Managerial accounting, 5th by jiambalvo test bank ch06

CHAPTER Cost Allocation and Activity-Based Costing Summary of Questions by Objectives and Bloom’s Taxonomy Item SO BT Item True-False Statements 1 K K K K 10 K 11 K 12 Multiple Choice Questions 29 K 54 30 K 55 31 K 56 32 K 57 33 K 58 34 C 59 35 K 60 36 K 61 37 K 62 38 C 63 39 K 64 40 K 65 41 K 66 42 K 67 43 K 68 44 K 69 45 K 70 46 K 71 47 K 72 48 K 73 49 K 74 50 K 75 51 K 76 52 K 77 53 K 78 Matching 152 1-6 K Exercises 153 2-4 AP 157 154 C 158 155 1,2,4 AP 159 156 AP 160 SO BT Item SO BT Item 1 1 2 K K K K K K 3 4 4 4 3,4 4 5 4,5 6 A1 2 1,2 3 SO BT 13 14 15 16 17 18 3 4 K K K K K K 19 20 21 22 23 24 5 5 K K K K C K C K K K K K K K C C C K C K K K K K C C C K K AP AP 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 2 2 3 3 2,4 3 3 2 2 3 3 AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 3 3 3 3 3 3 3 3 5 5 5 AP AP AP AP 161 162 163 164 3,4 3,4 3,4 AP AP AP AP 165 166 167 168 4,5 Item SO BT 25 *26 *27 28 A1 A1 K K K C AP AP AP AN AP AP AP AP AP AP AP AP AP AP AP AP AN AN AP AP AP AP AP AP AP 129 130 131 132 133 134 135 136 137 138 139 140 141 142 143 144 145 146 147 148 149 150 151 5 5 5 5 5 5 5 5 5 5 5,6 AP AP AP AP AP AP AN AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP C AP AP AP C 169 170 2,5 AP AN 6-2 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition Challenge Exercises 171 2,5 AN 172 Short-Answer Essays 174 K 176 175 C 177 AP 173 AN K C 178 179 C C 180 *181 A1 C C *182 A1 K Chapter Cost Allocation and Activity-Based Costing 6-3 TRUE-FALSE Indirect costs occur because resources are shared by more than one cost objective Cost allocation is the process of assigning direct and indirect costs to products Cost allocation methods that provide the most accurate full cost information for financial reporting, also provide the most accurate information for cost-plus contracts One of the reasons that companies allocate costs is to allow for the frivolous use of common resources One of the reasons that companies allocate costs is to encourage managers to use externally provided services, rather than those that are internally provided From a decision-making standpoint, the allocated cost should measure the opportunity cost of using a company resource Once the opportunity cost associated with a shared resource is determined, it is unlikely to change In order to provide full cost information for external reporting purposes, indirect production costs must be allocated to goods produced Cost-plus contracts guarantee that the supplier will pay for production costs and the customer will pay a fixed amount or percentage of the cost 10 The more costs that are allocated to a cost-plus contract, the smaller the profit will be for the supplier of the contract 11 A cost objective is the product, service, or department that will receive the allocated cost 12 Large cost pools that contain many different kinds of costs are most useful to managers in making decisions 13 The allocation base selected should ideally have a relative benefits relationship with the costs to be allocated 14 In the direct method of allocating costs, service department costs are allocated only to production departments, not to other service departments 15 When service department costs are allocated using actual costs and actual usage, the amount allocated to one department will depend on the usage of other departments 16 Allocating actual service department costs allows the service departments to pass on the costs of inefficiencies to the production departments 17 Managers should not be held responsible for noncontrollable costs 18 Allocating unitized fixed and variable costs leads to better decision making than allocating total costs 6-4 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 19 Allocating fixed costs on a per unit basis will often cause the managers receiving the allocations to perceive the costs as variable 20 ABC is more likely than traditional costing systems to undercost complex, low-volume products 21 ABC allocates cost pools to cost objectives using cost drivers as the allocation base 22 Under the ABC approach, costs are assigned to cost drivers based on a chosen cost objective 23 An example of a unit-level activity is the design of a particular product 24 Activity-based management aims at improving the efficiency and effectiveness of business processes 25 Activity-based costing uses benchmarking to compare the cost of an activity in one organization to the cost for a similar activity in another organization *26 Before resources used by the major activities of a business can be identified, managers using activity-based management must identify ways to improve the effectiveness of the activities *27 The process of determining major activities occurs before the resources used by each activity are identified in performing an activity-based management study 28 A batch-level activity is an activity that supports all other activities Answers T F T F F 10 T F T F F 11 12 13 14 15 T F F T T 16 17 18 19 20 T T F T F 21 22 23 24 25 T F F T F *26 F *27 T 28 F Chapter Cost Allocation and Activity-Based Costing 6-5 MULTIPLE CHOICE 29 Indirect costs occur when A resources are shared by more than one product or service B costs are directly traced to products or services C controllable costs are incurred by cost objectives D All of these answer choices are correct 30 The process of assigning indirect costs is called A benchmarking B tracing C cost allocation D cost unitizing 31 Which of the following is not a reason that companies allocate costs? A To calculate the full cost of products for financial reporting purposes B To discourage managers from using external suppliers C To reduce the frivolous use of company resources D To provide information needed by managers to make appropriate decisions 32 Costs may not be allocated to A cost drivers B services C departments D cost objectives 33 From a decision-making standpoint, the allocated cost should measure the A sunk cost of the resource involved B variable costs of the materials purchased C opportunity cost of using a company resource D product cost of the goods produced 34 If managers are not charged for centrally administered services, what may managers likely do? A Seek outside suppliers B Limit their frivolous use of these services C Consider the services as free D Evaluate and consider lower-cost alternatives for the services 35 Full cost information A is required by GAAP for internal reporting purposes B requires the allocation of indirect costs C provides managers with cost information on uncontrollable costs D treats all costs as fixed costs 36 A contract that specifies that the supplier will be paid for the cost of production as well as some fixed amount or percentage of cost is called a(n) A relative-benefits contract B cost-plus contract C allocation cost pool D indirect cost budget 6-6 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 37 In which of the following industries are cost-plus contracts common? A Hybrid car manufacturers B Soft drink bottlers C Governmental defense suppliers D Newspaper publishers 38 A major problem with cost-plus contracts is that they A include costs that not follow GAAP B cause the supplier to take significant financial risks C require the supplier to use variable costing D create an incentive to allocate as much cost as possible to the goods produced under the contract 39 Which of the following is not a step in the cost allocation process? A Calculate the cost involved in each step of the production process B Select an allocation base to relate the cost pools to the cost objectives C Form cost pools D Identify the cost objectives 40 A cost objective is the A reason for allocating the cost B basis on which costs are allocated C product, service, or department that is to receive the allocation D relative benefit received from using a resource 41 What is the product, service, or department that is to receive the cost allocation called? A Cost-plus recipient B Cost objective C Cost driver D Cost pool 42 Which of the following is least likely to be a cost objective? A Salaries such as those in the accounting and personnel departments B Individual products such as spades and mowers C Product lines such as loans and estate plans D Departments such as assembly and finishing 43 Which of the following is a grouping of individual costs whose total is allocated using one allocation base? A Cost objective B Cost pool C Direct cost D Cost driver 44 A cost pool is A not necessary in cost-plus contracts B useful when separating mixed costs into their fixed and variable components C allocated using a single allocation base D a method of allocating costs among service departments Chapter Cost Allocation and Activity-Based Costing 6-7 45 Which of the following is a measure of activity used to distribute indirect costs? A Cost objective B Cost pool C Cost driver D Cost unitization 46 Which of the following is the overriding concern in forming a cost pool? A To ensure that there are no variable costs in the cost pool B To ensure that the total amount in the cost pool is less than the direct costs for the product C To ensure that only costs which have been budgeted are included in the cost pool D To ensure the costs in the pool are homogeneous or similar 47 Which of the following statements about cost pools is true? A The costs in each of the cost pools should be homogeneous or similar B The number of cost pools must be the same as the number of products produced by a company C Only four different kinds of costs may be included in a single cost pool D Each cost pool should include the costs of one expense account 48 An allocation base A is the minimum amount to be allocated to a cost objective B is also called a cost pool C represents the items to which a cost will be allocated D relates the cost pool to the cost objectives 49 An allocation base A is also called a cost objective B is a characteristic that is the same for all cost drivers C ideally uses a cause-and-effect relationship to the cost pool D All of these answer choices are correct 50 Which of the following is not a criterion typically used to allocate indirect fixed costs? A Ability to bear costs B Equity C Feasible outcomes D Relative benefits 51 Which of the following is not a service department in a typical manufacturing firm? A Security B Fabrication C Maintenance D Personnel 52 Which of the following is a method of allocation used to assign service department costs to production departments, but not to other service departments? A Equity method B Direct method C Lump-sum method D Traditional method 6-8 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 53 Service department costs are allocated to producing departments A so that the costs can be allocated to the products in the producing departments B so that less cost is allocated to service departments C so that the service will not be purchased externally D All of these answer choices are correct 54 Which of the following allocations would not occur when the direct method is used in a manufacturing company? A Personnel department costs are allocated to the maintenance department B Maintenance department costs are allocated to the mixing department C Security department costs are allocated to the packaging department D Payroll department costs are allocated to the assembly department 55 The advantage of allocating budgeted rather than actual service department costs is that A managers are not motivated to evaluate the charges B only one cost pool is necessary C service departments cannot pass on the costs of inefficiencies and waste D this practice is acceptable under GAAP 56 What costs are affected by the manager’s decisions for which the manager should be held accountable? A Indirect costs B Controllable costs C Sunk costs D Pooled costs 57 Managers are correct when they perceive that almost all cost allocations are A insignificant B arbitrary C designed to make them look bad D unnecessary 58 When fixed costs are unitized, they A are stated on a per unit basis B may appear to remain the same in total at all levels of activity C may cause managers to use volume-related allocation D All of these answer choices are correct 59 An allocation of a predetermined amount that is not affected by changes in the activity level of the organizational unit receiving the allocation is called a(n) A allocation base B unitized cost C lump-sum allocation D cost driver 60 Lump-sum allocations A generally changes year after year B not change when the activity levels of any of the user departments change C are impacted by the usage of the allocated resource by other departments D make fixed costs appear variable Chapter Cost Allocation and Activity-Based Costing 6-9 61 Which of the following statements is true concerning lump-sum allocations of service department costs? A They make fixed costs appear to be variable to the manager receiving the allocation B They are not affected by the activity level in the department receiving the allocation C They make fixed costs appear to be variable to the manager receiving the allocation and are not affected by the activity level in the department receiving the allocation D They not make fixed costs appear to be variable to the manager receiving the allocation and are affected by the activity level in the department receiving the allocation 62 Which of the following is not a problem caused by assigning actual service department costs to operating departments based on actual usage of service department activities by the operating departments? A The cost assigned to one manager will be affected by the service usage of another manager B Inefficiencies in the service department will be passed along to the operating departments C Operating managers having high peak capacity requirements will not have to bear the full cost of meeting this peak capacity D All of these answer choices are problems caused by assigning actual service costs to operating departments 63 The Copy Department of Hernandez Hardware is budgeted to incur $30,000 per month in fixed costs plus a cost of $0.02 per copy The company allocates copy costs to user departments as follows: • Fixed costs are allocated as a lump sum based on budgeted fixed costs and estimated peak demand for each department • Variable costs are allocated based on the budgeted rate per copy times the department's actual usage Which of the following is an advantage of this allocation scheme over allocating all actual service costs based on actual usage? A Departments that use copy services are charged for cost overruns in the copy department B The amount charged to a particular user department is affected by the number of copies used by another department C Managers in departments that use services pay for the fixed costs that fluctuate based on their changing needs D Managers are charged for the activities they use 64 From the perspective of a manager of a producing department, which of the following is a desired feature of a cost allocation received from a service department? A The amount of the allocation should be based solely on the usage of the service by the producing department and not a function of the usage of the service by other departments B The budgeted cost should be allocated rather than actual service department costs C The allocation should force the production manager to pay for fluctuating demands that the production manager is creating D All of these answer choices are correct 6-10 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 65 Companies that use only one or two cost pools rather than several cost pools A incurs more cost of record keeping B will experience more profit than if more pools are used C may price products incorrectly due to inaccurate cost allocation D are likely to be using ABC 66 When activity-based costing is implemented, the initial outcome is that A the unit cost of all products will be higher B the unit cost of all products will be lower C the unit cost of low-volume products will be higher and the unit cost of high-volume products will be lower D the unit cost of low-volume products will be lower and the unit cost of high-volume products will be higher 67 Which of the following is likely to occur when fewer overhead cost pools are used? A Product costs will be less accurate B Recordkeeping will be more expensive C Decisions such as product pricing will be improved D All products will be undercosted 68 The traditional approach to cost allocation A tends to over-cost high volume core products B usually requires more cost pools than ABC C attempts to identify the activities that cause costs D produces more accurate costs than other allocation methods 69 Which of the following steps is not involved in the ABC approach? A Identify activities that cause costs to be incurred B Allocate costs to products based on activity usage C Group costs of activities into cost pools D Improve processes based on benchmarking 70 How many distinct activities are used by most companies that design ABC systems? A Fewer than B to 10 C 11 to 24 D 25 to 100 71 Happy Foods uses ABC costing Which of the following is most likely to be a cost driver for the cost of cashiering at a convenience store? A Cost of items purchased B Direct labor cost C Number of customers processed D Number of employees handling the job 72 Which of the following is generally true when a company compares activity-based costing (ABC) and traditional volume-based costing? A ABC uses fewer cost drivers in an effort to reduce total costs B ABC allocates costs based primarily on production volume C ABC is less expensive D ABC is less likely to undercost complex, low-volume products Chapter Cost Allocation and Activity-Based Costing 6-41 EXERCISES 153 APC Service’s copy department, which does almost all of the photocopying for the sales and administrative departments, budgets the following costs for the year, based on the expected activity of 4,000,000 copies: Salaries Employee benefits for salaried employees Depreciation of copy machines Utilities (fixed) Paper (variable, cent per copy) Toner (variable, cent per copy) $90,000 10,000 10,000 5,000 40,000 40,000 The costs are assigned to two cost pools—one for fixed and one for variable costs The costs are then assigned to the sales department and the administrative department Fixed costs are assigned on a lump-sum basis, 30 percent to sales and 70 percent to administration During the year, 4,800,000 copies were made consisting of 2,500,000 for Sales and 2,300,000 for Administration Calculate the copy department costs allocated to the Sales Department and separately to the Administration Department Answer Total fixed costs to be allocated = $90,000 + $10,000 + $10,000 + $5,000 = $115,000 Variable cost per unit = $80,000 ÷ 4,000,000 = $0.02 per copy Fixed costs allocated to Sales ($115,000 × 30) Variable costs allocated to Sales (2,500,000 copies × $0.02) Total costs allocated to Sales Fixed costs allocated to Administration ($115,000 × 70) Variable costs allocated to Administration (2,300,000 copies × $0.02) Total costs allocated to Administration 154 $34,500 50,000 $84,500 $ 80,500 46,000 $126,500 Cheez-It Financial has a website department that maintains and updates its website used by clients of the company’s two subsidiaries—Commercial Banking and Personal Banking For practical purposes, the costs of the website department are primarily fixed and consist primarily of salaries of the department’s two employees and depreciation on workstations and the web server Each subsidiary receives a cost allocation of $35 per website hour Jobs requested by the subsidiaries generally take weeks to complete often causing the subsidiaries to go outside the company for emergency services rather than wait for jobs to be completed Outside website maintenance services cost $65 per hour How does the allocation of $35 per website hour compare to the opportunity cost of using internal services? Answer The allocation of $35 per hour must be less than the opportunity cost (subsidiaries are willing to pay $65 per hour to avoid delays) Subsidiaries must have a benefit that exceeds $65 per hour 6-42 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 155 Harrod Productions manufactures small electric motors used by appliance companies In the past year, the company has experienced severe excess capacity due to competition from a foreign company that has entered Harrod’s market The company is currently bidding on a potential order from Kenmore Elite for 4,000 Model 44 motors The estimated cost of each motor follows: Direct material Direct labor Overhead Total $ 40 20 110 $170 The predetermined overhead rate is $5.50 per direct labor dollar based on estimated annual overhead of $2,640,000 and estimated annual direct labor of $480,000 The overhead is composed of $1,104,000 of variable costs and $1,536,000 of fixed costs The largest fixed cost relates to depreciation of plant and equipment a b c Answer a 156 What is the incremental cost of producing one Model 44 motor? Suppose Harrod can win the Kenmore Elite business by bidding a price of $160 per motor Should Harrod bid $160? Support your answer with explanation Discuss how an allocation of overhead based on opportunity cost would facilitate an appropriate bidding decision Direct material Direct labor Variable overhead ($2.30 × $20)* Total * Variable overhead rate = $1,104,000 ÷ $480,000 $40 20 46 $106 b Any bid won that is greater than $106 will generate incremental profit If Harrod can win a bid of $160, the company should bid this amount as it will generate a profit of $54 per motor c The opportunity cost related to overhead, in this case, is the variable overhead amount An allocation based on the opportunity cost idea, helps managers focus on incremental costs—the information needed for decision making Sanders Enterprises allocates manufacturing overhead costs to its two products—gears and rims —based on the machine hours used Manufacturing overhead costs are expected to total $108,800 in the coming year and the company plans to use 34,000 machine hours in the year The production of rims requires machine hours per rim and gears require 15 minutes per gear The current production schedule calls for 2,000 rims and 15,000 gears during the year a b Answer a b What is the overhead rate per machine hour? If production and overhead costs occur as scheduled, how much manufacturing overhead will be allocated to each of the two products? $108,800 ÷ 34,000 hours = $3.20 per machine hour Gears = 15,000 × 15/60 machine hours × $3.20 per machine hour = $12,000 Rims = 2,000 × machine hours × $3.20 per machine hour = $12,800 Chapter Cost Allocation and Activity-Based Costing 157 Likewise Instruments manufactures a variety of electronic instruments that are used in military and civilian applications Sales to the military are generally on a cost-plus profit basis with profit equal to 10 percent of cost Instruments used in military applications require more direct labor time because “fail-safe” devices must be installed At the start of the year, Likewise estimates that the company will incur $50,000,000 of overhead, $8,000,000 of direct labor, and 250,000 machine hours Consider the Model ET40 gauge that is produced for both civilian and military uses: Direct material Direct labor Machine hours a b Answer a b Civilian $3,000 $900 42 Military $3,500 $1,200 45 Calculate the cost of civilian and military versions of Model ET40 using both direct labor dollars and machine hours as alternative allocation bases Explain why Likewise Instruments may decide to use machine hours as an overhead allocation base Overhead rate based on direct labor dollars: ($50,000,000 ÷ $8,000,000 labor) = $6.25 per dollar of labor Overhead rate based on machine hours: ($50,000,000 ÷ 250,000 machine hours) = $200 per machine hour Direct material Direct labor Overhead Cost 158 6-43 Civilian Labor $ Mach Hrs $3,000 $ 3,000 900 900 5,625 8,400 $9,525 $12,300 Military Labor $ Mach Hrs $ 3,500 $ 3,500 1,200 1,200 7,500 9,000 $12,200 $13,700 The price charged for the civilian version of the Model ER40 does not depend on allocated costs However, the military version is sold for “cost” plus 10 percent of cost Therefore, the company has an incentive to make cost appear higher rather than lower This can be accomplished by allocating overhead cost using machine hours as the allocation base This base results in a higher cost ($13,700) compared to an allocation based on direct labor dollars, which results in a cost of only $12,300 Venus Swimwear is the designer and maker of elite swimwear The president of Venus wants to switch to an activity-based costing approach in the upcoming year to assign prices to the suits Production line setups are a major activity at Venus In the coming year, Venus expects to perform 450 setups at a total cost of $81,000 Venus plans to produce bandeau swimsuits that will require setups for the batch of 40 How much setup cost will be allocated to each bandeau swimsuit that is produced? Answer Cost per setup = $81,000 ÷ 450 = $180 Cost of setups related to the bandeau swim suits = × $180 = $360 Setup cost per swim suit = $360 ÷ 40 = $9.00 6-44 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 159 Fanatics Company has three service departments (C1, C2, and C3) and two production departments (B1 and B2) The following data relate to Fanatic’s allocation of service department costs: Budgeted Costs Number of Employees C1 $3,000,000 80 C2 2,000,000 60 C3 1,000,000 30 B1 300 B2 500 Service department costs are allocated by the direct method The number of employees is used as the allocation base for all service department costs Calculate the total service department cost allocated to each production department Answer B1: 300 ÷ 800 = 37.5% of production department employees B2: 500 ÷ 800 = 62.5% of production department employees Department C1 C2 C3 Total cost 160 Costs $3,000,000 2,000,000 1,000,000 $6,000,000 Cost Allocated to B1 B2 $1,125,000 $1,875,000 750,000 1,250,000 375,000 625,000 $2,250,000 $3,750,000 CSI Equipment produces surveillance equipment for security purposes Maintenance costs are allocated to assembly and testing on the basis of square footage occupied, and computing costs are allocated on the basis of the number of computer terminals The following data relate to allocations of service department costs: Service department costs Square footage Terminals Maintenance $400,000 Computing $340,000 Assembly 24,000 35 16,000 15 Allocate the service department costs to production departments using the direct method Answer Assembly Maintenance $400,000 ì (24,000 ữ 40,000) $400,000 ì (16,000 ÷ 40,000) Computing $340,000 × (35 ÷ 50) $340,000 × (15 ÷ 50) Total Testing $240,000 $160,000 238,000 $478,000 102,000 $262,000 Chapter Cost Allocation and Activity-Based Costing 161 6-45 Rickets Consulting has two divisions: Internal Audit and Management Services The firm’s accountants are in the process of selecting an allocation base to allocate centrally provided personnel costs to the two departments Two allocation bases have been proposed—dollars of salary and number of employees Personnel costs are expected to be $2,500,000 The following data relate to the allocations: Salaries in dollars Number of employees a b Internal Audit $14,000,000 150 Management Services $18,000,000 50 Prepare a schedule showing the allocations to the two divisions using each allocation base Referring to your answer to part a, explain why allocations are sometimes considered arbitrary Answer a Salaries Employees b 162 Internal Audit Proportion Amount 4375 $1,093,750 75 1,875,000 Management Services Proportion Amount 5625 $1,406,250 25 625,000 Both number of employees and salary appear to be plausible allocation bases, but they result in very different allocations This suggests that in many cases allocations are somewhat arbitrary The personnel department at Dansford Company has $45,000 in budgeted costs for the coming period Dansford is trying to determine whether to allocate these costs to the two production departments based on the number of employees or on machine hours used in the department Information about the production departments is given below: Number of employees Anticipated machine hours Molding 15 600 Engraving 35 400 Calculate the costs allocated to each of the production departments using each allocation base Which allocation base is preferable? Answer When number of employees is used as the allocation base: Molding = $45,000 × (15 ÷ 50) = $13,500 Engraving = $45,000 × (35 ÷ 50) = $31,500 When number of machine hours is used as the allocation base: Molding = $45,000 × (600 ữ 1,000) = $27,000 Engraving = $45,000 ì (400 ÷ 1,000) = $18,000 The number of employees is a better allocation base because it is more closely related to personnel department costs 6-46 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 163 The costs of the personnel department at Mama Maids total $37,800 annually These costs are allocated based on the number of employees in the production departments using the direct method If 12 of Mama Maids’ 36 employees work in the residential services department, what amount of the personnel department costs should be allocated to the residential services? Answer ($37,800 ữ 36) ì 12 = $12,600 164 Sentry Company has three departments, Civil, Criminal, and Probate Each department uses the services of the photocopying department The photocopying department has 10 copiers, and each copier can produce 100,000 copies per month and has a fixed annual cost of $7,800 The variable cost to produce a copy is $0.031 per copy During March, the Copying Department incurred $6,930 fixed and $23,870 in variable copying costs Following is the three production departments’ monthly consumption information: Civil Criminal Probate a b c d Answer a Peak Demand 600,000 copies 200,000 copies 200,000 copies Average Demand 300,000 copies 180,000 copies 180,000 copies March Usage 410,000 copies 190,000 copies 170,000 copies Describe three alternative ways that the production departments can be charged for services Assign the actual cost of March copying to the production departments based on the actual copies used by each department What is the cost per copy? (Round cost per copy to two decimal places and charges to departments to nearest whole dollar.) Assign the cost of March copying to the production departments, where the budgeted fixed cost is based on peak usage requirements, and the budgeted variable cost is based on actual usage What is the total cost per copy assigned to each department? Which way you believe is more equitable? Why? Actual cost per copy on actual copies used Budgeted total cost per copy based on average usage times actual copies used Fixed costs allocated on budgeted amounts; variable costs allocated on actual usage b $30,800 ÷ 770,000 = $0.04 per copy Civil - $16,400 Criminal - $7,600 Probate - $6,800 c Civil: 4.24 cents per copy (600,000/1,000,000 × $7,800) + (410,000 × $0.031) = $17,390 Criminal: 3.92 cents per copy (200,000/1,000,000 × $7,800) + (190,000 × $0.031) = $7,450 Probate: 4.02 cents per copy (200,000/1,000,000 × $7,800) + (170,000 × $0.031) = $6,830 d Dual rate (c) will encourage the departments demanding the capacity to pay capacity costs Chapter Cost Allocation and Activity-Based Costing 165 Waller Company has a regional division and a national division A travel department supports the employees in both divisions The fixed costs of the travel department ($54,000 per month) are allocated based on the peak usage of reservation services The national division has a peak monthly usage of 160 reservations and the regional has a peak usage of 240 reservations The variable costs of the travel department are allocated to the divisions based on the number of reservations made at a rate of $15 per reservation a b Answer a b 166 6-47 If the national division requires 28 reservations in November and the regional division requires 20 reservations during November, calculate the amount of travel department costs that will be allocated to each of the divisions Explain why the allocation is higher to the regional division when it uses fewer reservations Regional division = [$54,000 ì (240 ữ 400)] + ($15 ì 20) = $32,700 National division = [$54,000 ì (160 ữ 400)] + ($15 × 28) = $22,020 Regional has higher peak needs, so it is being charged a higher amount for capacity Hanson Inc is operating at 60 percent of its capacity Hanson has received an offer from a retail company to purchase 600 granite tables for $158 each Hanson’s accountants determined that the order can be accommodated within the excess capacity The following costs information is provided: Direct material Direct labor Manufacturing overhead Total $ 80 55 40 $175 Of the $40 of overhead, $18 is variable and $22 relates to fixed costs The $22 of fixed overhead is allocated as $3.00 per direct labor hour a b Answer a What will be the effect on profit if the order is accepted? Explain why managers who focus on the full reported cost per unit may be inclined to turn down the order The manufacturing overhead allocation includes $22 of fixed cost which will not increase if the special order is accepted (i.e., it is not an incremental cost) The incremental revenue and incremental costs associated with the order suggests that the company will be better off by $3,000 if the order is accepted Incremental revenue (600 × $158) Incremental costs Material (600 × $80) Labor (600 × $55) Variable overhead (600 × $18) Incremental net income $94,800 $48,000 33,000 10,800 91,800 $3,000 6-48 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition b 167 Managers who focus on the full reported cost may incorrectly treat the $22 of fixed cost as an incremental cost In this case, they will incorrectly conclude that the order should not be accepted because the total full cost of $175 is more than the offer price of $158 Bowcock Manufacturing allocates factory overhead using one cost pool with direct labor hours as the allocation base Bowcock has two production departments (A1 and A2) The new accountant at Bowcock estimates that next year the total factory overhead costs will be $4,000,000 and approximately 500,000 direct labor hours will be worked The accountant also estimates that A1 will use 150,000 direct labor hours and there will be about $2,000,000 in overhead costs in A1 A2 will use 350,000 direct labor hours and there will be $2,000,000 in overhead costs in A2 Bowcock has two products: R4 and R5 It takes two direct labor hours in A1 and three direct labor hours in A2 to complete one unit of R4 It takes one direct labor hour in A1 and four direct labor hours in A2 to complete one unit of R5 Which product will be undercosted and which will be overcosted using a single cost pool system? Support your answer with appropriate calculations Answer One-cost pool overhead rate = $4,000,000 ÷ 500,000 DLH = $8 per DLH Product R4: $8 × hours = $40 Product R5: $8 × hours = $40 Separate cost pools: A1’s overhead rate will be $2,000,000 ÷ 150,000 DLH = $13.33 per direct labor hour A2’s overhead rate will be $2,000,000 ÷ 350,000 DLH = $5.71 per direct labor hour Overhead allocated to each R4 = (2 labor hours × $13.33) + (3 labor hours × $5.71) = $43.79 Overhead allocated to each R5 = (1 labor hour × $13.33) + (4 labor hours × $5.71) = $36.17 The use of a single cost pool causes R4 to be undercosted and R5 to be overcosted With a single cost pool, both products receive the same allocation of cost per labor hour However, R4 uses relatively more time in A1 where overhead costs are high, while R5 uses relatively more time in A2, where overhead costs are low Chapter Cost Allocation and Activity-Based Costing 168 6-49 The following are six cost pools established for a company using activity-based costing The pools are related to the company’s products using cost drivers For each of the cost pools, identify a possible cost driver COST POOL COST DRIVER (1) Handling of raw materials (2) Production equipment repairs and maintenance (3) Raw materials storage (4) Plant heat, light, water, and power (5) Finished product quality control (6) Production line setups Answer (1) Number of inspections (2) Number of machine hours (3) Square footage 169 (4) Hours of usage (5) Number of inspections (6) Number of setups Carriage Hill Tooling produces specialized equipment Currently, overhead costs are allocated at a rate of $25 per machine hour and the company used 4,200 machine hours last year Carriage Hill’s CEO, Ralston, would like to see if ABC would make any difference in the costs allocated to jobs at the company The accounting staff has provided the following information about manufacturing overhead: Amount Cost Driver Setups $31,200 Number of setups Equipment 11,340 Number of machine hours Inspection 62,460 Number of inspections The company estimates that it will perform 120 setups and 400 inspections each year and will use 4,200 machine hours Job 345 will require setups, 700 machine hours, and 12 inspections a b c Answer a Using ABC, what amount of manufacturing overhead will be allocated to Job 345? What amount would Ralston allocate to job 345 using their current, traditional system? Why the two methods yield such different answers? [5 ì ($31,200 ữ 120)] + [700 × ($11,340 ÷ 4,200)] + [12 × ($62,460 ÷ 400)] = $5,063.80 b 700 ì ($105,000 ữ 4,200) = $17,500 c Job 345 uses 4.17% of annual setups, 16.67% of machine hours, and 3.00% of annual inspections It is a heavy user of machine hours, and is costed much higher when its usage of machine hours is viewed as the job’s primary resource 6-50 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 170 GH Mcgraw Appliances supplies parts for laundry and kitchen appliances Customer orders are placed over the Internet and are generally filled in one or two days using express mail services The company is conducting an ABM study of inventory management Management has determined that the cost of filling customer orders in the past year consisted primarily of $250,000 of salary expense related to five workers who “pick” parts from the warehouse and $550,000 of salary expense related to six workers who pack the orders for shipment In the past year, the company filled 100,000 orders annually Based on work performed for a chain of appliance manufacturers, management has determined a benchmark cost of $4 per order a b Answer a b Comment on the advisability of comparing the costs at GH McGraw Appliances to those at the appliance manufacturers’ chain store Management has observed the following: Workers go to a box that contains individual customer order sheets They take the bottom order (the “oldest”) and go into the warehouse with a handcart and a box They then fill the order and carry the parts to a packing station Can you suggest ways of improving this process? The cost of filling orders at GH McGraw Appliances is: ($250,000 + $550,000) ÷ 100,000 = $8 per order The cost of filling orders at the appliance chain is only $4 per order While the chain has a lower cost per order, it may be that, due to its size, the appliance chain has a “state of the art” warehouse It may be unrealistic for GH McGraw Appliances, which is relatively small, to compare itself to such a large company Order “pickers” can take multiple order sheets out to the warehouse when individual orders are small This will save considerable time going back and forth to the warehouse and may lead to lower costs if the company is willing to fire or reassign one or more of the five workers who pick parts In addition, the packing station can be moved close to the area where the parts are being picked from the warehouse to avoid time used to take the parts to the packing station Chapter Cost Allocation and Activity-Based Costing 6-51 CHALLENGE EXERCISES 171 VeraTrac has traditionally used direct labor cost to allocate overhead to its two products— hammers and mallets To improve cost determination, VeraTrac set up activity pools: setups, purchase ordering, and quality control VeraTrac provided the following information for the last quarter of 2014 related to the actual production of 2,400 hammers and 1,600 mallets: Setups Purchase ordering Quality control Direct labor Direct materials Estimated Cost $78,000 35,100 41,000 43,800 19,360 Expected Activity 240 setups 900 orders 500 inspections 3,650 hours 4,400 pounds Actual Cost $81,400 34,800 42,300 46,875 19,800 Actual Activity Hammers Mallets 145 setups 90 setups 420 orders 470 orders 220 inspections 275 inspections 2,150 hours 1,600 hours 2,100 pounds 3,400 pounds Actual labor cost is $12.50 per hour and actual material cost is $3.60 per pound a b c How much is the overhead unit cost of each hammer using activity-based costing? How much is the overhead unit cost of each hammer if the company continues to use one cost pool? (Round your intermediate calculations to two decimal places) Is the cost of the hammer over or undercosted? Explain some possible consequences of this Answer a Setups: $78,000 ÷ 240 = $325 per setup Orders: $35,100 ÷ 900 = $39 per order Quality control: $41,000 ÷ 500 = $82 per inspection Total overhead cost for all hammers Number of hammers Overhead cost per hammer $325 × 145 = $39 × 420 = $82 × 220 = $47,125 16,380 18,040 81,545 2,400 $ 33.98 b Rate: ($78,000 + $35,100 + $41,000) ÷ $43,800 = $3.52 per direct labor dollar Allocate overhead: $3.52 × 2,150 × $12.50 = $94,600 Overhead cost per hammer: $94,600 ÷ 2,400 hammers = $39.42 c The hammers are overcosted because the amount allocated under the more accurate, activity-based costing method assigns $5.44 less to each hammer than the allocation assigns using one cost pool If managers rely on the $39.42 overhead cost per hammer, they may price the product too high and lose customers to competitors 6-52 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 172 Sandifer Company is contemplating the establishment of an activity-based costing system It current applies all overhead cost based on direct labor costs The company has estimated the following costs and activities for May: Cost $33,60 60,000 84,000 35,520 60,000 Machine Setups Utilities Materials Handling Direct labor Direct material Activity 400 setups 200,000 usage hours 12,500 crates $20 per labor hour $1 per pound Direct labor cost is $20 per hour The following information pertains to the actual production of buckets and pails during May: Units produced Direct material cost incurred Direct labor cost incurred ($20 per hour) Setups implemented Crates handled Utility hours used a b c Buckets 60,000 $30,000 $24,000 120 6,800 80,000 Pails 40,000 $31,200 $12,000 290 5,200 125,000 Which items are cost pools? Which are cost drivers? Which are cost objectives? How much is the product cost per pail if Sandifer uses one cost pool to allocate all overhead costs to the cost objectives? How much is the product cost per pail if Sandifer uses ABC? Answers a Machine setups, utilities, materials handling ABC: Number of setups, number of usage hours, number of crates One cost pool: Direct labor cost Buckets and pails b Estimated MOH Estimated DL $ = = Direct materials Direct labor Overhead ($5 × $12,000) Cost of all pails Number of pails Product cost of each pail $33,600 + $60,000 + $84,000 $35,520 $5.00 per direct labor dollar $ 31,200 12,000 60,000 $103,200 40,000 $ 2.58 Chapter Cost Allocation and Activity-Based Costing 6-53 c Setups: $33,600 ÷ 400 = $84 per setup Utilities: $60,000 ÷ 200,000 = $0.30 per hour Materials handling: $84,000 ÷ 12,500 = $6.72 per crate Direct materials Direct labor $84 × 290 setups.= $0.30 ×125,000 hours = $6.72 × 5,200 crates = Total cost Total units Product cost per pail 173 $24,360 37,500 34,944 31,200 12,000 $140,004 40,000 $ 3.50 Clark Inc has operating departments—commercial, industry, and private for which the corporate office provides kinds of services, accounting and housekeeping Accounting costs are allocated on the basis of number of employees, and housekeeping costs are allocated based on the basis of number of square feet Accounting Housekeeping Commercial Industry Private a b Answer: a, Direct costs $ 56,000 33,000 116,000 124,000 105,000 # of Square feet 2,000 3,000 6,000 4,000 8,000 # of Employees 10 35 40 25 How much total cost will Clark, Inc allocate to the commercial department? As it relates to Clark, Inc., what is meant by a cause-and-effect relationship? Accounting allocated to commercial: $56,000 ì (35 ữ 100) = $19,600 Housekeeping allocated to commercial: $33,000 ì (6,000 ữ 18,000) = $11,000 Total = $30,600 b.If the cost driver (the allocation base) selected relates costs to cost objectives that caused the costs to be incurred, the allocation is said to be based on a cause-and-effect relationship One expects that when the activity or driver increases, the cost pool should increase The more activity generated by a particular production department, the more cost that should be allocated to that department SHORT-ANSWER ESSAYS 174 List the four major reasons that companies allocate costs Answer Companies allocate costs (1) to provide information needed to make appropriate decisions, (2) to reduce the frivolous use of common resources, (3) to encourage managers to evaluate the efficiency of internally provided services, and (4) to calculate the “full cost” of products for financial reporting purposes and for determining cost-based prices 6-54 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 175 What is a cost-plus contract? Why are cost-plus contracts used? Answer The supplier is paid for all costs of production as well as some fixed amount or percentage of cost in a cost-plus contract Cost-plus contracts are used when suppliers need to be assured that they will be reimbursed for their costs and will not bear any of the financial risk associated with the project 176 What is the difference between a cost pool and a cost objective? Answer A cost pool is a grouping of individual costs whose total is allocated using one allocation base A cost objective is the product, service, or department that will receive the cost allocation 177 Why is it better to allocate budgeted rather than actual service department costs? Answer If budgeted costs are allocated, service departments cannot pass on the costs of inefficiencies and waste to the user departments If actual service department costs are allocated, the service departments will have no incentive to control their costs Budgeted allocations can also be more timely 178 Why areis lump- sum allocations used to allocate fixed costs? Answer When lump-sum allocations are used to allocate fixed costs, the costs will appear fixed to the managers whose departments receive the allocations If lump-sum allocations are not used, an increase in volume will lead to an increased allocation of fixed costs and may cause incorrect decisions 179 If a manager is allocated the costs of service departments based on actual costs and actual activity usage levels, what frustrations might the manager feel? Answer The manager will not be able to plan or control costs since the charge the manager receives will be a function of the manager’s usage as well as cost control in the service department 180 Describe the difference between the traditional approach to allocating costs and activity-based costing Answer The traditional approach to allocating costs assumes that all overhead costs are proportional to production volume In activity-based costing, the company identifies the activities that cause costs and allocates costs based on the volume of the activities that caused the costs These activities may or may not be related to production volume Chapter Cost Allocation and Activity-Based Costing *181 6-55 What is the difference between ABC and ABM? Answer While ABC focuses on activities with the goal of measuring the costs of products and services produced by them, ABM focuses on activities with the goal of managing the activities themselves *182 What are the four steps in ABM? Answer Determine major activities Identify resource used by each activity Evaluate the performance of the activities Identify ways to improve the efficiency and effectiveness of the activities ...6-2 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition Challenge Exercises 171 2,5 AN 172 Short-Answer Essays 174... costs leads to better decision making than allocating total costs 6-4 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 19 Allocating fixed costs on a per unit basis will often... cost-plus contract C allocation cost pool D indirect cost budget 6-6 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 37 In which of the following industries are cost-plus contracts