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Exam 12: Cost Allocation

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Question 31

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The names of two popular methods for allocating service department costs are the direct method and the step- up method.

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Question 32

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is not likely to be a cost driver.

A) A cost accountant's labor hours
B) Product inspections
C) Production orders
D) Material requisitions

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Question 33

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B. G. Drive- In is a fast- food restaurant that sells burgers and hot dogs in a 1950s environment. The fixed operating cost of the company is $20,000 per month. The owner wants all costs allocated to either the sale of burgers or hot dogs. Other items, mostly drinks and fries, are sold in equal proportions on a per order basis. The following information is provided for the operations of the company: $\begin{array} { l l l } & \text { Burgers } & \text { Hot Dogs } \\\text { Budget } S \text { ales } & 3,000 & 2,000 \\\text { Actual Sales } & 2,500 & 1,500\end{array}$ Required: a. Compute the cost assigned to each food item if budgeted sales are used as the allocation base. b. Compute the cost assigned to each food item if actual sales is used as the base.

Redford Company's power plant provides electricity for its two producing departments, A and B. The budget for the power plant shows the following: Budgeted fixed costs $\$ 400,000$ Budgeted variable cos ts per kilowatt hour $\quad\quad \$ 1$ Additional data are as follows: $\begin{array}{l}&\text { Dept. A }&\text { Dept. B }\\\text { Long- runcap acity available } \mathrm{e}^{*} & 350,000 & 200,000 \\\text { Budgeted } ^{*} & 280,000 & 175,000 \\\text { Actual }^{*} & 270,000 & 165,000\\{ }^{*} \text { in kilowatt hours }\end{array}$ Actual power plant costs were $215,000 fixed and $350,000 variable. Required: a. Compute the amount of fixed costs allocated to each department. b. Compute the amount of variable costs allocated to each department.

Why should budgeted cost rates, rather than actual cost rates, be used for allocating the variable costs of service departments?

Dove Company processes copper ore into two products, C and U. The ore costs $5 per pound and conversion costs are $15 per pound. Dove Company plans to produce 40,000 pounds of C and 20,000 pounds of U from 60,000 pounds of ore. C sells for $30 per pound and U sells for $40 per pound. Assuming the physical- units method of allocating joint costs, the amount of joints costs allocated to product U would be:

is a cost objective.

This joint cost allocation method requires a common physical unit for measuring the output of each product

Carter Company manufactures two models of pens-a standard and a deluxe model. Three activities have been identified as cost drivers and the related overhead costs ($60,000) pooled together to arrive at the following information: $\begin{array}{llll}& \text { Number of } & \text { Number of } & \text { Number of } \\\text { Product } & \text { Setups } & \text { Components } & \text { DLH }\\\text { Standard } & 22 & 8 & 375 \\\text { Deluxe } & 28 & 12 & 225 \\\text { Costs per pool } & \$ 15,000 & \$ 36,000 & \$ 9,000\end{array}$ is the total amount of overhead costs assigned to the deluxe model assuming traditional costing and applying overhead costs based on direct labor hours is used.

Roadrunner Company processes copper ore into two products, C and U. The ore costs $5 per pound and conversion costs are $15 per pound. Roadrunner Company plans to produce 40,000 pounds of C and 20,000 pounds of U from 60,000 pounds of ore. C sells for $30 per pound and U sells for $40 per pound. Assuming the relative- sales- value method of allocating joint costs, the amount of joint cost allocated to product C would be:

Some cost- allocation methods provide for penalties to managers that over- predict potential usage of a cost driver.

Simba Company has three service departments, A, B, and C, and two production departments, P1 and P2. Costs in departments A and B are allocated based on square feet, and costs in department C are allocated based on direct- labor hours. The following data are available: $\begin{array}{l}&\text { Direct } & \text { Square Feet } & \text { Direct- } \\&\text { Department Costs} & \text { Occupied } & \text { Labor }\\&&&\text { Hours }\\\text { Service Dep artment: }\\\mathrm{A} & \$ 300,000 & 6,000 & 13,000 \\\text { B } & 225,000 & 4,000 & 7,000 \\\text { C } & 480,000 & 3,000 & 6,000\text { Production }\\\text { Department: }\\\text { P1 } & \$ 750,000 & 8,000 & 17,000 \\\text { P2 } & 600,000 & 7,000 & 15,000\end{array}$ Required: Assuming the direct method of allocating costs, determine the amount of each service department's costs that will be allocated to each production department.

What are the four purposes of cost allocation?

In the dual method of allocation, fixed costs should be allocated using budgeted cost rates times the actual cost driver level.

Ranger Company produces three products from a joint process. Products Hee and Haw are considered main products. Product Cims is a by- product. Joint processing costs should be allocated to:

In the step- down method, the first service department in the sequence is the one that renders the:

Many companies that previously applied costs to final products based on direct- labor hours have changed to another cost driver, such as machine hours. Why?

Costs that are added to the production process before individual products are separately identifiable

Type 1 allocations are costs that flow from:

Lewis Company manufactures two models of pens-a standard and a deluxe model. Three activities have been identified as cost drivers and the related overhead costs ($60,000) pooled together to arrive at the following information: $\begin{array} { l l l l } \text { Product } & \begin{array} { l } \text { Number of } \\\text { Setups }\end{array} & \begin{array} { l } \text { Number of } \\\text { Components }\end{array} & \begin{array} { l } \text { Number of } \\\text { DLH }\end{array} \\\text { Standard } & 22 & 8 & 375 \\\text { Deluxe } & 28 & 12 & 225 \\\text { Costs per pool } & \$ 15,000 & \$ 36,000 & \$ 9,000\end{array}$ If activity- based costing is used, the cost assigned to the standard model using the number of direct labor hours would be: