cost to that department.
5. An individual cost cannot be both fixed and direct with respect to a particular cost object.

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Question 8

Martin's is a store with three departments, Appliances, Tools, and Home Improvements. The company expects to incur the following indirect costs related to its operations:
Store manager's salary
Store supplies
Electric bill
Clerical staff salaries
Payroll taxes
Office supplies
Water bill
Sewer bill
Medical insurance
Vacation pay
Required:
1) Organize the indirect costs into three cost pools: Store Administration, Utilities, and Fringe Benefit Costs, assuming that each department is a cost object
2) Identify an appropriate cost driver for each cost pool.

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Question 9

Parr Corporation makes three products, X, Y, and Z. Expected overhead costs for the coming year include: $$\begin{array} { | l | r | } 
\hline \text { Depreciation on factory building } & \$ 140,000 \
\hline \text { Factory utility costs } & 160,000 \
\hline \text { Supervisory salaries } & 250,000 \
\hline \text { Factory supplies } & 50,000 \
\hline \text { Total } & \$ 600,000 \
\hline
\end{array}$$ 
Parr uses direct labor hours as the cost driver to allocate overhead costs. Budgeted direct labor hours for each product are:
Product X, 15,000 direct labor hours
Product Y, 10,000 direct labor hours
Product Z, 5,000 direct labor hours
Required:
1) Determine the amount of manufacturing overhead that should be allocated to each of the three products.
2) Assume that each unit of Product X requires $40 in direct materials and 3 direct labor hours at a rate of $15 per hour. Calculate the budgeted or expected cost of each unit of X.

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Question 10

Indicate whether each of the following statements is true or false.
1. Cost accumulation refers to identifying whether a particular cost is fixed or variable.
2. Cost objects may be departments, sales territories, or individual products.
3. Cost accumulation is not useful in a service-type business.
4. An allocation base has a cause-and-effect relationship with a cost object.
5. Timeliness of managerial accounting information is more important than its precision.

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Question 11

Select the term from the list provided that best describes each of the following descriptions.

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Question 12

Vance Electronics expects to make 100,000 Bluetooth speakers during 2014. Direct materials cost per unit are estimated at $12, and direct labor cost is expected to be $4 per unit. The total manufacturing overhead for the year is budgeted at $850,000.
Required:
1) Calculate the amount of overhead that should be allocated to each speaker during the year.
2) Assume that, during the month of October, Vance made and sold 8,000 speakers. What would the cost of goods sold be for the month?
3) Assume that the company sells the speakers at cost plus 40% of cost. What would be the selling price for each speaker?

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Question 13

The College of Business Administration needs to distribute $12,000 received from an anonymous donor and earmarked for three business student organizations, Beta Alpha Psi (BAP), Delta Sigma Pi (DSP), and Beta Gamma Sigma (BGS). Relevant information is provided below: $$\begin{array} { | l | r | r | r | } 
\hline \text { Possible Cost Driver } & \text { BAP } & \text { DSP } & { \text { BGS } } \
\hline \text { Number of students } & 30 & 40 & 100 \
\hline \text { Budgeted expenses } & \$ 5,500 & \$ 4,000 & \$ 500 \
\hline \begin{array} { l } 
\text { Number of } \
\text { organizations }
\end{array} & 1 & 1 & 1 \
\hline
\end{array}$$ 
Assume that each organization wishes to obtain the highest funding possible.
Required:
1) Which cost driver will each organization recommend be used to distribute the funds?
2) Which cost driver would you recommend and why?

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Question 14

Indicate whether each of the following statements is true or false.
1. Estimated cost data must often be used in making decisions because actual cost information is not yet available.
2. Managers often accumulate both estimated and actual cost data for the same cost object.
3. A direct cost must be allocated to a cost object.
4. For a department in a retail store, cost of goods sold is a direct cost.
5. Determining whether a cost is direct or indirect depends on the selection of cost object.

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Question 15

Indicate whether each of the following statements is true or false.
1. Volume measures include number of labor hours, quantity of direct materials used, and number of units sold.
2. A variable overhead cost should be allocated to cost objects using a volume measure as the allocation base.
3. A causal relationship exists between a fixed overhead cost and the volume of production.
4. The allocation base used by a manufacturer to allocate overhead costs may affect the apparent profitability of the various products the company makes.
5. Fixed indirect costs are often allocated using arbitrary allocation bases.

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Question 16

Burke Company has 160 employees, 88 of whom are in Department 1 and 72 in Department 2. The company expects to incur $166,000 of office supplies costs in 2014. How much of this cost should be allocated to Department 1?

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Question 17

The management accountant at Morrison, Inc. provided the following estimated costs for producing 2,500 units of a specialty product manufactured by the firm: $$\begin{array} { | l | r | } 
\hline \text { Direct Materials } & \$ 10,000 \
\hline \text { Direct Labor (1 hour per unit) } & 5,000 \
\hline \text { Unit-level support costs } & 10,000 \
\hline \text { Batch level support costs } & 5,000 \
\hline \text { Product-level support costs } & 3,000 \
\hline \text { Facility-level support costs } & 7,000 \
\hline
\end{array}$$ 
The company believes that direct labor hours are the most appropriate cost driver for assigning overhead costs to its product.
Required:
1) Compute the predetermined overhead rate for this company.
2) Compute the specialty product's total estimated cost per unit.
3) Why do firms assign overhead costs using a predetermined overhead rate instead of assigning actual costs?

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Question 18

The following information was gathered for Company J, a manufacturing company with three departments, A, B, and C:
Manufacturing supplies cost is expected to be $300,000. Possible cost drivers are direct labor hours, direct materials cost, and number of units completed and sold. The three departments have varying amounts for these items. $$\begin{array} { | l | r | r | r | } 
\hline & \text { Department A } & \text { Department B } & \text { Department C } \
\hline \text { Direct labor hours } & 15,000 & 40,000 & 45,000 \
\hline \text { Direct materials cost } & \$ 500,000 & \$ 2,500,000 & \$ 2,000,000 \
\hline \text { \# of units expected to be } & & & \
\text { completed and sold } & 80,000 & 30,000 & 40,000 \
\hline
\end{array}$$ 
Based on this information, indicate whether each of the following statements is true or false.
1. If number of units completed and sold is selected as the cost driver, the allocation rate for manufacturing supplies cost would be $2 per unit.
2. If direct labor hours is selected as the cost driver, the manufacturing supplies cost allocated to Department B would be $100,000.
3. The manufacturing supplies cost allocated to Department C would be unaffected by the choice of the cost driver.
4. If the amount of bonuses to department managers is based on income after all expenses, the manager for Department A would prefer that direct materials cost be selected as the cost driver.
5. If the amount of bonuses to department managers is based on income after all expenses, the manager for Department B would prefer that direct labor hours be selected as the cost driver.

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Question 19

Morris Company makes one product, and it expects to incur a total of $600,000 in indirect (overhead) costs during 2014. Production of the product for the year is expected to be: $$\begin{array} { | l | l |r | r r | r | } 
\hline & { \text { Quarter } } \
\hline & 1 & 2 & 3 & 4 \
\hline \begin{array} { l } 
\text { Estimated } \
\text { production in } \
\text { units }
\end{array} & 40,000 & 15,000 & & 27,000 & 38,000 \
\hline
\end{array}$$ 
Required:
1) Calculate a predetermined overhead rate based on the number of units of product expected to be made during 2014.
2) Assuming that direct materials and direct labor costs are $10 and $15, respectively, determine the total cost per unit using the overhead rate you calculated in part a.

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Question 20

Indicate whether each of the following statements is true or false.
1. Indirect costs are traced to cost objects.
2. Cost drivers are used to allocate indirect costs to cost objects.
3. An allocation rate is calculated by dividing the allocation base by the total cost to be allocated.
4. A cost driver must be identified for each cost pool that is to be allocated.
5. Depreciation on a building might be allocated to the departments sharing the building based on the number of square feet occupied by each department.

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Quiz 12: Cost Accumulation, Tracing, and Allocation

Select the term from the list provided that best describes each of the following descriptions.

Burke Company has 160 employees, 88 of whom are in Department 1 and 72 in Department 2. The company expects to incur $166,000 of office supplies costs in 2014. How much of this cost should be allocated to Department 1?