Fundamentals of Cost Accounting, 6e (Lanen)
Chapter 11 Service Department and Joint Cost Allocation
1) The human resource department in a manufacturing company would be considered a service
department.
2) One reason to allocate service department costs to user departments is to encourage the user
departments to monitor their use of the service department costs.
3) The direct method makes no cost allocations between or among service departments.
4) The selection of an allocation base in the direct method is easier than the selection of an
allocation base in the step method.
5) The step method allocates some, but not all, service department costs to other service
departments.
6) One advantage of the step method is that all reciprocal services are recognized between
service departments.
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7) With the reciprocal method, the total service department costs less the direct costs of the
service department equal the cost allocated to the service department.
8) One potential disadvantage of the reciprocal method is it could overstate the cost of running
the organization’s service departments.
9) In deciding whether to outsource a service department or not, the cost of the service
department should be estimated using the step method of allocation.
10) Joint products are outputs from common inputs and a common production process.
11) Joint costs are processing costs incurred after the split-off point in a common production
process.
12) The estimated net realizable value for a product is its estimated selling price after processing
the product beyond the split-off point.
13) In general, it is better to use a product’s market value at the split-off point than its estimated
net realizable value in allocating joint costs.
14) The estimated net realizable value at the split-off point is calculated by taking the sales value
after further processing and deducting the additional processing costs.
15) If a company’s two joint products can be sold at the split-off point, there is no reason for
allocating the joint costs to the products.
16) The physical quantities method of allocating joint costs is often used when the output sales
prices are highly volatile.
17) The physical quantities method allocates joint costs so that each joint product has the same
gross margin as a percentage of sales.
18) In a sell-or-process-further decision, the additional costs incurred after the split-off point are
irrelevant.
19) In a sell-or-process-further decision, the common costs incurred prior to the spilt-off point
are irrelevant.
20) Since by-products have minor sales value, alternative methods of accounting for them will
not have a material effect on the financial statements.
21) Service department costs are allocated to user departments, in part, because:
A) it measures the use of plant capacity.
B) it helps ensure that machines are operating efficiently.
C) user departments use the functions of service departments.
D) service departments are final cost centers.
22) Which of the following best describes intermediate cost centers?
A) Any cost center whose costs are not allocated to another cost center.
B) Service departments cannot be intermediate cost centers.
C) User departments cannot be intermediate cost centers.
D) Any cost center whose costs are charged to other departments in an organization.
23) Which of the following best describes final cost centers?
A) Any cost center whose costs are not allocated to another cost center.
B) Service departments are always final cost centers.
C) User departments cannot be final cost centers.
D) Any cost center whose costs are charged to other departments in an organization.
24) Which of the following would be an appropriate cost-allocation base for allocating the cost
of the company cafeteria?
A) Square footage occupied by departments.
B) Number of hours of use.
C) Number of meals served.
D) Salaries of personnel purchasing meals.
25) Which of the following is the least practical reason for allocating service department costs to
user departments?
A) To ascertain profitability of user departments.
B) To evaluate performance of managers and divisions.
C) To make user departments aware that services are costly.
D) To provide the best possible service to users.
26) Service department costs are:
A) Generally treated as period costs rather than product costs.
B) Reported as selling and administrative expenses on the income statement.
C) Eventually applied by the user departments to the units produced.
D) Seldom found in manufacturing organizations.
27) A management purpose for allocating joint costs of a processing center to the various
products produced is to:
A) Establish inventory values for unsold units.
B) Record accurate cost of sales by product line.
C) Compute total processing cost variances by product.
D) Report correct standard product costs for comparative analysis.
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28) Which of the following service departments could logically use space occupied (square
footage) to allocate its costs to user departments?
A) Material Handling.
B) Cafeteria.
C) Custodial Services.
D) Cost Accounting.
29) Which of the following departments is not a service department in a typical manufacturing
company?
A) Assembly.
B) Accounting.
C) Human resources.
D) Information processing.
30) Criteria for selecting allocation bases for service department allocations should not include:
A) Direct, traceable benefits from the service.
B) The extent of facilities provided.
C) The ease of making an allocation.
D) Sales dollars generated during the period.
31) Dreamland University has 20 departments. Two of its best departments are the (1) College of
Innovation (COI) and (2) Testing Services. The College of Innovation (COI) attempts to teach
students the difficult, but useful, skill of innovation. Testing Services grades examinations for
professors. How would these two departments be classified?
College of Innovation Testing Services
A. Service Service
B. User Service
C. User User
D. Service User
A) Option A
B) Option B
C) Option C
D) Option D
32) Which of the following is not a reason to justify the allocation of support services?
A) Tax reporting requirements.
B) Influencing behavior of employees.
C) To trace costs to the activity that created the costs.
D) Cost based contracts.
33) Which of the following statements is(are) false regarding the direct method of allocating
service department costs?
(A) The selection of an allocation base in the direct method is easier than the selection of an
allocation base in the step method.
(B) Once an allocation is made from a service department using the direct method, no further
allocations are made back to that department.
A) Only A is false.
B) Only B is false.
C) Neither of these is false.
D) Both of these are false.
34) Jamison Company has two service departments and two producing departments. Square
footage of space occupied by each department follows:
Custodial services 1,000 feet
General administration 3,000 feet
Producing Department A 8,000 feet
Producing Department B 8,000 feet
20,000 feet
The department costs of Custodial Services are allocated on a basis of square footage of space. If
Custodial Services costs are budgeted at $38,000, the amount of cost allocated to General
Administration under the direct method would be:
A) $0.
B) $7,125.
C) $6,000.
D) $5,700.
35) Veneer Company has two service departments and two producing departments. The number
of employees in each department is:
Personnel 10
Cafeteria 25
Producing Department A 265
Producing Department B 250
550
The department costs of the Personnel Department are allocated on a basis of the number of
employees. If these costs are budgeted at $37,125 during a given period, the amount of cost
allocated (rounded to two decimal places) to Department B under the direct method would be:
A) $0.
B) $17,187.50.
C) $16,875.00.
D) $18,021.84.
36) Which of the following is not a benefit of cost allocation?
A) Instilling responsibility for all costs of the company in division managers.
B) Constructing performance measures that may be more meaningful than contribution margins.
C) Relating indirect costs to contracts, jobs and products.
D) Additional bookkeeping costs incurred to provide cost allocation information.
37) Tenet Engineering, Inc. operates two user divisions as separate cost objects. To determine
the costs of each division, the company allocates common costs to the divisions. During the past
month, the following common costs were incurred:
Computer services (85% fixed) $ 260,000
Building occupancy 600,000
Personnel costs 110,000
Total common costs $ 970,000
The following information is available concerning various activity measures and service usages
by each of the divisions:
Division A Division B
Area occupied (square feet) 20,000 40,000
Payroll $ 380,000 $ 180,000
Computer time (hours) 200 220
Computer storage (megabytes) 4,050 -0-
Equipment value $ 200,000 $ 250,000
Operating profit (pre-allocations) $ 555,000 $ 495,000
If common computer service costs are allocated using computer time as the allocation basis,
what is the computer cost allocated to Division B (rounded to the nearest whole dollar)?
A) $136,190.
B) $137,647.
C) $144,444.
D) $173,333.
38) Tenet Engineering, Inc. operates two user divisions as separate cost objects. To determine
the costs of each division, the company allocates common costs to the divisions. During the past
month, the following common costs were incurred:
Computer services (85% fixed) $ 260,000
Building occupancy 600,000
Personnel costs 110,000
Total common costs $ 970,000
The following information is available concerning various activity measures and service usages
by each of the divisions:
Division A Division B
Area occupied (square feet) 20,000 40,000
Payroll $ 380,000 $ 180,000
Computer time (hours) 200 220
Computer storage (megabytes) 4,050 -0-
Equipment value $ 200,000 $ 250,000
Operating profit (pre-allocations) $ 555,000 $ 495,000
Using the most appropriate allocation basis, what is the personnel cost allocated to Division A
(rounded to the nearest whole dollar)?
A) $58,143.
B) $74,643.
C) $76,463.
D) $110,000.
39) Tenet Engineering, Inc. operates two user divisions as separate cost objects. To determine
the costs of each division, the company allocates common costs to the divisions. During the past
month, the following common costs were incurred:
Computer services (85% fixed) $ 260,000
Building occupancy 600,000
Personnel costs 110,000
Total common costs $ 970,000
The following information is available concerning various activity measures and service usages
by each of the divisions:
Division A Division B
Area occupied (square feet) 20,000 40,000
Payroll $ 380,000 $ 180,000
Computer time (hours) 200 220
Computer storage (megabytes) 4,050 -0-
Equipment value $ 200,000 $ 250,000
Operating profit (pre-allocations) $ 555,000 $ 495,000
If all common costs are allocated using operating profit as the allocation basis, what is the total
cost allocated to Division B (rounded to the nearest whole dollar)?
A) $457,286.
B) $512,714.
C) $555,000.
D) $1,087,576.
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40) Which of the following methods provides no data for service departments to monitor each
other’s costs?
A) Direct method.
B) Reciprocal method.
C) Step method.
D) All three methods, Direct, Step and Reciprocal, provide data for monitoring costs.
41) The Maryville Construction Company occupies 85,000 square feet for construction of mobile
homes. There are two manufacturing departments, finishing and assembly, and four service
departments labeled S1, S2, S3, and S4. Information relevant to Maryville is as follows:
Allocation
Department Area used S1 S2 S3 S4 Finishing Assembly
S1 17,000 — 0.10 0.20 — 0.20 0.50
S2 4,250 — — 0.30 0.30 — 0.40
S3 8,500 0.20 0.20 — 0.30 0.20 0.10
S4 4,250 0.30 0.10 0.30 — 0.20 0.10
Finishing 21,250 — — — — — —
Assembly 29,750 — — — — — —
Rent paid for the area used is $720,000.
How much rent is allocable to the assembly department using the direct method of allocation?
A) $420,000.
B) $332,500.
C) $300,000.
D) $252,000.
42) The Maryville Construction Company occupies 85,000 square feet for construction of mobile
homes. There are two manufacturing departments, finishing and assembly, and four service
departments labeled S1, S2, S3, and S4. Information relevant to Maryville is as follows:
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Allocation
Department Area used S1 S2 S3 S4 Finishing Assembly
S1 17,000 — 0.10 0.20 — 0.20 0.50
S2 4,250 — — 0.30 0.30 — 0.40
S3 8,500 0.20 0.20 — 0.30 0.20 0.10
S4 4,250 0.30 0.10 0.30 — 0.20 0.10
Finishing 21,250 — — — — — —
Assembly 29,750 — — — — — —
Rent paid for the area used is $720,000.
How much rent would be charged to S4 using the step method of allocation and a S3-S4–S1-S2
sequence for the allocations?
A) $36,000.
B) $40,000.
C) $54,000.
D) $90,000.
43) If two service departments service the same number of departments, which service
department’s costs should be allocated first when using the step method?
A) The service department that provides the most service to other service departments.
B) The service department that provides the most service to the user departments.
C) The service department with the least cost.
D) The service department that provides the least service to other service departments.
44) Which of the following is a weakness of the step method of service cost allocations?
A) Computations are more complex than the reciprocal method.
B) All interdepartmental services are ignored.
C) All intradepartmental services are ignored.
D) The order of service department allocation has to be determined.
45) The Hsu Manufacturing Company has two service departments: Maintenance and
Accounting. The Maintenance Department’s costs of $300,000 are allocated on the basis of
machine hours. The Accounting Department’s costs of $120,000 are allocated on the basis of the
number of employees within a specific department. The direct departmental costs for A and B
are $300,000 and $500,000, respectively.
Maintenance Accounting A B
Machine hours 480 20 2,300 200
Number of employees 2 2 8 4
What is the Maintenance Department’s cost allocated to Department A using the direct method?
A) $92,000.
B) $230,000.
C) $276,000.
D) $386,400.