Management And Accounting Web

# Management Accounting: Concepts, Techniques & Controversial Issues Chapter 6 Extra MC Solution

James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida

Assume the Bee company has two service departments 1 and 2 and two producing departments 3 and 4. Direct costs and other data (in thousands) needed for stage I cost allocations are provided below. Department 1 allocates costs based on cubic feet of service used. Department 2 allocates costs on the basis of floor space occupied.

1. Using the Direct method, the service department costs allocated to department 2 would be

a. Zero

2. Using the Direct method, the total service department costs allocated to department 3 would be

a. (8/12)(10,000) + (5/7)(30,000)

3. Using the Step-down method,

b. the cost of Department 2 should be allocated first.

4. Now ignore your answer to the previous question and assume department 2 is closed or allocated first. Using the Step-down method, the total service department costs allocated to department 3 would be

d. (8/12)[10,000 + (2/9)(30,000)] + (5/9)(30,000)

5. Use the reciprocal method and C1 and C2 to represent the total costs of the two service departments after all service department allocations to other service departments. Which equation should be used to represent the cost of department 1?

c. C1 = 10,000 + (2/16)(C1) + (2/10)(C2)

6. Use the reciprocal method and C1, C2 and C3 to represent the total costs of the first three departments after service department allocations. Which equation could be used to accurately determine the cost of department 3?

c. C3 = 300,000 + (8/16)(C1) + (5/10)(C2)

Assume the Clip Company has two service departments S1 (Housekeeping) and S2 (Maintenance) and two producing departments P1 and P2. Direct costs and other data (in thousands) are provided below. S1 allocates costs based on housekeeping labor hours. S2 allocates costs on the basis of maintenance labor hours.

7. Using the Direct method, the service department costs allocated to S1 are

e. none of the above.

8. Using the Direct method, the total service department costs allocated to P1 are

b. (10/30)(20,000) + (20/60)(40,000)

9. Using the Step-down method,

b. the cost of S2 should be allocated first.

10. Now ignore your answer to the previous question and assume S1 is allocated first using the step down method. Then the service cost allocation to S2 is

a. (2/32)(20,000)

11. Now ignore your answer to the previous questions and assume S2 is allocated first using the Step-down method. Then the total service department costs allocated to P2 is

c. (20/30)[20,000+(7/67)(40,000)] + (40/67)(40,000)

12. Use the reciprocal method and CS1 and CS2 to represent the total costs of the two service departments after all service department allocations to other service departments. Which equation should be used to represent the cost of S1?

e. None of these.

13. Use the reciprocal method and CS1, CS2, CP1 and CP2 to represent the total costs of the departments after service department allocations. Which equation could be used to accurately determine the cost of P1?

c. CP1 = 100,000 + (10/33)(CS1) + (20/70)(CS2)

14. Which first stage allocation method, or methods considers reciprocal services?

e. b and c.

15. In first stage cost allocations based on the step-down method, when there is a tie between two departments, the first service department to be closed is

d. based on the department that provides the greatest proportion of its service to the department with which it is tied.

16. From the perspective of the matching concept, the logical way to allocate service department costs is based on

c. Cause and effect.

17. The dual rate method of allocating service department costs refers to

b. using separate rates for allocating fixed and variable service costs.

18. Allocating service department costs based on budgeted rates rather than actual rates

e. all of the above.

19. When a decision is made concerning whether to sell a joint product at the split off point or process the product beyond that point, the relevant information includes

d. b and c.

Assume the October Company has three service departments S1 (Engineering), S2 (Materials Handling) and Maintenance (S3) as well as two producing departments P1 (Forming) and P2 (Finishing). Direct costs and other data are provided below. S1 allocates costs based on engineering hours. S2 allocates costs on the basis of Human resource hours and S3 allocates costs based on Maintenance hours.

20. Using the Direct method, the service department costs allocated to P1 are determined as follows:

a. (1,000/1500)(60,000) + (30/65)(80,000) + (125/175)(100,000)

21. Using the Step-down method,

b. the cost of S2 should be allocated first.

22. Now ignore your answer to the previous question and assume that S3 is allocated first using the step down method. Then the service cost allocation from S3 to S1 is

d. (10/195)(100,000)

23. Now ignore your answer to the previous questions and assume that S2 is allocated first using the Step-down method. Then the service costs allocated from S2 to S3 is

c. (20/95)(80,000)

24. Based on the reciprocal method which equation should be used to represent the cost of S1?

e. S1 = 60,000 + (10/100)(S2) + (10/200)(S3)

25. Based on the reciprocal method which equation should be used to represent the cost of S2?

d. S2 = 80,000 + (5/100)(S2) + (10/200)(S3)

26. Based on the reciprocal method which equation should be used to represent the cost of P1?

a. P1 = 500,000 + (1,000/1,500)(S1) + (30/100)(S2) + (125/200)(S3)

27. The logic underlying the choice of methods for service department cost allocations is usually based on

b. cause and effect relationships.

28. The logic underlying the choice of methods for joint cost allocations is usually based on

c. ability to bear the costs.

29. Which service department cost allocation method or methods are acceptable for external reporting?

e. all of the above.

30. Which service department cost allocation method or methods is needed for decisions concerning outsourcing services?

c. reciprocal method.

31. Which end of period method or methods of allocating service department costs promotes the calculation of both spending and idle capacity variances within service departments?

c. allocate based on a single budgeted rate.

32. Which end of period method or methods of allocating service department costs cause idle capacity costs to be allocated to users?

d. a and b.

33. The most accurate way to allocate joint costs based on the cause and effect logic is to use

e. the answer cannot be known or determined.

34. The net realizable values used for joint cost allocations are equal to

d. the final sales values less the after split-off costs.

35. It is said that performance evaluation systems are interactive. This means that

a. The measurement systems must be designed recognizing that performance measurements affect the behavior of the people evaluated.

Chapter 6 Extra MC Questions