Test Bank - Chapter16 ABC Approach

Chapter 16 Service Department Costing: An Activity Approach

True/False 1. T Medium

In both the direct and step methods of allocating service department costs, any amount of the allocation base that is attributable to the service department whose cost is being allocated is ignored.

2. F Medium

The direct method has the disadvantage that it may leave some service department costs unallocated.

3. T Easy

Under the direct method of allocating service department costs, reciprocal services provided among service departments are ignored.

4. F Medium

If personnel department expenses are allocated on the basis of the number of employees in various departments, then the number of employees in the personnel department itself must be included in the allocation base when the step method is used.

5. T Medium

The step method requires that an order of allocation is established before service department costs can be allocated to operating departments.

6. T Easy

The step method of allocating service department costs takes into account some, but not all, of the reciprocal services that service departments provide to each other.

7. F Medium

The step method usually begins with the service department that provides the least amount of service to the other service departments.

8. F Medium

The total amount of a service department's variable cost allocated to an operating department should usually be the same at the beginning and at the end of a period.

9. T Medium

The total amount of a service department's fixed cost allocated to an operating department should usually be the same at the beginning and at the end of a period.

10. F Medium

The fixed costs of service departments should be allocated to operating departments at the end of a period in proportion to the amount of capacity the service departments actually use during the period.

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11. F Medium

For performance evaluation purposes, actual service department costs instead of budgeted service department costs should be allocated to operating departments.

12. F Easy

An allocation basis for service department costs should reflect how much cost the operating departments can bear. For this reason, the sales of the operating departments is often a good allocation basis.

13. F Medium

Services provided between service departments are known as non valueadded activities.

14. F Easy

The reciprocal method of allocating service department costs is much simpler than the direct method and as a consequence is much more widely used.

15. F Medium

All of a service department's actual costs should be allocated to operating departments to ensure that they are fully recovered.

Multiple Choice 16. D Medium

Reciprocal service department costs are: a. allocated to producing departments under the direct method but not allocated to producing departments at all under the step method. b. allocated to producing departments under the step method but not allocated to producing departments at all under the direct method. c. not allocated to producing departments under either the direct or the step methods. d. allocated to producing departments under both the direct and step methods.

17. D Medium

The step method of allocating service department costs: a. is a less accurate method of allocation than the direct method. b. cannot be used when a company has more than two service departments. c. is a simpler allocation than the direct method. d. ignores some interdepartmental services.

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18. B Easy

Grant Company has several service departments that provide services for each other as well as for producing departments with the company. The method that would be least accurate in allocating the company's service department costs would be: a. by cost behavior. b. by the direct method. c. by the step method. d. by the reciprocal method.

19. B Medium

Variable service department costs should be allocated to operating departments at the end of the period according to the formula: a. Budgeted rate X Budgeted activity. b. Budgeted rate X Actual activity. c. Actual rate X Actual activity. d. Budgeted total cost X Percentage of peakperiod capacity required.

20. D Medium

It would be best to allocate fixed service department costs to operating departments at the end of the period according to which one of the following the formulas? a. Budgeted rate X Budgeted activity. b. Budgeted rate X Actual activity. c. Actual rate X Actual activity. d. Budgeted total cost X Percentage of peakperiod capacity required.

21. C Medium

Piedmont Company has one service department and three operating departments. During a particular year, a substantial variance developed between the actual costs and the budgeted costs of the service department. For performance evaluation purposes, the variance should be: a. allocated to the operating departments on a basis of usage. b. allocated to operating departments, but on some basis other than usage. c. kept in the service department, and not charged to the operating departments at all. d. none of these.

22. C Medium

If a portion of the actual cost incurred by a service department is not allocated to other departments, at the end of the period, the unallocated cost should be: a. allocated equally between the other departments. b. allocated between the other departments in proportions to budgeted activity. c. treated as a variance of the service department. d. treated as a variance of the other departments.


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23. B Medium

The longrun average or peak period needs of operating departments would be the most suitable base for allocating: a. the variable element of power costs. b. the fixed element of power costs. c. total power costs. d. none of these.

24. C Easy CMA adapted

Because this allocation method recognizes that service departments often provide each other with interdepartmental services, it is considered to be the most accurate method for allocating service department costs to operating departments. This method is: a. the direct method. b. the step method. c. the reciprocal method. d. the full method.

25. A Medium

25. Parker Company has two service departments, cafeteria and engineering, and two operating departments. The number of employees in each department is given below: Cafeteria ................... 10 Engineering .................. 40 Operating Department 1 ....... 500 Operating Department 2 ....... 200 The costs of the Cafeteria are allocated to other departments on the basis of the number of employees in the departments. If these costs are budgeted at $69,375, the amount of cost allocated to Engineering under the direct method would be: a. $0. b. $3,700. c. $3,750. d. $17,344.


26. C Medium CPA adapted

Boa Corp. uses the direct method to allocate service department overhead costs to operating departments. Information for the month of June follows: Service Departments o Maintenance Utilities Departmental costs incurred .. $ 20,000 $10,000 Service provided to departments: Maintenance ............ 10% Utilities .............. 20% Operating A ........... 40% 30% Operating B ........... 40% 60% The amount of maintenance department costs allocated to Operating Department A for June would be: a. $8,000. b. $8,800. c. $10,000. d. $20,000.

27. C Medium

Fairview Hospital has a Food Services department which provides food for patients in all other departments of the hospital. For May, variable food costs were budgeted at $3 per meal, based on 15,000 meals served during the month. At the end of the month, it was determined that 16,000 meals had been served at a total cost of $54,000. How much food cost should be charged to other departments at the end of the month for performance evaluation purposes? a. $45,000 b. $51,200 c. $48,000 d. $50,625


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28. A Medium

Swift Company has a Maintenance Department which does maintenance work on all equipment in operating departments A and B. The Maintenance Department budgeted variable maintenance costs of $0.20 per machine hour for June. Actual variable maintenance costs for the month totaled $15,000. Budgeted and actual machine hours in the operating departments for the month were: Dept. A Dept. B Total Budgeted machine hours ....... 22,000 18,000 40,000 Actual machine hours worked .. 30,000 20,000 50,000 How much variable maintenance cost for the month should be charged to Dept. A at the end of the month for performance evaluation purposes? a. $6,000 b. $15,000 c. $8,250 d. $9,000

29. C Medium

Wilson Company maintains a cafeteria for its employees. For June, variable food costs were budgeted at $45 per employee based on a budgeted level of 200 employees in other departments. During the month, an average of 190 employees worked in other departments and actual food costs totaled $9,250. How much food cost should be charged to other departments at the end of the month for performance evaluation purposes? a. $9,000 b. $9,250 c. $8,550 d. $9,737

30. A Medium

The medical services department of Carey Company budgeted $20 of variable medical expenses per employee for May, based on 1,000 employees in operating departments. During May an average of 1,050 employees were employed in operating departments. Actual variable medical expenses totaled $23,100 for the month. How much variable medical expenses should be charged to operating departments at the end of May for performance evaluation purposes? a. $21,000 b. $23,100 c. $20,000 d. $22,000


31. B Medium

The fixed costs of Baxter Company's personnel department are allocated to operating departments on the basis of direct labor hours. The following data have been provided: Operating Department X Y Direct labor hours Longrun average ... 15,000 10,000 Direct labor hours Actual ............. 10,000 6,000 The fixed costs of the personnel department are budgeted at $56,000 per year and are incurred in order to support longrun average requirements. How much of this fixed cost should be allocated to Operating Department X at the end of the year for performance evaluation purposes? a. $35,000 b. $33,600 c. $52,500 d. $22,400

Reference: 161 Westmore Company has two service departments and two operating departments. Budgeted costs and other data relating to these departments are presented below: Building Operating Department & Grounds Personnel A B Departmental costs ..... $54,000 $200,000 $650,000 $800,000 Square feet occupied ... 1,000 3,000 12,000 15,000 Number of employees .... 10 5 45 55 Direct laborhours ..... 76,000 92,000 The costs of Building & Grounds are allocated first on the basis of square feet of space occupied. Personnel costs are allocated on the basis of number of employees. The departmental costs for the operating departments are overhead costs. Predetermined overhead rates in the operating departments are computed on the basis of direct laborhours. 32. C Medium Refer To: 161

Assume that the company uses the direct method of allocating service department costs to operating departments. How much Building & Grounds cost would be allocated to Department A? a. $29,700 b. $21,600 c. $24,000 d. $20,903


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33. D Medium Refer To: 161

Assume that the company uses the direct method of allocating service department costs. The predetermined overhead rate that would be used in Department B would be closest to: a. $11.50/DLH. b. $12.00/DLH. c. $10.00/DLH. d. $10.22/DLH.

34. C Medium Refer To: 161

Assume that the company uses the step method of allocating service department costs to operating departments and Building and Grounds costs are allocated first. How much Personnel Department cost would be allocated to Department B? a. $0 b. $107,368 c. $112,970 d. $107,590

35. B Medium Refer To: 161

Assume again that the company uses the step method. The total amount of cost allocated from the two service departments to the operating departments for the year would be: a. $1,450,000. b. $254,000. c. $1,704,000. d. $850,000.

Reference: 162 Russet Company has two service departments and two producing departments. Budgeted costs and budgeted activity in the various departments for the most recent year are presented below: Custodial Cutting Assembly Services Cafeteria Department Department Overhead costs ......... $252,000 $140,000 $600,000 $900,000 Square feet of space occupied ..... 1,000 2,000 8,000 10,000 Number of employees .... 20 30 150 200 Machinehours .......... 40,000 60,000 Service Department costs are allocated to producing departments with the costs of Custodial Services allocated first on the basis of square feet of space occupied. The costs of the Cafeteria are allocated on the basis of number of employees. Predetermined overhead rates in the Cutting and Assembly Departments are based on machinehours. Round all calculations to the nearest dollar. 36. D Medium Refer To: 162

Under the direct method of allocation, the amount of Custodial Services cost allocated to the Cutting Department would be: a. $0. b. $96,000. c. $100,800. d. $112,000.


37. A Hard Refer To: 162

Under the direct method of allocation, the predetermined overhead rate for the year in the Assembly Department would be. a. $18.67. b. $18.17. c. $3.67. d. $3.17.


Under the step method of allocation, the amount of Custodial Services cost allocated to the Assembly Department would be: a. $0. b. $120,000. c. $126,000. d. $140,000.


Under the step method of allocation, the amount of cost allocated from the Cafeteria to the Cutting Department would be: a. $0. b. $70,800. c. $61,500. d. $60,000.

40. A Medium Refer To: 162

Under the step method of allocation, the amount of cost allocated from the Cafeteria to Custodial Services would be: a. $0. b. $8,260. c. $7,000. d. $7,568.

Reference: 163 The James Company has four departments with data as follows: Service Depts. Operating Depts. o Cafeteria Maintenance Milling Finishing Budgeted costs .......... $12,000 $10,000 $42,000 $38,000 Number of employees ..... 12 10 84 66 Labor hours ............. 1,500 1,250 5,250 4,750 41. C Medium Refer To: 163

Maintenance Department costs are allocated on the basis of labor hours. The amount of cost allocated to Milling from Maintenance under the direct method would be: a. $5,600. b. $6,720. c. $5,250. d. $5,700.


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Cafeteria costs are allocated on the basis of number of employees. If the step method is used with costs of the Cafeteria allocated first, the amount of cost allocated from the Cafeteria to Maintenance would be: a. $0. b. $625. c. $698. d. $750.

Reference: 164 Anderson Company has two service departments and two producing departments. The costs of the Personnel Department are allocated to other departments on the basis of the number of employees in the departments. Departments and number of employees are as follows: Employees Personnel Department ........... 30 Engineering Department ......... 90 Producing Department No. 1 ..... 590 Producing Department No. 2 ..... 290 Total employees ................ 1,000 43. C Medium Refer To: 164

Costs in the Personnel Department total $900,000 per year. Under the step method, the costs of the Personnel Department are allocated before the costs of the Engineering Department are allocated. The amount of this cost allocated to the Engineering Department under the step method (rounded to the nearest dollar) would be: a. $0. b. $81,000. c. $83,505. d. $92,046.


The amount of Personnel Department cost that would be allocated to Producing Department 2 under the direct method would be: a. $0. b. $261,000. c. $269,072. d. $296,591.


Reference: 165 The Toville City Hospital has two service departmentsEnergy and Housekeeping. These two departments provide services to the three operating departmentsPediatrics, Surgery, and Health Care. The fixed costs of the Energy Department are allocated on the basis of kilowatt hours (KWH), and the fixed costs of the Housekeeping Department are allocated on the basis of square footage of space occupied. Data for August are as follows: House Pedia Health Energy keeping trics Surgery Care Budgeted fixed costs .............. $160,000 $200,000 Actual fixed costs .............. $162,000 $207,000 Square footage ........ 5,000 5,000 20,000 10,000 70,000 Longrun average KWH ........ 2,000 36,000 90,000 90,000 144,000 Actual KWH used ....... 2,000 30,000 75,000 60,000 135,000 The hospital allocates service department costs by the step method, starting with the Energy Department. The Energy Department's budgeted fixed costs are determined by the longrun average KWH requirements. 45. B Medium Refer To: 165

The amount of fixed cost allocated from Housekeeping to Pediatrics for August would be: a. $200,000. b. $43,200. d. $40,500. c. $44,640.


The amount of fixed cost allocated from Energy to Surgery for August would be: a. $40,500. b. $38,900. c. $42,000. d. $40,000.


The amount of fixed cost allocated from Housekeeping to Surgery for August would be: a. $22,320. b. $21,600. c. $35,980. d. $25,180.


The total amount of fixed cost allocated to Health Care from all service departments for August would be: a. $221,040. b. $61,600. c. $215,200. d. $175,800.


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Reference: 166 The MohawkHudson Company is an electric utility which has two service departments, Accounting and Maintenance. It has two operating departments, Generation and Transmission. The company does not distinguish between fixed and variable service department costs. Maintenance Department costs are allocated on the basis of maintenance hours of service. Accounting Department costs are allocated to operating departments on the basis of accounting hours of service provided. Budgeted costs and other data for the coming year are as follows: Accounting Maintenance Generation Transmission Budgeted costs ........ $100,000 $200,000 $600,000 $400,000 Maintenance hours of service .......... 600 7,200 4,800 Accounting hours of service .......... 500 2,000 4,500 3,500 The step method is used to allocate service department costs, with the accounting department being allocated first. 49. B Medium Refer To: 166

The amount of accounting department costs allocated to the maintenance department would be: a. $0. b. $20,000. c. $19,048. d. $18,000.


The amount of accounting department costs allocated to the generation department would be: a. $42,857. b. $57,143. c. $38,000. d. $45,000.


The amount of maintenance department cost allocated to the accounting department would be: a. $0. b. $69,315. c. $75,000. d. $88,000.


The amount of maintenance department cost allocated to the generation department would be: a. $132,000. b. $123,750. c. $150,685. d. $140,000.


Reference: 167 Lakeside Nursing Home has two operating departments, Custodial Care and Rehabilitation. It also has a Housekeeping Department that serves the two operating departments. The costs of the Housekeeping Department are all variable and are allocated to the operating departments on the basis of labor hours. Data for September follow: Custodial Care Rehabilitation Budgeted labor hours .... 3,000 1,000 Actual labor hours ...... 3,200 1,600 The budgeted costs of the Housekeeping Department for September were $24,000 and the actual costs were $29,760. 53. D Medium Refer To: 167

How much Housekeeping Department cost should be allocated to Custodial Care at the start of September for flexible budget planning purposes? a. $16,000 b. $6,000 c. $8,000 d. $18,000


How much Housekeeping Department cost should be charged to Rehabilitation at the end of September for performance evaluation purposes? a. $19,840 b. $9,920 c. $9,600 d. $7,440

55. A Hard Refer To: 167

How much of the actual Housekeeping Department costs for September should not be charged to the operating departments for performance evaluation purposes? a. $960 b. $5,760 c. $0 d. $1,240

Reference: 168 Community General Hospital has a Food Services Department that provides meals for all patients in the hospital. Budgeted and actual meals served for the month just ended are: Meals Served o Budgeted Actual Pediatrics Department ........ 30,000 24,000 Surgical Department .......... 50,000 76,000 Total meals .................. 80,000 100,000 The budgeted variable cost of meals for the month just ended was $100,000; the actual variable cost of meals for the month was $130,000. Managerial Accounting, 9/e

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How much Food Services variable cost should be allocated to the Pediatrics Department at the beginning of the current year for planning purposes? a. $0. b. $37,500. c. $39,000. d. $48,750.


How much of the $130,000 actual Food Services variable cost should be allocated to the Surgical Department at the end of the month just completed? a. $62,500. b. $65,000. c. $95,000. d. $98,800.


How much of the $130,000 actual Food Services cost for the month just completed should be kept in the Food Services Department and not allocated to the other departments? a. $30,000. b. $5,000. c. $4,000. d. $0.

Reference: 169 Nathan Company has an Equipment Services Department that performs all needed maintenance work on the equipment in the company's Fabrication and Assembly Departments. Cost of the equipment Services Department are allocated to the Fabrication and Assembly Departments on the basis of direct laborhours. Data for the year just completed follow: Fabrication Assembly Total o Budgeted direct laborhours ..... 20,000 60,000 80,000 Actual direct laborhours ....... 30,000 70,000 100,000 Peakperiod direct laborhours .. 40,000 80,000 120,000 For the year just ended, the company budgeted its variable maintenance costs at $200,000 for the year. Actual variable maintenance costs for the year totaled $275,000. 59. B Medium Refer To: 169

How much of the $200,000 of budgeted variable maintenance cost should have been allocated to the Fabrication Department at the beginning of the year just completed? a. $66,667. b. $50,000. c. $60,000. d. $100,000.



How much of the $275,000 of actual variable maintenance cost should be allocated to the Assembly Department at the end of the year just ended for purposes of measuring performance? a. $175,000. b. $116,900. c. $192,500. d. $150,000.


How much (if any) of the $275,000 in variable maintenance cost should not be allocated to the Fabrication and Assembly Departments? a. $0. b. $75,000. c. $25,000. d. $108,000.

Reference: 1610 Fixed costs budgeted for Caterton's Maintenance Department for last year totaled $280,000; actual fixed costs for the year totaled $308,000. The level of budgeted fixed costs is determined by peakperiod requirements. The Milling Department requires 15/35 of the peakperiod capacity and the Assembly Department requires 20/35. 62. B Easy Refer To: 1610

How much fixed maintenance cost should be allocated to the Milling department at the beginning of the year for flexible budget planning purposes? a. $145,600 b. $120,000 c. $132,000 d. $140,000


How much fixed maintenance cost should be charged to the Assembly department at the end of the year for purposes of measuring performance? a. $160,000 b. $176,000 c. $173,500 d. $147,800

64. C Hard Refer To: 1610

How much of the actual fixed maintenance cost for the year should be kept in the Maintenance department and not charged to the other departments for performance evaluation purposes? a. $0 b. $308,000 c. $28,000 d. $280,000


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Reference: 1611 Mueller Industries has a Maintenance Department that services the company's Milling and Assembly Departments. Fixed costs of the Maintenance department are allocated to these departments on the basis of peakperiod machinehour. Data on machinehours for the year just ended follow: Milling Assembly Total o Budgeted machine hours ........... 60,000 140,000 200,000 Actual machinehours ............. 50,000 200,000 250,000 Peakperiod machinehours ........ 100,000 200,000 300,000 Fixed costs budgeted for the Maintenance Department for the year just ended totaled $500,000; actual fixed costs for the year totaled $530,000. 65. B Medium Refer To: 1611

How much of the $500,000 in budgeted fixed costs should be allocated to the Milling Department at the beginning of the year for planning purposes? (Round to the nearest dollar.) a. $100,000. b. $166,667. c. $250,000. d. $83,333.


How much of the $530,000 in actual fixed costs should be allocated to the Assembly Department at the end of the year for purposes of measuring performance? (Round to the nearest dollar.) a. $424,000. b. $371,000. c. $333,333. d. $353,333.


How much of the $530,000 in actual fixed cost for the year should be kept in the Maintenance Department and not allocated to the other departments? (Round to the nearest dollar.) a. $0. b. $88,333. c. $95,000. d. $30,000.

Reference: 1612 The Sherman Company manufactures and sells rowboats and canoes. The company has two operating departments, Carpentry and Finishing. The company also has a Maintenance Department which serves both operating departments. The costs in the Maintenance Department are budgeted at $120,000 per month plus $0.25 per labor hour. The budgeted fixed costs are determined by the peakperiod requirements. The Carpentry Department requires 62.5% of the peakperiod capacity and the Finishing Department requires 37.5%. For May, Carpentry has estimated that it will operate 100,000 labor hours and Finishing has estimated that it will operate 80,000 labor hours.



How much Maintenance Department cost should be allocated to Carpentry at the beginning of May for flexible budget planning purposes? a. $112,500 b. $100,000 c. $74,537 d. $92,400


How much Maintenance Department cost should be allocated to Finishing at the beginning of May for flexible budget planning purposes? a. $67,500 b. $65,400 c. $70,000 d. $65,000

Essay 70. Medium

Central Medical Clinic has two service departments, Building Services and Energy, and three operating departments, Pediatrics, Geriatrics, and Surgery. Central allocates the cost of Building Services on the basis of square footage and Energy on the basis of patient days. No distinction is made between variable and fixed costs. Budgeted operating data for the year just completed follow: Service Departments Operating Departments o Building Services Energy Pediatrics Geriatrics Surgery Budgeted costs before allocation $20,000 $10,000 $90,000 $60,000 $100,000 Square footage 1,000 4,000 6,000 18,000 12,000 Patient days 5,500 7,700 8,800 Required: a. Prepare a schedule to allocate service department costs to operating departments by the direct method (round all dollar amounts to the nearest whole dollar). b. Prepare a schedule to allocate service department costs to operating departments by the step method, allocating Building Services first (round all amounts to the nearest whole dollar).


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Answer: a. Direct Method: Service Departments Operating Departments o Building Services Energy Pediatrics Geriatrics Surgery Budgeted costs before allocation $20,000 $10,000 $90,000 $60,000 $100,000 Allocation of Building Services: (20,000) Pediatrics: 6,000/36,000 x $20,000 3,333 Geriatrics: 18,000/36,000 x $20,000 10,000 Surgery: 12,000/36,000 x $20,000 6,667 Allocation of Energy: (10,000) Pediatrics: 5,500/22,000 x $10,000 2,500 Geriatrics: 7,700/22,000 x $10,000 3,500 Surgery: 8,800/22,000 x $10,000 ______ _______ _______ _______ 4,000 Costs after allocation $ 0 $ 0 $95,833 $73,500 $110,667 b. Step Method Service Departments Operating Departments o Building Services Energy Pediatrics Geriatrics Surgery Budgeted costs before allocation $20,000 $10,000 $90,000 $60,000 $100,000 Allocation of Building Services: (20,000) Energy: 4,000/40,000 x $20,000 2,000 Pediatrics: 6,000/40,000 x $20,000 3,000 Geriatrics: 18,000/40,000 x $20,000 9,000 86 Managerial Accounting, 9/e

Surgery: 12,000/40,000 x $20,000 6,000 Allocation of Energy: (12,000) Pediatrics: 5,500/22,000 x $12,000 3,000 Geriatrics: 7,700/22,000 x $12,000 4,200 Surgery: 8,800/22,000 x $12,000 _______ _______ _______ _______ 4,800 Costs after allocation $ 0 $ 0 $96,000 $73,200 $110,800


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71. Hard

Delta Manufacturing Company has two service departments, Custodial Services and Maintenance, and three production departments, Cutting, Milling, and Assembly. Delta allocates the cost of Custodial Services on the basis of square footage and Maintenance on the basis of laborhours. No distinction is made between variable and fixed costs. Budgeted operating data for the year just completed follow: Service Departments Production Departments o Custodial Services Maintenance Cutting Milling Assembly Budgeted costs before allocation $18,000 $ 8,000 $80,000 $50,000 $90,000 Square footage 1,000 10,000 5,000 22,000 13,000 Laborhours 4,000 8,000 8,000 Required: a. Prepare a schedule to allocate service department costs to the production departments by the direct method (round all dollar amounts to the nearest whole dollar). b. Prepare a schedule to allocate service department costs to the production departments by the step method, allocating Custodial Services first (round all amounts to the nearest whole dollar). Answer: a. Direct Method: Service Departments Production Departments o Custodial Services Maintenance Cutting Milling Assembly Budgeted costs before allocation $18,000 $ 8,000 $80,000 $50,000 $90,000 Allocation of Custodial Services: (18,000) Cutting: 5,000/40,000 x $18,000 2,250 Milling: 22,000/40,000 x $18,000 9,900 Assembly: 13,000/40,000 x $18,000 5,850 Allocation of Maintenance: (8,000) Cutting: 4,000/20,000 x $8,000 1,600 Milling:


8,000/20,000 x $8,000 3,200 Assembly: 8,000/20,000 x $8,000 _____ _ _______ _______ _______ 3,200 Costs after allocation $ 0 $ 0 $83,850 $63,100 $99,050


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b. Step Method Service Departments Production Departments o Custodial Services Maintenance Cutting Milling Assembly Budgeted costs before allocation $18,000 $ 8,000 $80,000 $50,000 $90,000 Allocation of Custodial Services: (18,000) Maintenance: 10,000/50,000 x $18,000 3,600 Cutting: 5,000/50,000 x $18,000 1,800 Milling: 22,000/50,000 x $18,000 7,920 Assembly: 13,000/50,000 x $18,000 4,680 Allocation of Maintenance: (11,600) Cutting: 4,000/20,000 x $11,600 2,320 Milling: 8,000/20,000 x $11,600 4,640 Assembly: 8,000/20,000 x $11,600 _______ _______ _______ _______ 4,640 Costs after allocation $ 0 $ 0 $84,120 $62,560 $99,320 72. Medium

Flinders Company has two service departments, Factory Administration and Maintenance, and two operating departments. Selected information relating to these departments is given below: Factory Operating Department Administration Maintenance X Y Departmental costs ......... $113,400 $80,000 $700,000 $600,000 Number of employees ..... 3 5 40 60 Total labor hours ......... 4,000 6,000 80,000 120,000 The company allocates service department costs by the step method. Factory Administration costs are allocated first on the basis of number of employees, and then Maintenance costs are allocated on the basis of total labor hours. Required:


Prepare a schedule showing the allocation of service department costs to other departments.


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Answer: Factory Operating Department Administration Maintenance X Y Departmental costs ......... $113,400 $80,000 $700,000 $600,000 Allocation: Factory Admin. (113,400) 5,400 43,200 64,800 Maintenance .. (85,400) 34,160 51,240 Departmental costs after allocation .... $ 0 $ 0 $777,360 $716,040 73. Medium

Hancock Company has two service departmentsFactory Administration and Maintenanceand two producing departments. Selected information relating to these departments follow: Factory Producing Departments Administration Maintenance X Y o Number of employees ... 15 25 200 300 Total labor hours ....... 20,000 30,000 400,000 600,000 Overhead costs $300,000 $250,000 $850,000 $1,200,000 The company allocates service department costs using the step method. Costs of Factory Administration are allocated on the basis of the number of employees. Costs of Maintenance are allocated on the basis of laborhours. Allocation begins with the Factory Administration Department. Required: Prepare a schedule showing the allocation of service department costs to the other departments. Answer: Factory Producing Departments Administration Maintenance X Y Overhead costs $300,000 $250,000 $ 850,000 $1,200,000 Allocation: Factory Admin. ($300,000) 14,286 114,286 171,428 Maintenance .. _________ (264,286) 105,714 158,572 Overhead costs after allocation .... $ 0 $ 0 $1,070,000 $1,530,000


74. Medium

Leslie Company operates a cafeteria for the benefit of its employees. The company subsidizes the cafeteria heavily by allowing employees to purchase meals at greatly reduced prices. Budgeted and actual costs in the cafeteria for the year just ended are as follows: Budgeted Actual Variable costs ... $500,000 $436,000 Fixed costs ...... $340,000 $352,000 *

Unrecovered cost after deducting amounts received from employees.

Costs of the cafeteria are allocated to producing departments on the basis of the number of employees in these departments. Fixed costs are allocated on the basis of the peakperiod number of employees. Data on employees in the company's producing departments follows: Machining Assembly Total Budgeted number of employees ....... 300 500 800 Actual number of employees ......... 200 400 600 Peakperiod number of employees .... 400 600 1,000 Required: a. Compute the dollar amount of variable and fixed costs that should be allocated to each of the producing departments at the beginning of the year for planning purposes. b. Compute the dollar amount of variable and fixed costs that should be allocated to each of the producing departments at the end of the year for purposes of evaluating performance. Identify the amount, if any, of actual costs that should not be allocated to the operating departments. Answer: a. Budgeted variable rate: $500,000  800 employees = $625 per employee. Fixed costs are allocated on the basis of peak period number of employees: Machining, 40%; Assembly, 60%. Machining Assembly Variable cost allocation: Machining: 300 x $625 ... $ 187,500 Assembly: 500 x $625 ... $312,500 Fixed cost allocation: Machining: 40% x $340,000 136,000 Assembly: 60% x $340,000 204,000


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b. Variable costs are allocated at the budgeted rate of $625 per employee. Fixed costs are allocated in the same pre determined lumpsum amounts as at the beginning of the year. Machining Assembly Variable cost allocation: Machining: 200 x $625 ... $ 125,000 Assembly: 400 x $625 ... $250,000 Fixed cost allocation: Machining: 40% x $340,000 136,000 Assembly: 60% x $340,000 204,000 The remaining amounts of variable and fixed costs are variances that should not be allocated: Actual variable costs ................ $436,000 Amount of variable cost allocated .... 375,000 Variancenot allocated .............. $ 61,000 Actual fixed costs ................... $352,000 Amount of fixed cost allocated ....... 340,000 Variancenot allocated .............. $ 12,000 75. Medium

Standard Company operates a daycare center for the benefit of its employees. The company subsidizes the daycare center heavily. Budgeted and actual costs for the daycare center for the year just completed are as follows: Budgeted Actual Variable costs* .......... $700,000 $740,000 Fixed costs ............. $420,000 $440,000 *Unrecovered cost after deducting amounts received from employees. Costs of the daycare center are allocated to operating departments on the basis of the number of employees in these departments. Fixed costs of the daycare center are allocated on the basis of the peakperiod number of employees. Data on employees in the company's operating departments follow: Cutting Assembly Packaging Budgeted number of employees ..... 300 400 300 Actual number of employees ....... 200 300 250 Peakperiod number of employees .. 400 400 800 Required: a. Compute the dollar amount of variable and fixed costs that should be allocated to each of the producing departments at the beginning of the year for planning purposes. b. Compute the dollar amount of variable and fixed costs that should be allocated to each of the producing departments at the end of the year for purposes of evaluating performance.


Identify the amount, if any, of actual costs that should not be allocated to the operating departments.


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Answer: a. Budgeted variable rate: $700,000  1,000 employees = $700 per employee. Fixed costs are allocated on a basis of peak period number of employees: Cutting, 25%; Assembly, 25%; Packaging, 50% Cutting Assembly Packaging Variable cost allocation: Cutting: 300 x $700 ......... $210,000 Assembly: 400 x $700 ........ $280,000 Packaging: 300 x $700 ........ $210,000 Fixed cost allocation: Cutting: 25% x $420,000 ... 105,000 Assembly: 25% x $420,000 .... 105,000 Packaging: 50% x $420,000 .... 210,000 b. Variable costs are allocated at the budgeted rate of $700 per employee. Fixed costs are allocated in the same predetermined lumpsum amounts as at the beginning of the year. Cutting Assembly Packaging Variable cost allocation: Cutting: 200 x $700 ......... $140,000 Assembly: 300 x $700 ........ $210,000 Packaging: 250 x $700 ........ $175,000 Fixed cost allocation: Cutting: 25% x $420,000 ..... 105,000 Assembly: 25% x $420,000 .... 105,000 Packaging: 50% x $420,000 .... 210,000 The remaining amounts of variable and fixed costs are variances that should not be allocated: Actual variable costs ................... $740,000 Amount of variable cost allocated ....... 525,000 Variancenot allocated ................. $215,000 Actual fixed costs ...................... $440,000 Amount of fixed cost allocated .......... 420,000 Variancenot allocated ................. $ 20,000


76. Medium

Gabritz, Inc. has a maintenance department that provides services to the company's two operating departments. The variable costs of the maintenance department are allocated on the basis of the number of maintenance hours logged in each department. Last year, budgeted variable maintenance costs were $7.50 per maintenance hour and actual variable maintenance costs were $7.80 per maintenance hour. The budgeted and actual maintenance hours for each operating department for last year appear below: Operating Departments A B Budgeted maintenance hours ... 3,000 2,500 Actual maintenance hours ..... 3,100 2,700 Required: a. Compute the amount of variable maintenance department cost that should have been allocated to each operating department at the beginning of the year for flexible budget planning purposes. b. Compute the amount of variable maintenance department cost that should have been charged to each operating department at the end of the year for performance evaluation purposes. c. Compute the amount of actual variable maintenance department cost that should NOT have been charged to the operating departments at the end of the year for performance evaluation purposes. Answer: a. Allocated to Operating Department A: 3,000 x $7.50 ..................... $22,500 Allocated to Operating Department B: 2,500 x $7.50 ..................... $18,750 b. Charged to Operating Department A: 3,100 x $7.50 ..................... $23,250 Charged to Operating Department B: 2,700 x $7.50 ..................... $20,250 c. Total actual variable cost: (3,100 + 2,700) x $7.80 ............ $45,240 Total charges: (3,100 + 2,700) x $7.50 ............ 43,500 Total uncharged cost ..................... $ 1,740


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77. Medium

Smurnov Company has a purchasing department that provides services to two factories in Texas. One is located in Austin and the other in Belmont. Budgeted costs for the purchasing department consist of $91,000 per year of fixed costs and $7 per purchase order for variable costs. The level of budgeted fixed costs is determined by the peakperiod requirements. The Austin factory requires 3/7 of the peakperiod capacity and the Belmont factory requires 4/7. During the coming year, 2,700 purchase orders are budgeted to be processed for the Austin factory and 3,900 purchase orders for the Belmont factory. Required: Compute the amount of purchasing department cost that should be allocated to each factory at the beginning of the period for flexible budget planning purposes. (The company allocates fixed and variable costs separately.) Answer: Austin Belmont Variable cost: 2,700 x $7.00 ........... $18,900 3,900 x $7.00 ........... $27,300 Fixed cost: 3/7 x $91,000 ........... 39,000 4/7 x $91,000 ........... 52,000 Total allocated cost ...... $57,900 $79,300

78. Medium

Warehouse Services is a service department in the Werner Company, providing storage service to three operating departments. The company allocates the costs of this department to operating departments on the basis of cubic feet occupied. Last year, Warehouse Services budgeted variable storage costs of $0.15 per cubic foot occupied, and fixed costs of $120,000. Actual storage space occupied during the year, along with long term storage needs of operating departments, is given below: Operating Dept. o X Y Z Longterm storage needs in cubic feet ............... 200,000 600,000 800,000 Actual storage space used ... 160,000 590,000 750,000 Actual variable storage costs amounted to $0.16 per cubic foot occupied. Actual fixed storage costs were $123,000.


Required: a. Compute the amount of variable storage cost that should be charged to each operating department at the end of the year for performance evaluation purposes. b. Compute the amount of fixed storage cost that should be charged to each operating department at the end of the year for performance evaluation purposes. Answer: a. Dept X: 160,000 x $0.15 = $24,000 Dept Y: 590,000 x $0.15 = $88,500 Dept Z: 750,000 x $0.15 = $112,500 b. Dept X: 200/1600 x $120,000 = $15,000 Dept Y: 600/1600 x $120,000 = $45,000 Dept Z: 800/1600 x $120,000 = $60,000


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Test Bank - Chapter16 ABC Approach

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