Objective 15.4
1) A cost of operating a facility, department, activity area, or like cost object that is shared by two or more
users is called a ________.
A) combined cost
B) distinct cost
C) fixed cost
D) common cost
2) Under the stand-alone method of allocating common costs ________.
A) the individual users of a cost object are ranked in the order of users least responsible for the common
cost and then uses this ranking to allocate cost among those users
B) disputes can arise over who is the primary user
C) each party bears a proportionate share of the total costs in relation to their individual stand-alone costs
D) the individual users of a cost object are ranked in the order of users most responsible for the common
cost and then uses this ranking to allocate cost among those users
3) Under the incremental method of allocating common costs ________.
A) the parties are interested in being viewed as primary users
B) each party bears a proportionate share of the total costs in relation to their individual stand-alone costs
C) the first-incremental user bears a higher proportion of the cost in comparison with the primary user
D) the primary user bears the maximum of the total cost
Answer the following questions using the information below:
Emrald Corp currently uses a manufacturing facility costing $500,000 per year; 90% of the facility’s
capacity is currently being used. A start-up business has proposed a plan that would utilize the other 10%
of the facility and increase the overall costs of maintaining the space by 5%.
4) If the stand-alone method were used, what amount of cost would be allocated to the start-up business?
A) $48,000
B) $50,000
C) $50,500
D) $52,500
5) If the incremental method were used, what amount of cost would be allocated to the start-up business?
A) $40,000
B) $50,000
C) $46,000
D) $42,000
6) If the stand-alone method were used, what amount of cost would be allocated to the start-up business?
A) $70,000
B) $66,000
C) $60,000
D) $74,000
7) If the incremental method were used, what amount of cost would be allocated to the start-up business?
A) $20,000
B) $300,000
C) $60,000
D) $75,000
8) The stand-alone method of allocating determines the weights for cost allocation by considering each
user of the cost as a separate entity.
9) Under the incremental method, the primary user usually receives the highest allocation of the common
costs.
10) If the incremental users are newly formed companies or subunits, the incremental method may
decrease their chances for short-run survival by assigning them a high allocation of the common costs.
11) Allocating common costs can best be achieved by using the stand-alone cost-allocation method.
12) The stand-alone cost allocation method ranks the individual users of a cost object in order of users
most responsible for a common cost and then uses these rankings to allocate the costs among the users.
13) The Shapley value method of allocating common costs considers each party as first the primary party
and then the incremental party and computes an average allocation.
14) The Maintenance Department has been servicing Gizmo Production for four years. Beginning next
year, the company is adding a Scrap-Processing Department to recycle the materials from Gizmo
Production. As a result, maintenance costs are expected to increase from $480,000 per year to $500,000 per
year. The Scrap-Processing Department will use 25% of the maintenance efforts.
Required:
a. Using the stand-alone cost-allocation method, identify the amount of maintenance cost that will be
allocated to Gizmo Production and the Scrap-Processing Department next year.
b. Using the incremental cost-allocation method, identify the amount of maintenance cost that will be
allocated to Gizmo Production and the Scrap-Processing Department next year.
c. What is the difference between the two methods that would affect Scrap-Processing Department?
15) Buildz Corp has been servicing the Production Casting Department for five years. Beginning next
year, the company is adding a Production Molding Department to compliment the materials produced by
the Production Casting Department. As a result, data center costs are expected to increase from $800,000
per year to $1,000,000 per year. The Production Molding Department will use 20% of the data center
efforts.
Required:
a. Using the stand-alone cost-allocation method, identify the amount of data center cost that will be
allocated to Production Casting and the Production Molding Department next year.
b. Using the incremental cost-allocation method, identify the amount of data center cost that will be
allocated to Production Casting and the Production Molding Department next year.
16) What is a “common cost”? What are two methods that a manager can use to allocate common costs to
two or more users?
Objective 15.5
1) Which of the following is included in an explicit written contract for cost allocation?
A) resource allocation for the budgeted costs
B) the rate at which the company should be taxed upon
C) permissible cost-allocation bases
D) profit that the company must earn
2) Contract disputes regarding cost allocation can be reduced by defining ________.
A) the material items allowed for production
B) the terms used, such as what constitutes direct labor
C) permissible tax deductions
D) minimum profit level the company should earn
3) Cost-based prices ________.
A) are one way of setting prices in a competitive market
B) provide an inherit incentive for the producer to control costs
C) pass the majority of risk to the buyer
D) are required in all government contracts
4) An example of an allowable cost considered by U.S government contract is ________.
A) costs of economy-class airfares
B) costs of lobbying activities
C) costs of alcoholic beverages
D) costs of vacation for executives
5) In certain high-cost defense contracts involving new weapons and equipment, contracts are rarely
subject to competitive bidding because ________.
A) the government taxes the defense companies at a higher level than that of other public sector
companies
B) there is an implicit agreement among defense contractors to “share contracts”
C) all defense contractors have essentially the same cost structure
D) no contractor is willing to assume all the risk of receiving a fixed price for the contract
6) All contracts with U.S. government agencies must comply with the cost accounting standards issued
by the SEC.
7) In government contracting, there is a complex interplay of political considerations and accounting
principles.
8) In costs-plus-fixed-fee contracts the allocation of a specific cost may be difficult to defend on the basis
of any cause-and-effect reasoning.
9) If the government wants to contract a very large scale project with significant uncertainty about what
the final cost will be; often a cost-plus contract is awarded to attract qualified contractors who may
otherwise not be willing to accept the risks inherent in a guaranteed bid price.
10) The issue of “allowable costs” is applicable in government cost-plus contracts.
11) John Peters is drafting the provisions of a cost-plus contract and is concerned with ironing out any
possible misunderstandings during the life of the contract. What advice can you provide to reduce
contract disputes over reimbursement amounts based on costs?
12) There is uncertainty in defense contracts about the final cost to produce a new weapon or equipment.
Explain.
Objective 15.6
1) ________ occurs when revenues are related to a particular revenue object but cannot be traced to it in
an economically feasible (cost-effective) way.
A) Revenue estimation
B) Revenue allocation
C) Resource allocation
D) Revenue optimization
2) Which of the following is an example of a revenue object?
A) suppliers
B) products
C) labor
D) duration to complete a given task
3) Tours Corp offers towing services, auto routing, travel brochures, and other travel services for one
annual fee. This is an example of ________.
A) revenue tracing
B) revenue allocation
C) a bundled product
D) a business conglomerate
4) Businesses offer bundled products to ________.
A) increase customer exposure
B) avoid the problems of cost allocation
C) avoid the problems of revenue allocation
D) decrease taxes
5) The stand-alone revenue-allocation method ________.
A) uses product-specific information on the products in the bundle as weights for allocating the bundled
revenues to the individual products
B) ranks individual products in a bundle according to criteria determined by management
C) ranks individual products in a bundle according to costs allocated to the products
D) survey customers about the importance of each of the individual products in their purchase decision
6) The best method to determining weights for the stand-alone revenue-allocation method is ________.
A) selling prices revenue-allocation method because the weights explicitly consider the prices customers
are willing to pay for the individual products
B) unit cost revenue-allocation method because it can be used on all occasions
C) the direct revenue-allocation method since selling prices or unit costs are difficult to calculate for
individual products
D) physical-units revenue-allocation method because the physical units explicitly value the prices
customers are willing to pay for the individual products
7) The method that ranks individual products in a bundle for revenue allocation is the ________.
A) stand-alone revenue-allocation method
B) incremental revenue-allocation method
C) unit-cost weighting method
D) physical-unit weighting method
8) Approaches used to rank products for revenue allocation can include ________.
A) surveying suppliers on the importance of each product
B) using recent data on stand-alone sales performance
C) having sales agents use their knowledge and intuition
D) surveying middlemen on the importance of each product
9) To give more weight to the product that most likely drives the sales of the bundled product, the
revenue allocation should be weighted using ________.
A) selling prices
B) unit costs
C) physical units
D) stand-alone product revenues
10) Craylon Corp sells two products X and Y. X sells for $200 and Y sells for $150. Both X and Y sell for
$300 as a bundle. What is the revenue allocated to product Y, if product X is termed as the primary
product in the bundle?
A) $100
B) $128.50
C) $110
D) $112.85
Answer the following questions using the information below:
Buzz’s Educational Software Outlet sells two or more of the video games as a single package. Managers
are keenly interested in individual product-profitability figures. Information pertaining to three bundled
products and the stand-alone prices is as follows:
Stand-Alone
Selling Price
Cost
Package
Packaged
Price
Reading Fun
$25
$3.60
1. Reading Fun & Math Fun
$44
Math Fun
$30
$4.00
2. Reading Fun & Analysis
$56
Analysis
$45
$5.00
3. All three
$76
11) Using the stand-alone method with selling price as the weight for revenue allocation, what amount of
revenue will be allocated to Reading Fun in the first package (Reading Fun & Math Fun)?
A) $20
B) $22
C) $19
D) $25
12) Using the incremental method for revenue allocation, what amount of revenue will be allocated to
Reading Fun in the first package (Reading Fun & Math Fun)? Assume Reading Fun is the primary
product, followed by Math Fun, and then Analysis.
A) $20
B) $22
C) $19
D) $25
13) Using the stand-alone method with selling price as the weight for revenue allocation, what amount of
revenue will be allocated to Math Fun in the package that contains all three products?
A) $24.12
B) $30.00
C) $22.80
D) $25.33
14) Using the incremental method, what amount of revenue will be allocated to Math Fun in the package
that contains all three products? Assume Reading Fun is the primary product, followed by Math Fun, and
then Analysis.
A) $24.12
B) $30.00
C) $22.80
Answer the following questions using the information below:
Electro Corp sells a refrigerator and a freezer as a single package for $1,000. Other data are in the chart
below.
Refrigerator
Packaged Price
Selling price
$800
$1,000
Manufacturing cost per unit
$600
Stand-alone product revenues
$1,200,000
15) Using the stand-alone method with selling price as the weight for revenue allocation, what amount
will be allocated to the refrigerator?
A) $500.00
B) $333.33
C) $666.67
D) $676.67
16) Using the stand-alone method with stand-alone product revenues as the weight for revenue
allocation, what amount will be allocated to the refrigerator?
A) $628.50
B) $600.00
C) $627.00
D) $625.00
17) Using the stand-alone method with manufacturing cost per unit as the weight for revenue allocation,
what amount will be allocated to the refrigerator?
A) $770.00
B) $672.50
C) $720.00
D) $750.00
18) Using the stand-alone method with physical units as the weight for revenue allocation, what amount
will be allocated to the refrigerator?
A) $500
B) $20
C) $600
D) $825
19) An example of a bundled product is when a computer software manufacturer charges a single price
for the spreadsheet, word processing, and presentation software on the same CD.
20) Revenue allocation is required to determine the profitability of individual items within a bundled
product.
21) The stand-alone method uses the product in the bundle with the most sale and then uses this ranking
to allocate bundled revenues to individual products.
22) Revenue allocation based on the number of physical units is only appropriate when individual
products in the bundle are of equal value.
23) The selling prices method under stand-alone revenue-allocation method is best because the weights
explicitly consider the prices customers are willing to pay for the individual products
24) When allocating the revenues between a bundled product offering, management judgement can be
used in issuing revenue-allocation weights.
25) The price of a bundled product is typically more than the sum of the prices of the individual products
sold separately.
26) Give examples of bundled products for each of the following industries:
a. Resort hotel
b. Bank
c. Restaurant
d. Computer store
e. Super markets
f. Personal care products manufacturer
27) Max’s Movie Store encounters revenue-allocation decisions with its bundled product sales. Here, two
or more of the movie videos are sold as a single package. Managers at Max’s are keenly interested in
individual product-profitability figures. Information pertaining to its three bundled products and the
stand-alone selling prices of its individual products is as follows:
Stand-Alone
Selling Price,
Cost
Package
Packaged Price
New Releases
$15
$2.00
New & Older
$20
Older Releases
$10
$1.50
New & Classics
$17
Classics
$8
$1.25
All three
$25
Required:
a. With selling prices as the weights, allocate the $25 packaged price of “All Three” to the three videos
using the stand-alone revenue-allocation method.
b. Allocate the $25 packaged price of “All Three” to the three types of videos using the incremental
revenue-allocation method. Assume New Releases is the primary product, followed by Older Releases,
and then Classics.
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28) Software For You encounters revenue-allocation decisions with its bundled product sales. Here, two
or more units of the software are sold as a single package. Managers at Software For You are keenly
interested in individual product-profitability figures. Information pertaining to its three bundled
products and the stand-alone selling prices of its individual products is as follows:
Stand-Alone
Selling Price,
Cost
Package
Packaged Price
Word Processing
(WP)
$125
$18
WP & SS
$220
Spreadsheet (SS)
$150
$20
WP & AS
$280
Accounting Software
(AS)
$225
$25
All three
$380
Required:
a. Using the stand-alone revenue-allocation method, allocate the $380 packaged price of “All Three” to
the three software products
1. with selling prices as the weights.
2. with individual product costs as the weights.
3. based on physical units.
b. Allocate the $380 packaged price of “All Three” to the three software products using the incremental
revenue-allocation method. Assume Word Processing is the primary product, followed by Spreadsheet,
and then Accounting Software.
29) Describe and discuss the two methods of allocating revenues of a bundled package to the individual
products in that package. Describe any special problems associated with the method.
30) Explain three approaches to determining weights for the the stand-alone revenue-allocation. Which
method do managers prefer?