Accounting 3341

Practice Examination II

Part I

1. Which of the following is not a primary purpose for allocating costs?

a. to provide information for economic decisions

b. to motivate managers and other employees
c. to measure income and assets for reporting to external parties
d. to foster cost awareness among managers

2. Which of the following is considered both a cost allocation objective and a criterion?

a. cause and effect

b. benefits received
c. fairness or equity
d. ability to bear

3. Homogeneity is used to

a. develop cost pools in which the costs have the same or similar cost-allocation base.
b. develop cost pools of similar amounts for allocation purposes.
c. develop cost pools based upon similarity of origination of costs to be allocated.
d. develop cost pools only for activity-based costing.

4. Production-cost cross-subsidization results from

a. allocating indirect costs to multiple products.

b. assigning traced costs to each product.
c. assigning costs to different products using varied costing systems within the same
organization.
d. assigning broadly averaged costs across multiple products without recognizing
amounts of resources used by which products.

5. In refining a cost system

 a. total direct costs are unchanged because they can be traced in an economically
feasible way to the product and traced costs are more accurate.
b. the costs are grouped in non-homogeneous pools.
c. the criterion of cause-and-effect is used to relate indirect costs to a factor that
systematically links to a cost object.
d. the organization looks for cost-allocation bases that will provide a uniform spreading of
indirect costs to each product.

6. Which of the following statements is more representative of activity-based costing in

comparison to a department-costing system?
a. the use of multiple cost-allocation bases.
b. the use of indirect-cost rates for significant resource use.
c. the use of the cause-and-effect criterion.
d. the use of multiple cost pools.

7. A significant limitation of activity-based costing is the

a. attention given to indirect cost allocation.
b. many necessary calculations.
c. operations staff’s attitude toward the accounting staff.
d. use it makes of technology.

8. For planning purposes, managers prefer to use

a. actual rates for cost allocation because the rates are calculated from real amounts.
b. actual rates for cost allocation because actual rates are easier to justify to users.
c. budgeted rates for cost allocation because the rates are known in advance.
d. budgeted rates for cost allocation because any variances are transferred to users.

XYZ Inc. has two support departments: (1) Buildings & Grounds and (2) Computer Services
and two operating departments: (1) Signs and (2) Mailers. The support relationships between
the four departments are as follows:

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 Used By
Supplied By Building & Grounds Computer Services Signs Mailers

Buildings & Grounds — 0.20 0.60 0.20

Computer Services 0.15 — 0.30 0.55

Actual cost data for each support department are:

Fixed Variable
Buildings & Grounds $ 50,000 $90,000
Computer Services $100,000 $21,000

9. Total fixed costs allocated from Buildings & Grounds to the Signs Department, using the
direct allocation method are
a. $37,500
b. $33,333
c. $30,000
d. $25,000

A
= [.60 / (.60 + .20)] * $50,000
= $37,500

10. If a cost is incurred for more than one user, that cost is considered a(n)

a. homogeneous cost
b. common cost
c. stand-alone cost
d. incremental cost

11. Which of the following is often the most basic cause of contract disputes?

a. allowable costs
b. cost-allocation issues
c. use of common costs
d. writing into the contract “rules of the game”

12. For purposes of allocating joint costs to joint products, the sales value at splitoff method
could be used in which of the following situations?

No costs beyond splitoff Cost beyond splitoff

a. Yes No

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 b. Yes Yes
c. No Yes
d. No No

B
The following data apply to questions 13-14
Brant Corporation manufactures two products out of a joint process—Scout and Andro. The
joint costs incurred are $400,000 for a standard production run that generates 70,000 pounds
of Scout and 30,000 pounds of Andro. Scout sells for $9.00 per pound while Andro sells for
$7.00 per pound.

13. If there are no additional processing costs incurred after the splitoff point, the amount of
joint costs allocated to Scout on a physical-measure basis is

a. $300,000
b. $280,000
c. $120,000
d. $100,000

B
= $400,000 * [70,000 / (70,000 + 30,000)]
= $280,000

14. If there are no additional processing costs incurred after the splitoff point, the amount of
joint costs allocated to Andro on a sales value at splitoff basis is

a. $300,000
b. $225,000
c. $175,000
d. $100,000

D
Sales Value of Scout = 70,000 lbs. * $9.00 = $630,000
Sales Value of Andro = 30,000 lbs. * $7.00 = $210,000

= $400,000 * [$210,000 / ($630,000 + $210,000)

= $100,000

15. Tanner Company manufactures products Katran and Klare from a joint process. Product
Katran has been allocated $7,500 of total joint costs for the 1,500 units produced. Katran
can be sold at the splitoff point for $4 per unit, or it can be processed further with additional
costs of $2,000 and sold for $7 per unit. If Katran is processed further and sold, the result
would be

a. a break-even situation

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 b. an overall loss of $1,500
c. a gain of $2,500 from further processing
d. a gain of $1,000 from further processing

C
Incremental Revenue 1,500 units * ($7 - $4) $4,500
Incremental Costs (2,000)
Operating Income $2,500

Part II

A. Departments X and Y use a common facility whose fixed costs of operation are
$90,000. The service provided by the facility to X can be purchased externally
for $60,000. Similarly, Department Y can buy the facility's services externally for
$90,000. Under the Stand-Alone Cost Allocation Method, how much in common
costs would be allocated to Department X?

= $90,000 x [$60,000/($60,000+$90,000)]
= $36,000

B. A firm has two departments (X and Y) that use a central computer network. The
network is expected to incur $4,000 in fixed costs and $3 per hour in variable
costs. X and Y estimated that they would use the network for 500 and 300
hours, respectively; their actual usages were 600 and 200 hours, respectively.
The computer network actually cost $4,500 in fixed costs and $2.75 per hour in
variable costs.

1. Under a single-rate approach, using budgeted rates and usages, what is

the cost allocated to Department X?

= [$4,000+$3(500+300)]/800 = $8/hr
= $8/hr x 600 hrs = $4,800

2. Under a dual-rate approach, using budgeted rates and usages, what is

the cost allocated to Department X?

Fixed: 4,000 x (500 / 800) = $2,500

Variable: $3 x 600 = 1,800

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 $4,300

Part III
Alphabet Inc. has a manufacturing plant with three service departments (A, B and C)
and a single operating department (D). Following are the hours of service (measured
in direct labor hours) expected to be provided by A, B and C for this year.

Estimated Service Provided To

Dept. A Dept. B Dept. C Dept. D Totals
Service Dept. A ---- 750 750 1,500 3,000
Service Dept. B 600 ---- 1,200 200 2,000
Service Dept. C 1,200 1,800 ---- 1,000 4,000

Support department costs are:

Department A $ 8,500
Department B $15,000
Department C $ 7,500
Department D $ 9,000

1. Under the step-down method, using the most popular sequence, which service
departments’ costs will be allocated first, second, and third?

A to other service departments : (750+750)/3,000 = .50

B to other service departments : (600+1,200)/2,000 = .90

C to other service departments : (1,200+1,800)/4,000 = .75

The sequence is B, C, A

2. Carry out the step-down method of allocating the service department costs.
(Show all the steps; Round all allocations to the nearest dollar).

B C A D
Costs $15,000 $7,500 $8,500 $9,000
Allocate B
(1,200/2,000; 600/2,000; 200/2,000) (15,000) 9,000 4,500 1,500
Allocate C
(1,200/2,200; 1,000/2,200) (16,500) 9,000 7,500

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 Allocate A (22,000) 22,000
Totals -0- -0- -0- 40,000

3. Write the linear equations you would need to reflect the relationships among the
various service departments using the reciprocal method of allocating service
department costs.

A = $8,500 + .3B + .3C *

B = $15,000 + .25A + .45C **

C = $7,500 + .25A + .6B ***

* 600/2,000 = .30; 1,200/4,000 = .30

**750/3,000 = .25; 1,800/4,000 = .45
***750/3,000 = .25; 1,200/2,000 = .60

Part IV

Big Red produces precisely engineered components for engines. There are 2
products: Quality and Superior. The existing cost accounting system applies all costs
except direct materials to products based on direct labor hours. During 2001, you
conducted a study of operations and cost drivers that eventually led to the company’s
dividing its sole manufacturing department into 5 activities. The 2002 budgeted support
costs for these activities are as follows:

Support

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Activity Costs Cost Driver
Materials Handling $158,400 Number of parts
Machine Set-ups 120,000 Number of set-ups
Machinery Maintenance 2,460,000 Machine hours
Finishing 2,192,000 Direct labor hours
Packing and shipping 90,000 Number of orders shipped
$5,020,400

The following budget is for 2002:

Quality Superior Totals

Number of units 10,000 800 N/A
Direct materials cost per unit $80 $110 N/A
Number of parts 300,000 96,000 396,000
Machine hours 70,000 12,000 82,000
Direct labor hours 100,000 9,600 109,600
Machine set ups 100 50 150
Orders shipped 1,000 800 1,800

1. Calculate the activity cost driver rate for each activity using the chart below:

Budgeted Support Budgeted Cost Activity Cost

Activity Costs Driver Usage Driver Rate
Materials handling $158,400 396,000 $.40/part

Machine setups $120,000 150 $800/set-up

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 Machinery $2,460,000 82,000 $30/mhr
maintenance
Finishing $2,192,000 109,600 $20/dlh

Packing and shipping $90,000 1,800 $50/shipment

2. Calculate support costs per unit for each product using activity-based costing.

Quality Superior
Materials $.4/part * 300,000 = $120,000 $.4/part * 96,000 = $38,400
Handling
Machine $800/set-up * 100 = $80,000 $800/set-up * 50 = $40,000
Set-up
Machinery $30/mhr * 70,000 = $2,100,000 $30/mhr * 12,000 = $360,000
Maintenance
Finishing $20/dlh * 100,000 = $2,000,000 $20/dlh * 9,600 = $192,000

Packing and $50/shpmt * 1,000 = $50,000 $50/shpmt * 800 = $40,000

Shipping
Totals $4,350,000 $670,400
Divide by # of units 10,000 800
Support Cost per Unit $435/unit $838/unit

3. Calculate the budgeted overhead cost per unit for each product using the
existing direct labor hour-based system.

5,020,400
 = $45.81/ DLH
109,600

Quality:

(100,000 DLH / 10,000 units = 10 DLH per unit

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 $45.81 x 10 DLH = $458.10/unit

Superior:

9,600 DLH / 800 units = 12 DLH per unit

$45.81 x 12 DL hrs/unit = $ 549.72 per unit

Part V
Nedved Labs produces a drug used for the treatment of hypertension. Chemicals are
mixed and heated, creating a reaction; a unique separation process then extracts the
drug from the mixture. A batch yields a total of 25 gallons: 5 gallons of which are sold
to veterinarians and 20 gallons of which are sold for human use.

The costs of mixing, heating, and extracting the drug amount to $1,500 per batch. The
output sold for human use is pasteurized at a cost of $1,200 and is sold for $585 per
gallon. The product sold to veterinarians is irradiated at a cost of $50 and is sold for
$410 per gallon.

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In March, Nedved, which had no opening inventory, processed one batch of chemicals.
It sold 17 gallons of product for human use and 3 gallons of the veterinarian product.
Nedved uses the net realizable value method for allocating joint production costs.

1. How much in joint costs will NedVed allocate to each product?

Human Animal
Total Sales Values
(20G*$585; 5G*$410) $11,700 $2,050
Less separable costs (1,200) (50)
Net Realizable Value 10,500 2,000
Weights:
(10,500/12,500; 2,000/12,500) .84 .16
Joint Costs Allocated
($1,500*.84; $1,500*.16) $1,260 $240
Cost per Gallon
(1,260+1,200)/20G $123 per gallon $58 per gallon
(240+50)/5G

2. Compute gross margins (dollars and percentages) for each product.

Human Animal
Sales ($585 * 17G) ($410 * 3G) 9,945 1,230
COGS: Joint costs 1,260 240
Separable costs 1,200 50
Less EI: ($123 * 3G; $58 * 2G) (369) (116)
Total COGS 2,091 174
Gross Margin 7,854 1,056
Gross Margin % 79% 86%

3. If Nedved were to use the constant gross margin method, what would the gross
margin percentage be for each product?

Total Sales Values ($585 * 20G) + ($410 * 5G) = 13,750

Less: Joint Costs (1,500)
Separable costs ($1,200 + $50) (1,250)
Gross Margin $11,000

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GM % ($11,000 / $13,750 80%

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