Allocation Support Costs

Chapter 18: Allocation of Support Activity Costs and Joint Costs
MULTIPL C!"IC #USTI"$S

1. Which of the following would be considered a service department for an airline?
A. Maintenance.
B. Information Systems.
. !urchasing.
". #light atering.
$. All of the above.
Answer% $ &'% 1 (ype% )
*. Which of the following would not be considered a service department in a hospital?
A. Security.
B. ardiac are.
. !atient +ecords.
". Accounting.
$. ,uman +esources.
Answer% B &'% 1 (ype% +
-. onsider the following statements about service department costs%
I.(he costs of the ,uman +esources "epartment in a manufacturing organi.ation must be
allocated to production departments in order to achieve a correct costing of inventory.
II.(he allocation of service department costs re/uires that an organi.ation select both an
allocation base and an allocation method.
III.Service department cost allocations are more relevant for firms involved in service
industries 0e.g.1 repair1 health care2 than for those involved with manufacturing.
Which of the above statements is 0are2 correct?
A. I only.
B. II only.
. I and II.
". II and III.
$. I1 II1 and III.
Answer% &'% 1 (ype% +1 )
3. Which of the following methods ignores the fact that some service departments provide
service to other service departments?
A. "irect method.
B. Indirect method.
. Step4down method.
". +eciprocal method.
$. "ual4cost allocation method.
Answer% A &'% 1 (ype% +
44 Hilton, Managerial Accounting, Sixth Edition
5. onsider the following statements about the direct method of service department cost
allocation%
I.6nder the direct method1 all service department costs are eventually allocated to production
departments.
II.(he order in which service department costs are allocated to production departments is
important.
III.'nce a service department7s costs have been allocated1 no costs are re4circulated bac8 to
that department.
A. I only.
B. II only.
. I and II.
". I and III.
$. I1 II1 and III.
Answer% " &'% 1 (ype% +
9. (he Milrose linic has two service departments 0,uman +esources and Information
+esources2 and two :production: departments 0In4patient (reatment and 'ut4patient
(reatment2. (he service departments service each other1 and studies have shown that
Information +esources provides the greater amount of service. Which of the following
allocations would occur if Milrose uses the direct method of cost allocation?
A. Information +esources cost would be allocated to In4patient (reatment.
B. Information +esources cost would be allocated to ,uman +esources.
. ,uman +esources cost would be allocated to Information +esources.
". In4patient (reatment cost would be allocated to 'ut4patient (reatment.
$. 'ut4patient (reatment cost would be allocated to Information +esources.
Answer% A &'% 1 (ype% )
;. (rac8ster orporation has two service departments 0Maintenance and ,uman +esources2 and
three production departments 0Machining1 Assembly1 and #inishing2. Maintenance is the
largest service department and Assembly is the largest production department. (he two
service departments service each other as well as the three producing departments. 'n the
basis of this information1 which of the following cost allocations would not occur under the
direct method?
A. Machining cost would be allocated to Assembly.
B. Maintenance cost would be allocated to #inishing.
. Maintenance cost would be allocated to ,uman +esources.
". ,uman +esources cost would be allocated to #inishing.
$. Allocations :A: and :: would not occur.
Answer% $ &'% 1 (ype% )
45 Hilton, Managerial Accounting, Seventh Edition
<. Which of the following methods recogni.es some 0but not all2 of the services that occur
between service departments?
A. "irect method.
B. Step4down method.
. Indirect method.
". +eciprocal method.
Answer% B &'% 1 (ype% +
=. When the step4down method is used1 the service department whose costs are allocated first is
often the department that%
A. obtains the highest yield.
B. has the lowest cost.
. is the newest.
". serves the greatest number of other service departments.
$. serves the fewest other service departments.
Answer% " &'% 1 (ype% +
1>. onsider the following statements about the step4down method of service department cost
allocation%
I.6nder the step4down method1 all service department costs are eventually allocated to
production departments.
II.(he order in which service department costs are allocated is important.
III.'nce a service department7s costs have been allocated1 no costs are re4circulated bac8 to
that department.
A. I only.
B. II only.
. I and II.
". I and III.
$. I1 II1 and III.
Answer% $ &'% 1 (ype% +
Chapter 18 46
11. "uluth orporation has two service departments 0Maintenance and ,uman +esources2 and
three production departments 0Machining1 Assembly1 and #inishing2. (he two service
departments service each other1 and studies have shown that Maintenance provides the
greatest amount of service. 'n the basis of this information1 which of the following cost
allocations would li8ely occur under the step4down method?
A. Machining cost would be allocated to Assembly.
B. Maintenance cost would be allocated to #inishing.
. Maintenance cost would be allocated to ,uman +esources.
". ,uman +esources cost would be allocated to Maintenance.
$. Allocations :B: and :: above.
Answer% $ &'% 1 (ype% )
1*. (he ,opwood linic has two service departments 0,uman +esources and Information
Systems2 and two :production: departments 0In4patient (reatment and 'ut4patient (reatment2.
(he service departments service each other1 and studies have shown that Information Systems
provides the greatest amount of service. Which of the following allocations would not occur
if ,opwood uses the step4down method of cost allocation?
A. Information Systems cost would be allocated to ,uman +esources.
B. ,uman +esources cost would be allocated to Information Systems.
. ,uman +esources cost would be allocated to In4patient (reatment.
". In4patient (reatment cost would be allocated to 'ut4patient (reatment.
$. Allocations :B: and :": above.
Answer% $ &'% 1 (ype% )
1-. Which of the following methods accounts for 1>>? of the services that occur between service
departments?
A. "irect method.
B. Indirect method.
. +eciprocal method.
". Step4down method.
Answer% &'% 11 9 (ype% +
13. +eno orporation has two service departments 0Maintenance and ,uman +esources2 and
three production departments 0Machining1 Assembly1 and #inishing2. (he two service
departments service each other1 and studies have shown that Maintenance provides the
greatest amount of service. @iven the various cost allocation methods1 which of the following
choices correctly denotes whether Maintenance cost would be allocated to ,uman +esources?
"irect Step4"own +eciprocal
A. Aes )o Aes
B. Aes )o )o
. Aes Aes Aes
". )o Aes )o
$. )o Aes Aes
Answer% $ &'% 11 9 (ype% )
15. Which of the following methods would be of little use when allocating service department
costs to production departments?
A. (he direct method.
B. (he reciprocal method.
. (he step4down method.
". (he net4reali.able4value method.
$. (he dual4cost allocation method.
Answer% " &'% 11 *1 3 (ype% )
19. +yan1 Inc.1 has two service departments 0,uman +esources and Building Maintenance2 and
two production departments 0Machining and Assembly2. (he company allocates Building
Maintenance cost on the basis of s/uare footage and believes that Building Maintenance
provides more service than ,uman +esources. (he s/uare footage occupied by each
department follows.
,uman +esources 31>>>
Building Maintenance 111>>>
Machining 191>>>
Assembly **1>>>
Assuming use of the direct method1 over how many s/uare feet would the Building
Maintenance cost be allocated 0i.e.1 spread2?
A. 151>>>.
B. -<1>>>.
. 3*1>>>.
". 5-1>>>.
$. More information is needed to Budge.
Answer% B &'% 1 (ype% A
Chapter 18 48
1;. !eterson ompany has two service departments 0afeteria and ,uman +esources2 and two
production departments 0Machining and Assembly2. (he number of employees in each
department follows.
afeteria 3>
,uman +esources 9>
Machining *>>
Assembly ->>
!eterson uses the direct method of cost allocation and allocates cost on the basis of employees.
If ,uman +esources cost amounts to C11<>>1>>>1 how much of the department7s cost would be
allocated to Machining?
A. C9>>1>>>.
B. C;*>1>>>.
. C=>>1>>>.
". C11*>>1>>>.
$. Some other amount.
1<. "urango1 Inc.1 has two service departments 0,uman +esources and Building Maintenance2
and two production departments 0Machining and Assembly2. (he company allocates Building
department follows.
,uman +esources 51>>>
Building Maintenance =1>>>
Machining 151>>>
Assembly **1>>>
Assuming use of the step4down method1 over how many s/uare feet would the Building
Maintenance cost be allocated 0i.e.1 spread2?
A. 131>>>.
B. -;1>>>.
. 3*1>>>.
". 511>>>.
$. More information is needed to Budge.
Answer% &'% 1 (ype% A
1=. Anniston1 Inc.1 has two service departments 0,uman +esources and Building Maintenance2 and
Maintenance cost on the basis of s/uare footage and ,uman +esources cost on the basis of employees1
and believes that Building Maintenance provides more service than ,uman +esources. (he s/uare
footage and employees in each department follow.
S/uare
#ootage $mployees
,uman +esources 31>>> 1>
Building Maintenance 1>1>>> 15
Machining 151>>> 3>
Assembly *11>>> 9>
Assuming use of the step4down method1 which of the following choices correctly denotes the
number of s/uare feet and employees over which the Building Maintenance cost and ,uman
+esources cost would be allocated 0i.e.1 spread2?
Building
Maintenance
,uman
+esources
A. -91>>> 1>>
B. 3>1>>> 1>>
. 391>>> 11>
". 5>1>>> 11>
$. Some other combination of figures not listed above.
*>. Western1 Inc.1 has two service departments 0,uman +esources and Building Maintenance2 and
department follows.
,uman +esources -15>>
Building Maintenance <1;>>
Machining =1=>>
Assembly 151>>>
'ver how many s/uare feet would the Building Maintenance cost be allocated 0i.e.1 spread2
with the direct method and the step4down method?
"irect
Method
Step4"own
Method
A. *31=>> *<13>>
B. *31=>> -;11>>
. *<13>> *31=>>
". -;11>> *31=>>
$. Some other combination of figures not listed above.
Answer% A &'% 1 (ype% A
Chapter 18 5
*1. Saunders ompany has two service departments 0afeteria and ,uman +esources2 and two
production departments 0Machining and Assembly2. (he number of employees in each
department follows.
afeteria *>
,uman +esources ->
Machining 1>>
Assembly 15>
Saunders uses the step4down method of cost allocation and allocates cost on the basis of
employees. ,uman +esources cost amounts to C11*>>1>>>1 and the department provides more
service to the firm than afeteria. ,ow much ,uman +esources cost would be allocated to
Machining?
A. C>.
B. C3*<15;*.
. C3331333.
". C3<>1>>>.
$. Some other amount.
**. ,unt orporation has two service departments 0S1 and S*2 and two production departments
0!1 and !*21 and uses the step4down method of cost allocation. Management has determined
that S1 provides more service to the firm than S*1 and has decided that the number of
employees is the best allocation base to use for S1. (he following data are available%
"epartment
)umber of
$mployees
S1 1>
S* *>
!1 5>
!* ;>
Which of the following statements is 0are2 true if S1 and S* have respective operating costs of
C*<>1>>> and C-5>1>>>?
A. S* should allocate a portion of its C-5>1>>> cost to S1.
B. S17s cost should be allocated 0i.e.1 spread2 over 13> employees.
. S17s cost should be allocated 0i.e.1 spread2 over 15> employees.
". S* should allocate a total of C-=>1>>> to !1 and !*.
$. Statements :B: and :": are both correct.
Answer% $ &'% 1 (ype% A
6se the following to answer /uestions *-4*5%
(he "ollar Store has a ,uman +esources "epartment and a Danitorial "epartment that provide service
to three sales departments. (he ,uman +esources "epartment cost is allocated on the basis of
employees1 and the Danitorial "epartment cost is allocated on the basis of space. (he following
information is available%
,uman
+esources Danitorial Sales E1 Sales E* Sales E-
Budgeted cost C351>>> C->1>>>
Space in s/uare feet 31>>> 11>>> *>1>>> ->1>>> 5>1>>>
)umber of employees 5 1> 15 35 ->
*-. 6sing the direct method1 the amount of Danitorial "epartment cost allocated to Sales
"epartment no. * is%
A. C<15;1.
B. C<1953.
. C=1>>>.
". C1>1-5>.
$. C131*1>.
*3. 6sing the step4down method and assuming that ,uman +esources is allocated first1 the
amount of ,uman +esources cost allocated to Sales "epartment no. - is%
A. C1*1>>>.
B. C1*1<5;.
. C1-15>>.
". C151>>>.
$. C**15>>.
*5. 6sing the step4down method and assuming ,uman +esources is allocated first1 the amount of
Danitorial cost allocated to Sales "epartment no. * is%
A. C<15;1.
B. C=1>>>.
. C=1<5;.
". C1>1*3;.
$. C1>1-5>.
Answer% $ &'% 1 (ype% A
Chapter 18 5!
6se the following to answer /uestions *94*<%
(he "eFter Manufacturing ompany has two production departments 0Assembly and #inishing2 and
two service departments 0,uman +esources and Danitorial2. (he proBected usage of the two service
departments is as follows%
6se of 6se of
,uman +esources Danitorial
,uman +esources 444 5?
Danitorial 1>? 444
Assembly 9>? 3>?
#inishing ->? 55?
(he budgeted costs in the service departments are% ,uman +esources1 C=>1>>> and Danitorial1 C5>1>>>.
*9. 6sing the direct method1 the amount of Danitorial "epartment cost allocated to the #inishing
"epartment is%
A. C*11>5-.
B. C*31<3-.
. C*51>>>.
". C*<1=3;.
$. C-3115;.
Answer% " &'% 1 (ype% A
*;. 6sing the step4down method and assuming the ,uman +esources "epartment is allocated
first1 the amount of ,uman +esources cost allocated to the Assembly "epartment is%
A. C*11>5-.
B. C*<1=3;.
. C531>>>.
". C9>1>>>.
$. C;<1<3*.
*<. 6sing the step4down method and assuming the ,uman +esources "epartment is allocated
first1 the total amount of service department cost allocated to the #inishing "epartment is%
A. C5<1=3;.
B. C91115<.
. C;31>>>.
". C;<1<3*.
$. C<11>5-.
5" Hilton, Managerial Accounting, Seventh Edition
*=. (he process of allocating fiFed and variable costs separately is called%
A. the separate allocation procedure 0SA!2.
B. diverse allocation.
. reciprocal4cost allocation.
". common4cost allocation.
$. dual4cost allocation.
Answer% $ &'% * (ype% +
->. 6nder dual4cost allocation1 fiFed costs are allocated on the basis of a user department7s%
A. long4run usage of a service department7s output.
B. short4run usage of a service department7s output.
. long4run usage and short4run usage of a service department7s output.
". neither long4run usage nor short4run usage of a service department7s output.
$. either long4run usage or short4run usage of a service department7s output.
Answer% A &'% * (ype% +
-1. onsider the following statements about dual4cost allocation%
I."ual4cost allocation prevents a change in the short4run activity of one department from
affecting the cost allocated to another department.
II."ual4cost allocations create an incentive for user department managers to understate their
eFpected long4run service needs.
III."ual4cost allocations are generally preferred over lump4sum allocations1 or those that
combine variable and fiFed costs together.
Which of the above statements is 0are2 true?
A. I only.
B. III only.
. I and II.
". II and III.
$. I1 II1 and III.
Answer% $ &'% * (ype% +
-*. When allocating service department costs1 companies should use%
A. actual costs rather than budgeted costs1 and separate rates for variable and fiFed costs.
B. budgeted costs rather than actual costs1 and separate rates for variable and fiFed costs.
. budgeted costs rather than actual costs1 and a rate that combines variable and fiFed costs.
". actual costs rather than budgeted costs1 and a rate that combines variable and fiFed costs.
$. a rate that is based on matriF theory.
Answer% B &'% * (ype% +
Chapter 18 54
--. @annon orporation allocates administrative costs on the basis of staff hours. Short4run
monthly usage and anticipated long4run monthly usage of staff hours for 'perating
"epartments 1 and * follow.
"ept. 1 "ept. * (otal
Short4run usage 0hours2 3>1>>> 9>1>>> 1>>1>>>
&ong4run usage 0hours2 351>>> 551>>> 1>>1>>>
If @annon uses dual4cost accounting procedures and variable administrative costs total
C*>>1>>>1 the amount of variable administrative cost to allocate to "epartment 1 would be%
A. C<>1>>>.
B. C<51>>>.
. C=>1>>>.
". C1>>1>>>.
$. some other amount.
Answer% A &'% * (ype% A
-3. +onan orporation allocates administrative costs on the basis of staff hours. Short4run
Short4run usage 0hours2 <>1>>> 1*>1>>> *>>1>>>
&ong4run usage 0hours2 =>1>>> 11>1>>> *>>1>>>
If +onan uses dual4cost accounting procedures and fiFed administrative costs total C11>>>1>>>1
the amount of fiFed administrative cost to allocate to "epartment 1 would be%
A. C3>>1>>>.
B. C35>1>>>.
. C5>>1>>>.
". C<5>1>>>.
Answer% B &'% * (ype% A
-5. )ashville orporation allocates administrative costs on the basis of staff hours. Short4run
Short4run usage 0hours2 351>>> 551>>> 1>>1>>>
&ong4run usage 0hours2 3<1>>> 5*1>>> 1>>1>>>
Gariable and fiFed administrative costs total C1<>1>>> and C3>>1>>>1 respectively. If
)ashville uses dual4cost accounting procedures1 the total amount of administrative cost to
allocate to "epartment * would be%
A. C->119>>.
B. C->;1>>>.
. C-1-19>>.
". C-1=1>>>.
Answer% B &'% * (ype% A
-9. A company that uses activity4based costing would li8ely allocate costs from%
A. service departments to production departments.
B. service departments to products and services.
. service departments to production departments and then to products and services.
". activity4cost pools to production departments.
$. activity4cost pools to products and services.
Answer% $ &'% - (ype% +
-;. (he point in a Boint production process where each individual product becomes separately
identifiable is commonly called the%
A. decision point.
B. separation point.
. individual product point.
". split4off point.
$. Boint product point.
Answer% " &'% 3 (ype% +
-<. (he Boint4cost allocation method that recogni.es the revenues at split4off but does not consider
any further processing costs is the%
A. relative4sales4value method.
B. net4reali.able4value method.
. physical4units method.
". reciprocal4accounting method.
$. gross margin at split4off method.
Answer% A &'% 3 (ype% +
Chapter 18 56
-=. Which of the following methods should be selected if a company terminates all processing at
the split4off point and desires to use a cost4allocation approach that considers the :revenue4
producing ability: of each product?
A. @ross margin at split4off method.
B. +eciprocal4accounting method.
. +elative4sales4value method.
". !hysical4units method.
$. )et4reali.able4value method.
Answer% &'% 3 (ype% )
3>. Which of the following choices correctly denotes the data needed to allocate Boint costs under
the relative4sales4value method?
Sales Galue
of !roduct
at Split4'ff
Separable
ost
Sales Galue of !roduct
After !rocessing
Beyond Split4'ff
A. Aes Aes )o
B. Aes Aes Aes
. Aes )o )o
". )o Aes Aes
$. )o )o Aes
Answer% &'% 3 (ype% +
31. When allocating Boint costs1 Wolstein calculates the final sales value of the various products
manufactured and subtracts appropriate separable costs. (he company is using the%
A. gross margin at split4off method.
B. reciprocal4accounting method.
. relative4sales4value method.
". physical4units method.
$. net4reali.able4value method.
Answer% $ &'% 3 (ype% +
3*. Webster manufactures A1 B1 and 1 all of which are Boint products1 and "1 which is classified
as a by4product. If Boint manufacturing costs amount to C35>1>>> and the company is using a
popular accounting method1 the firm will%
A. allocate C35>1>>> among A1 B1 and .
B. allocate C35>1>>> among A1 B1 1 and ".
. increase C35>1>>> by the net reali.able value of " and then allocate the total among A1 B1
and .
". decrease C35>1>>> by the net reali.able value of " and then allocate the total among A1 B1
and .
$. decrease C35>1>>> by the net reali.able value of " and then allocate the total among A1 B1
1 and ".
Answer% " &'% 3 (ype% +
3-. Ithaca orporation uses the physical4units method to allocate costs among its three Boint
products% H1 A1 and I. (he following data are available for the period Bust ended%
Doint processing cost% C<>>1>>>
(otal production% 15>1>>> pounds
Share of Boint cost allocated to H% C19>1>>>
Share of Boint cost allocated to A% C3>>1>>>
Which of the following statements is true?
A. (he company would have relied on the sales value of each product when allocating Boint
costs to H1 A1 and I.
B. Ithaca produced ->1>>> pounds of I during the period.
. Ithaca produced 351>>> pounds of I during the period.
". Ithaca produced 1>51>>> pounds of I during the period.
$. Based on the data presented1 it is not possible to determine Ithaca7s production of I during
the period.
Answer% &'% 3 (ype% +1 A
33. @arvin orporation manufactures Boint products ! and J. "uring a recent period1 Boint costs
amounted to C<>1>>> in the production of *>1>>> gallons of ! and 9>1>>> gallons of J.
@arvin can sell ! and J at split4off for C*.*> per gallon and C*.9> per gallon1 respectively.
Alternatively1 both products can be processed beyond the split4off point1 as follows%
! J
Separable processing costs C151>>> C-51>>>
Sales price 0per gallon2 if processed beyond split4off C- C3
(he Boint cost allocated to J under the relative4sales4value method would be%
A. C3>1>>>.
B. C9*13>>.
. C931>>>.
". C9519>>.
Chapter 18 58
35. @unniston orporation manufactures Boint products W and H. "uring a recent period1 Boint
costs amounted to C->>1>>> in the production of *>1>>> gallons of W and 9>1>>> gallons of H. Both
products will be processed beyond the split4off point1 giving rise to the following data%
W H
Separable processing costs C3>1>>> C19>1>>>
Sales price 0per gallon2 if processed beyond split4off C13 C1*
(he Boint cost allocated to W under the net4reali.able4value method would be%
A. C;51>>>.
B. C<>1>>>.
. C<31>>>.
". C=>1>>>.
6se the following to answer /uestions 3943<%
+oc8y Mountain ompany produces two products 0H and A2 from a Boint process. $ach product may
be sold at the split4off point or processed further. Additional processing re/uires no special facilities1
and production costs of further processing are entirely variable and traceable to the products involved.
Doint manufacturing costs for the year were C9>1>>>. Sales values and costs were as follows%
If !rocessed #urther
6nits Sales Galue Sales Separable
!roduct Made at Split4off Galue osts
H =1>>> C3>1>>> C;<1>>> C1>15>>
A 91>>> <>1>>> =>1>>> ;15>>
39. If the Boint production costs are allocated based on the physical4units method1 the amount of
Boint cost assigned to product H would be%
A. C*>1>>>.
B. C*31>>>.
. C->1>>>.
". C-91>>>.
$. C3>1>>>.
3;. If the Boint production costs are allocated based on the relative4sales4value method1 the amount
of Boint cost assigned to product H would be%
A. C*>1>>>.
B. C*;1>>>.
. C--1>>>.
". C3>1>>>.
Answer% A &'% 3 (ype% A
3<. If the Boint production costs are allocated based on the net4reali.able4value method1 the
amount of Boint cost assigned to product A would be%
A. C*>1>>>.
B. C*;1>>>.
. C--1>>>.
". C3>1>>>.
3=. Which of the following statements about Boint4cost allocation is false?
A. Doint4cost allocation is useful in deciding whether to further process a product after split4
off.
B. Doint4cost allocation is useful in ma8ing a profit determination about individual Boint
products.
. Doint4cost allocation is helpful in inventory valuation.
". Doint4cost allocation can be based on the number of units produced.
$. Doint4cost allocation can be accomplished by using several different methods that focus on
sales value and product :worth.:
Answer% A &'% 5 (ype% )
5>. onsider the following statements about Boint product cost allocation%
I.Doint product cost is allocated because it is necessary for inventory valuation.
II.Doint product cost is allocated because it is necessary for ma8ing economic decisions about
individual products 0e.g.1 sell at split4off or process further2.
III.Doint cost may be allocated to products by using several different methods.
A. I only.
B. III only.
. I and II.
". I and III.
$. I1 II1 and III.
Answer% " &'% 5 (ype% +
51. $astside ,ospital has two service departments 0!atient +ecords and Accounting2 and two
:production: departments 0Internal Medicine and Surgery2. Which of the following
allocations would li8ely ta8e place under the reciprocal4services method of cost allocation?
A. Allocation of Accounting cost to !atient +ecords.
B. Allocation of !atient +ecords cost to Internal Medicine.
. Allocation of Surgery cost to Accounting.
". Allocation of Internal Medicine cost to Surgery.
$. Allocations :A: and :B: above.
Answer% $ &'% 1 (ype% )
Chapter 18 6
5*. Westside ,ospital has two service departments 0!atient +ecords and Accounting2 and two
:production: departments 0Internal Medicine and Surgery2. Which of the following
allocations would not ta8e place under the reciprocal4services method of cost allocation?
A. Allocation of Accounting cost to !atient +ecords.
B. Allocation of !atient +ecords cost to Internal Medicine.
. Allocation of Surgery cost to Accounting.
". Allocation of Internal Medicine cost to Surgery.
$. Allocations :: and :": above.
Answer% $ &'% 1 (ype% )
%&CISS
'unda(entals of )irect and Step*)o+n Methods
5-. )ovaturn orporation has three service departments 0S1 and S*2 and two production
departments 0!1 and !*2. S1 and S* both use the number of employees as an allocation base. (he
following data are available%

)umber of
$mployees Budgeted ost
S1 3> C1;*1>>>
S* 9> *5>1>>>
!1 ->> 99>1>>>
!* 5>> <3>1>>>
+e/uired%
A. Assuming use of the direct method%
1. 'ver how many employees would S17s budgeted cost be allocated?
*. ,ow much of S*7s cost would be allocated to !1?
-. ,ow much of !17s cost would be allocated to S1?
B. Assuming use of the step4down method%
1. ,ow much of S17s cost would be allocated to S*? )ovaturn allocates S17s costs
prior to allocating those of S*.
*. ,ow much of S*7s total cost would be allocated to !*?
-. ,ow much of S*7s total cost would be allocated to S1?
&'% 1 (ype% A
Answer%
A. 1. <>> 0->> K 5>>2
*. C=-1;5> LC*5>1>>> F 0->>M<>>2N
-. )one1 because production department costs are not allocated to service departments.
B. 1. S17s costs are allocated over <9> employees 09> K ->> K 5>>2. (hus1 C1*1>>> will be
allocated to S* LC1;*1>>> F 09>M<9>2N.
*. S*7s costs total C*9*1>>> 0C*5>1>>> K C1*1>>>21 resulting in C19-1;5> being allocated
to !* LC*9*1>>> F 05>>M<>>2.
-. )one1 because S17s costs are allocated prior to those of S*. 'nce a department is
closed1 no costs are allocated bac8 to it.
Chapter 18 6!
)irect and Step*)o+n Methods of Service )epart(ent Cost Allocation
53. Wyoming State ollege has two service departments1 the &ibrary and omputing Services1
that assist the School of Business and the School of ,ealth. Budgeted costs of the &ibrary and
omputing Services are C<>>1>>> and C11<>>1>>>1 respectively. 6sage of the service departments7
output during the year is anticipated to be%
!rovider of Service
6ser of Service &ibrary
omputing
Services
&ibrary 444 1>?
omputing Services 444 444
School of Business *>? 9>?
School of ,ealth <>? ->?
+e/uired%
A. 6se the direct method to allocate the costs of the &ibrary and omputing Services to the
School of Business and the School of ,ealth.
B. +epeat re/uirement :A: using the step4down method. Wyoming allocates the cost of
omputing Services first.
&'% 1 (ype% A
Answer%
A. School of Business School of ,ealth
#raction Amount #raction Amount
&ibrary C <>>1>>> *M1> C 19>1>>> <M1> C 93>1>>>
omputing Services 11<>>1>>> 9M= 11*>>1>>> -M= 9>>1>>>
(otal C*19>>1>>> C11-9>1>>> C11*3>1>>>
B. omputing services 0C11<>>1>>>2%
&ibrary 01>?2 C 1<>1>>>
School of Business 09>?2 11><>1>>>
School of ,ealth 0->?2 53>1>>>
&ibrary 0C<>>1>>> K C1<>1>>> O C=<>1>>>2%
School of Business 0*>?2 C 1=91>>>
School of ,ealth 0<>?2 ;<31>>>
55. hicago1 Inc.1 manufactures gauges for automobile dashboards. (he company has two
production departments1 Molding and Assembly. (here are three service departments% ,uman
+esources1 Maintenance1 and $ngineering. 6sage of services by the various departments
follows.
,uman
+esources Maintenance $ngineering
,uman +esources 44 44 44
Maintenance 5? 44 44
$ngineering 5? 1>? 44
Molding 3>? 3>? ;5?
Assembly 5>? 5>? *5?
(he budgeted costs in hicago7s service departments are% ,uman +esources1 C1<>1>>>P
Maintenance1 C*;>1>>>P and $ngineering1 C*>>1>>>. (he company rounds all calculations to
the nearest dollar.
+e/uired%
A. 6se the direct method to allocate hicago7s service department costs to the production
departments.
B. "etermine the proper departmental se/uence to use in allocating the firm7s service costs
by the step4down method.
. Ignoring your answer in part :B1: assume that ,uman +esources costs are allocated first1
Maintenance costs second1 and $ngineering costs third. 6se the step4down method to
allocate hicago7s service department costs.
&'% 1 (ype% A1 +
Chapter 18 64
Answer%
A. Molding Assembly
,uman +esources C1<>1>>> 3>M=> C <>1>>> 5>M=> C1>>1>>>
Maintenance *;>1>>> 3>M=> 1*>1>>> 5>M=> 15>1>>>
$ngineering *>>1>>> ;5M1>> 15>1>>> *5M1>> 5>1>>>
(otal C95>1>>> C-5>1>>> C->>1>>>
B. #irst% ,uman +esources 0serves two other service departments2
Second% Maintenance 0serves one other service department2
(hird% $ngineering 0serves no other service departments2
. ,uman +esources 0C1<>1>>>2%
Maintenance 05?2 C =1>>>
$ngineering 05?2 =1>>>
Molding 03>?2 ;*1>>>
Assembly 05>?2 =>1>>>
Maintenance 0C*;>1>>> K C=1>>> O C*;=1>>>2%
$ngineering 01>?2 C *;1=>>
Molding 03>?2 11119>>
Assembly 05>?2 1-=15>>
$ngineering 0C*>>1>>> K C=1>>> K C*;1=>> O C*-91=>>2%
Molding 0;5?2 C1;;19;5
Assembly 0*5?2 5=1**5
Molding% C;*1>>> K C11119>> K C1;;19;5 O C-911*;5
Assembly% C=>1>>> K C1-=15>> K C5=1**5 O C*<<1;*5
59. Bec8ers orporation is developing departmental overhead rates based on direct labor hours for
its two production departments1 Molding and Assembly. (he Molding "epartment wor8ed
*>1>>> hours during the period Bust ended1 and the Assembly "epartment wor8ed 3>1>>>
hours. (he overhead costs incurred by Molding and Assembly were C1511*5> and C33>1;5>1
respectively.
(wo service departments1 +epair and !ower1 directly support the two production departments.
(hese service departments have costs of C=>1>>> and C*5>1>>>1 respectively. (he following
schedule reflects the use of +epair and !ower7s output by the various departments%
+epair !ower Molding Assembly
+epair 0repair hours2 5>> 5>> 31>>>
!ower 08ilowatt hours2 1*>1>>> 3*>1>>> 9>1>>>
+e/uired%
A. Allocate the company7s service department costs to production departments by using the
direct method.
B. alculate the overhead application rates of the production departments. ,int% onsider
both directly traceable and allocated overhead when deriving your answer.
. Allocate the company7s service department costs to production departments by using the
step4down method. Begin with the !ower "epartment1 and round calculations to the
nearest dollar.
&'% 1 (ype% A
Answer%
A. Molding Assembly
+epair C =>1>>> >.5M3.5 C 1>1>>> 3.>M3.5 C <>1>>>
!ower *5>1>>> 3.*M3.< *1<1;5> >.9M3.< -11*5>
C-3>1>>> C**<1;5> C1111*5>
B. Molding Assembl
y
Allocated service department costs C**<1;5> C1111*5>
'verhead costs1 traceable to production departments 1511*5> 33>1;5>
(otal overhead costs C-<>1>>> C55*1>>>
"irect labor hours

*>1>>>

3>1>>>
'verhead rate per hour C1=.>> C1-.<>
Chapter 18 66
. !ower 0C*5>1>>>2%
+epair 01*>M9>>2
Molding 03*>M9>>2
Assembly 09>M9>>2
C 5>1>>>
1;51>>>
*51>>>
+epair 0C=>1>>> K C5>1>>> O C13>1>>>2%
Molding 05>>M315>>2
Assembly 031>>>M315>>2
C 151559
1*31333
Molding% C1;51>>> K C151559 O C1=>1559
Assembly% C*51>>> K C1*31333 O C13=1333
Understandin, Service )epart(ent Allocations
5;. onsider the following independent cases that relate to service department cost allocations%
Ca#e A% Stric8land ompany has two service departments L,uman +esources 0,M+2 and
Information SystemsN and two production departments 0Machining and Assembly2. ,uman
+esource cost is allocated by using the direct method based on the number of personnel in
each department. #or the period Bust ended1 there were 1<= employees in Machining1 and
Machining received C=>1>>> of ,M+7s overhead of C*>>1>>>. ,ow many employees are in the
Assembly "epartment?
Ca#e $% Walter Bur8e1 controller of AleFander $nterprises1 wants service department
managers to be aware that their use of other service departments costs the firm a substantial
amount of money. Would Bur8e prefer the direct method or the step4down method of cost
allocation? Why?
Ca#e C% &oc8wood ompany has four service departments 0S11 S*1 S-1 and S32 and two
production departments 0!1 and !*2. (he costs of S1 are allocated first1 followed in order by
the costs of S*1 S-1 and S3. &oc8wood uses the step4down method1 and the costs of S* are
allocated based on the number of computer hours used. omputer hours logged during the
period were as follows% S11 319>>P S*1 ;11>>P S-1 1>13>>P S31 1;19>>P !11 -;1>>>P and !*1
3<19>>. 'ver how many hours would S*7s cost be allocated?
Ca#e %% A recently hired staff accountant noted that given the nature of the allocations1 the
total cost allocated to production departments is typically less under the step4down method
than under the direct method. "o you agree with the accountant? Why?
+e/uired%
Answer the /uestions that are raised in ases A1 B1 1 and ".
&'% 1 (ype% A1 )
Answer%
ase A% Machining has been allocated 35? of ,M+7s cost 0C=>1>>> Q C*>>1>>>2 because it has
35? of the employees in the production departments. Since 1<= represents 35? of the total1
there are 3*> employees in production 01<= Q >.352. (hus1 Assembly has *-1 personnel 03*>
4 1<=2.
ase B% Bur8e would prefer the step4down method because service department costs are
allocated to other service departments 0although not all2. Such a practice ma8es managers
aware that services are not cost4free to the organi.ation.
ase % 11-19>> 01>13>> K 1;19>> K -;1>>> K 3<19>>2
ase "% )o. 6nder both approaches1 all service department costs are allocated to production
departments. (his process yields e/ual totals for each method.
Chapter 18 68
)ual*Cost Allocations
5<. +enaissance1 Inc.1 has centrali.ed much of its speciali.ed data processing operation1 with the
omputer "epartment performing services for "epartments A and B. Service hours
consumed during /uarter no. 1 and /uarter no. * follow.
A B
Juarter no. 1 9> 9>
Juarter no. * 3> 9>
omputer "epartment operating costs were%
Gariable
0!er ,our2 #iFed
Juarter no. 1 C5> C3>1>>
>
Juarter no. * 35 -<1>>>
ompany policy currently re/uires that total variable and fiFed costs be combined and
allocated as a lump4sum to users based on service hours.
+enaissance has been financially healthy for a number of years but began to eFperience
problems toward the end of /uarter no. 1. In response to these problems1 management issued
a directive to closely monitor costs and computer usage1 effective with the start of /uarter no.
*.
+e/uired%
A. ompute /uarter no. 17s total computer cost and determine the allocation to "epartment A
and "epartment B.
B. ,ow much cost would be allocated to "epartments A and B during /uarter no. *1 and how
would the heads of these departments li8ely react to the allocations in light of
management7s directive?
. Assume that at the beginning of /uarter no. *1 the company switched to dual4cost
allocations1 with variable costs allocated based on current usage and fiFed costs allocated
based on long4run average utili.ation. An analysis of proBected usage found that wor8 for
"epartment A was eFpected to consume 55? of the omputer "epartment7s time over the
forthcoming year. ,ow much cost would be allocated to A and B in /uarter no. *?
". @iven the use of dual allocations1 how1 if at all1 would a short4term increase or decrease in
A7s current usage affect the /uarterly cost allocation that is charged to "epartment B?
&'% * (ype% A1 )
Answer%
A. Gariable cost% 09> K 9>2 F C5> C
91>>>
#iFed cost 3>1>>
>
(otal cost C391>>
>
Since each department consumed 9> hours of services1 the cost would be split e/ually%
C391>>> Q * O C*-1>>>.
B. Gariable cost% 03> K 9>2 F C35 C
315>>
#iFed cost -<1>>
>
(otal cost C3*15>
>
"epartment A% 03> Q 1>>2 F C3*15>> O C1;1>>>
"epartment B% 09> Q 1>>2 F C3*15>> O C*515>>
(he head of A would be pleased because the department7s decreased usage resulted in a
C91>>> reduction in cost 0C*-1>>> 4 C1;1>>>2. In contrast1 the head of B would li8ely
be unhappy. Although unable to reduce usage1 usage did remain constantRa situation
that produced a C*15>> increase in cost 0C*515>> 4 C*-1>>>2 despite the fact that overall
cost declined.
. A B
Gariable%
3> hours F C35 C 11<>>
9> hours F C35 C *1;>>
#iFed%
C-<1>>> F 55? *>1=>>
C-<1>>> F 35? 1;11>>
(otal C**1;>> C1=1<>>
". (here is no effect on B. (he variable costs charged to "epartment A would increase or
decrease1 with other allocations remaining the same.
Chapter 18 7
Joint*Cost Allocations
5=. Suppose that one hog yields ->> pounds of ham1 *>> pounds of chops1 and 1>> pounds of
miscellaneous items. (he sales value of ham is C1.*> per poundP chops1 C1.5> per poundP and
miscellaneous items1 C>.=> per pound. (he hog costs C5<>1 and processing costs are C*>.
+e/uired%
A. "etermine the proper allocation of Boint costs to the three products by using the physical4
units method.
B. +epeat part :B: by using the relative4sales4value method.
&'% 3 (ype% A
Answer%
A. Weight at the
Split4'ff !oint
+elative
!roportion
Allocation of
Doint ostS
,am ->> pounds -M9 C->>
hops *>> pounds *M9 *>>
Miscellaneous items 1>> pounds 1M9 1>>
9>> pounds C9>>
SC5<> K C*>
B. Sales Galue
at Split4'ff
+elative
!roportion
Allocation of
Doint ost
,am 0->> F C1.*>2 C-9> -9M;5 C*<<
hops 0*>> F C1.5>2 ->> ->M;5 *3>
Miscellaneous items 01>> F C>.=>2 => =M;5 ;*
C;5> C9>>
'unda(entals of Joint*Cost Allocations
9>. ,iggins orporation manufactures two chemicals 0#leFtra and ,ydro2 in a Boint process. "ata
from a recent month follow.
"irect materials used% C-9>1>>>
"irect labor% C15>1>>>
Manufacturing overhead% C9=>1>>>
Manufacturing output%
#leFtra% 3>1>>> gallons
,ydro% 1*>1>>> gallons
#leFtra sells for C15 per gallon and ,ydro sells for C*> per gallon.
+e/uired%
A. ompute the total Boint costs to be allocated to #leFtra and ,ydro.
B. ompute the Boint costs that would be allocated to #leFtra by using the physical4units method.
. ompute the Boint costs that would be allocated to ,ydro by using the relative4sales4value method.
". Assume that ,ydro can be converted into a more refined product1 ,ydro4+1 in a totally separable
process at an additional cost of C3 per gallon. ,ydro4+ can be sold in the mar8etplace for C*9 per
gallon.
1. ompute the net reali.able value of ,ydro4+.
*. If ,iggins allocated C<>>1>>> of Boint cost to ,ydro4+ and sold =>? of the
production completed1 determine the cost of remaining ,ydro4+ that would be
transferred to the companyTs month4end balance sheet as finished4goods inventory.
&'% 3 (ype% A
Answer%
A. C11*>>1>>> 0C-9>1>>> K C15>1>>> K C9=>1>>>2
B. #leFtra constitutes *5? of the productive output L3>1>>> Q 03>1>>> K 1*>1>>>2N and
would therefore absorb C->>1>>> of Boint cost 0C11*>>1>>> F *5?2.
. (he total sales value of the two products is C-1>>>1>>>% #leFtra 03>1>>> gallons F C15
O C9>>1>>>2 K ,ydro 01*>1>>> gallons F C*> O C*13>>1>>>2. Since ,ydro has <>? of the
sales value 0C*13>>1>>> Q C-1>>>1>>>21 the company will allocate C=9>1>>> of Boint cost
0C11*>>1>>> F <>?2.
". 1. Sales value 01*>1>>> gallons F C*9 O C-11*>1>>>2 4 costs beyond split4off 01*>1>>>
gallons F C3 O C3<>1>>>2 O C*193>1>>>.
*. (he total cost of production is C11*<>1>>> 0C<>>1>>> K C3<>1>>>2. Since =>? of the
production is sold1 1>? of the cost1 or C1*<1>>>1 remains as inventory.
Chapter 18 7!
Joint*Cost Allocations
91. 'hio hemical manufactures two industrial chemicals in a Boint process. In 'ctober1 direct
material costing C1*>1>>> was processed at a cost of C->>1>>>1 resulting in 191>>> pounds of
!enteF and 31>>> pounds of @laFco. !enteF sells for C-5 per pound and @laFco sells for C9>
per pound. Management generally processes each of these chemicals further in separable
processes to produce more refined products. !enteF is processed separately at a cost of C;.5>
per pound1 with the resulting product1 !enteF4+1 selling for C35 per pound. @laFco is
processed separately at a cost of C1> per pound1 and the resulting product1 @laFco4+1 sells for
C1>> per pound.
+e/uired%
A. ompute the company7s total Boint production costs.
B. Assuming that total Boint production costs amounted to C5>>1>>>1 allocate these costs by
using%
1. (he physical4units method.
*. (he relative4sales4value method.
-. (he net4reali.able4value method.
&'% 3 (ype% A
Answer%
A. Doint production costs total C3*>1>>> 0C1*>1>>> K C->>1>>>2.
B. 1. Weight at the
Split4'ff !oint
+elative
!roportion
Allocation of
Doint ost
!enteF 191>>> 19M*> C3>>1>>>
@laFco 31>>> 3M*> 1>>1>>>
*>1>>> C5>>1>>>
*. Sales Galue
at Split4'ff
+elative
!roportion
Allocation of
Doint ost
!enteF 0191>>> F C-52 C59>1>>> 59M<> C-5>1>>>
@laFco 031>>> F C9>2 *3>1>>> *3M<> 15>1>>>
C<>>1>>> C5>>1>>>
-. Sales Galue
of #inal
!roductS
osts !ast
Split4offSS
)et
+eali.able
Galue
+elative
!roportion
Allocation
of Doint ost
!enteF4+ C ;*>1>>> C1*>1>>> C9>>1>>> 9>M=9 C-1*15>>
@laFco4+ 3>>1>>> 3>1>>> -9>1>>> -9M=9 1<;15>>
C111*>1>>> C19>1>>> C=9>1>>> C5>>1>>>
S !enteF4+% 191>>> F C35P @laFco4+% 31>>> F C1>>
SS!enteF4+% 191>>> F C;.5>P @laFco4+% 31>>> F C1>
$et*&eali-a.le*/alue Method0 1ross Mar,in Calculation
9*. "ouglas ompany1 a new firm1 manufactures two products1 D and U1 in a common process.
(he Boint costs amount to C<>1>>> per batch of finished goods. $ach batch results in *>1>>>
liters of output1 of which <>? are D and *>? are U.
(he two products are processed beyond the split4off point1 with "ouglas incurring the
following separable costs% D1 C* per literP U1 C5 per liter. After the additional processing1 the
selling price of D is C1* per liter1 and the selling price of U is C15 per liter.
+e/uired%
A. "etermine the proper allocation of Boint costs if the company uses the net4reali.able4value
method.
B. Assume that "ouglas sold all of its production of U during the current accounting period.
ompute U7s sales revenue1 cost of goods sold1 and gross margin.
. Is the firm7s cost4of4goods4sold figure influenced by the choice of a Boint4cost allocation
method? Briefly eFplain.
&'% 31 5 (ype% A1 )
Answer%
A. Sales Galue
of #inal
!roduct
osts
!ast
Split4'ff
)et
+eali.able
Galue
+elative
!roportion
Allocation
of Doint
ost
D 0191>>> F C1*2 C1=*1>>> C-*1>>> C19>1>>> 19>M*>> C931>>>
U 031>>> F C152 9>1>>> *>1>>> 3>1>>> 3>M*>> 191>>>
C*>>1>>> C<>1>>>
B. Doint costs C191>>>
osts beyond split4off *>1>>>
ost of goods sold C-91>>>
Sales revenue C9>1>>>
ost of goods sold -91>>>
@ross margin C*31>>>
. Aes. ost of goods sold is based on both separable costs and Boint cost. (he choice of
an allocation method will influence the amount of Boint cost charged to the product.
Chapter 18 74
Analysis of Joint Costs: 2or3in, 4ac3+ard
9-. Barry ompany manufactures H41111 H411*1 and H411- from a Boint process. (he following
information is available for the period Bust ended%
H4111 H411* H411- (otal
6nits produced 91>>> 131>>> ->1>>> 5>1>>>
Doint cost allocation ? C1<13>> ? C <>1>>>
Sales value at split4off C1>31>>> ? ? C*9>1>>>
+e/uired%
A. "oes Barry allocate Boint costs by using the physical4units method? $Fplain.
B. Assume that Barry does not use the physical4units method but instead allocates Boint costs
by using the relative4sales4value method. #ind the four un8nowns in the preceding table.
&'% 3 (ype% A1 )
Answer%
A. )o. H411* comprises *<? of the total units produced 0131>>> Q 5>1>>>2P however1 the
product was allocated *-? of the total Boint cost 0C1<13>> Q C<>1>>>2. Apparently1 then1
another method is being used.
B. H4111 has 3>? of the sales value 0C1>31>>> Q C*9>1>>>21 resulting in 3>? of the Boint cost
0C<>1>>> F 3>?21 or C-*1>>>. (his leaves C*=19>> to be allocated to H411- 0C<>1>>> 4
C-*1>>> 4 C1<13>>2. (he sales values follow by using the same percentages that are used
in the cost allocation 0C1<13>> Q C<>1>>> O *-?P C*9>1>>> F *-? O C5=1<>>2 and
0C*=19>> Q C<>1>>> O -;?P C*9>1>>> F -;? O C=91*>>2.
H4111 H411* H411- (otal
6nits produced 91>>> 131>>> ->1>>> 5>1>>>
Doint cost allocation C -*1>>> C1<13>> C*=19>> C <>1>>>
Sales value at split4off C1>31>>> C5=1<>> C=91*>> C*9>1>>>
Joint Costs5 Analysis of Joint Production Process
93. Mercury orporation allocates Boint costs by using the net4reali.able4value method. In the
company7s Michigan plant1 products " and $ emerge from a Boint process that costs C*5>1>>>.
$ is then processed at a cost of C**>1>>> into products # and @. "ata pertaining to "1 #1 and
@ follow.
" # @
osts beyond split4off C5>1>>> C*;1>>> C*51>>
>
Selling price 3> -< 5>
!ounds produced 1>1>>> 31>>> *1>>>
+e/uired%
A. Allocate the C**>1>>> processing cost between products # and @.
B. #rom a profitability perspective1 should product $ be processed into products # and @?
Show your calculations.
. Assume that the net reali.able value associated with $ is .ero. ,ow would you allocate
the Boint cost of C*5>1>>>?
&'% 3 (ype% A1 )
Answer%
A. Sales Galue
of #inal
!roduct
osts
!ast
Split4'ff
)et
+eali.able
Galue
+elative
!roportion
Allocation
of Doint
ost
# 031>>> F C-<2 C15*1>>> C*;1>>> C1*51>>> 1*5M*>> C1-;15>>
@ 0*1>>> F C5>2 1>>1>>> *51>>> ;51>>> ;5M*>> <*15>>
C*>>1>>> C**>1>>>
B. )o1 the company is losing C*>1>>>% )et reali.able value 0C*>>1>>>2 4 Boint costs
0C**>1>>>2.
. (he C*5>1>>> cost is a Boint cost between " and $. Since product " has a positive net
reali.able value of C-5>1>>> L01>1>>> pounds F C3>2 4 C5>1>>>N and $7s is .ero1 all
C*5>1>>> would be charged to ".
Chapter 18 76
)ISCUSSI"$ #USTI"$S
"vervie+ of Service*)epart(ent Cost Allocation Methods
95. ompanies are free to use the direct1 step4down1 and reciprocal allocation methods when
dealing with service4department costs.
+e/uired%
A. ,ow does the direct method wor8? What is its chief limitation?
B. Is the step4down method an improvement over the direct method? $Fplain.
. Which of the three methods is the most correct from a conceptual viewpoint? Why?
&'% 11 9 (ype% +1 )
Answer%
A. (he direct method allocates Boint costs solely to producing departments. (his method
does not allocate costs to other service departments and is based on the erroneous
assumption that service departments do not service each other.
B. (he step4down method is an improvement over the direct method1 as it recogni.es that
service departments service both producing departments and other service departments.
osts are allocated accordingly. (he step4down method is slightly more compleF than the
direct method1 re/uiring a determination of the proper order of departmental allocations.
. (he reciprocal method is the most correct approach from a conceptual viewpoint. (his
method fully recogni.es all services provided by service departments. (he direct method
completely ignores the fact that service departments service each other. (he step4down
method recogni.es only some of these services1 as once a department is closed out1 no cost
is reallocated bac8 to it.
)ual &ate /ersus Sin,le &ate
99. Many companies use the dual4rate method of cost allocation.
+e/uired%
A. ,ow does the dual4rate method wor8?
B. Is there any advantage of the dual4rate method over a method that uses a combined1 lump4
sum single rate? Briefly eFplain.
&'% * (ype% +
Answer%
A. (he dual4rate method involves creating two overhead rates1 one for variable costs and
another for fiFed costs. (he variable costs are normally allocated on the basis of short4run
usage of the service department7s outputP fiFed costs are allocated on the basis of long4run
usage.
B. Aes. When a single rate is used1 the cost allocated to a user department may be influenced
by the amount of service consumed by another department. #or eFample1 a user
department7s service consumption could remain flatP yet the amount of cost allocated to
that department could increase or decrease over previous amounts based solely on actions
of other users. "ual rates eliminate this problem.
Chapter 18 78

Allocation Support Costs

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Allocation Support Costs

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Chapter 18: Allocation of Support Activity Costs and Joint Costs

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