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Exam 21: Cost Allocation and Performance Measurement

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Question 51

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The process of preparing departmental income statements starts with allocating service departments.

A) True
B) False

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Question 52

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Traditional two-stage cost allocation means that indirect costs are first allocated to both operating and service departments, then operating department costs are allocated to service departments.

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Question 53

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Why would a firm use activity-based costing (ABC) rather than traditional two-stage methods of cost allocation for overhead?

Mach Co. operates three production departments as profit centers. The following information is available for its most recent year. Department 1's contribution to overhead as a percent of sales is:

An activity-based cost allocation system:

An activity-based costing system usually involves a fewer number of allocations compared with a traditional cost allocation system.

Outdoor Sports, Inc., produces two types of skis, downhill skis and cross country skis. Product and production information about the two items is shown below: Required: 1. If Outdoor Sports uses the traditional two-stage method of allocating overhead costs based on direct labor hours, what is the amount of indirect costs per set of skis for each of the two types of skis? 2. If Outdoor Sports uses activity based costing, what is the total amount of indirect costs per set of skis for each of the two types of skis? Assume that depreciation is allocated based on machine hours, setup costs based on the number of setups, and miscellaneous costs based on the number of direct labor hours.

A responsibility accounting performance report reports:

A company pays $15,000 per period to rent a small building that has 10,000 square feet of space. This cost is allocated to the company's three departments on the basis of the amount and value of the space occupied by each. Department One occupies 2,000 square feet of ground-floor space, Department Two occupies 3,000 square feet of ground-floor space, and Department Three occupies 5,000 square feet of second-floor space. If rents for comparable floor space in the neighborhood average $2.20 per square foot for ground-floor space and $1.10 per square foot for second-floor space and the rent is allocated based on the total value of the space, Department One should be charged rent expense for the period of:

Dresden, Inc. has four departments. Information about these departments follows is listed below. If allocated maintenance cost is based on floor space occupied by each, compute the amount of maintenance cost allocated to the Cutting Department.

White Company has two service departments and two operating (production) departments. The Payroll Department services all three of the other departments in proportion to the number of employees in each. The Maintenance Department costs are allocated to the two operating departments in proportion to the floor space used by each. Listed below are the operating data for the current period: The total cost of operating the Milling Department for the current period is:

Renton Co. has two operating (production) departments supported by a number of service departments. The following information was collected for a recent period: Indirect costs are allocated as follows: salaries on the basis of sales, office expenses on the basis of the number of employees, and all other costs on the basis of square footage. Additional information about the production departments follows: Sales for the Machining Department are $724,404 and sales for the Assembly Department are $356,796. Determine the departmental contribution to overhead and the departmental net income for each production department.

What is the primary purpose for using a responsibility accounting system?

For an investment center, the hurdle rate is:

In a responsibility accounting system:

A department that is responsible for maximizing revenues is known as a profit center.

Describe the information found on a responsibility accounting performance report.

Jamesway Corporation has two separate divisions that operate as profit centers. The following information is available for the most recent year: The White Division occupies 20,000 square feet in the plant. The Grey Division occupies 30,000 square feet. Rent is an indirect expense and is allocated based on square footage. Rent expense for the year was $50,000. Compute departmental income for the White and Grey Divisions, respectively.

Abbe Company reported the following financial numbers for one of its divisions for the year; average total assets of $4,100,000; sales of $4,525,000; cost of goods sold of $2,550,000; and operating expenses of $1,372,000. Compute the division's return on assets:

Expenses that are not easily associated with a specific department, and which are incurred for the benefit of more than one department, are: