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Cost Accounting, 15e Global Edition (Horngren/Datar/Rajan)
Chapter 15 Allocation of Support-Department Costs, Common Costs, and Revenues
Objective 15.1
1) The method that allocates costs in each cost pool using the same rate per unit is known as the ________.
A) incremental cost-allocation method
B) reciprocal cost-allocation method
C) single-rate cost allocation method
D) dual-rate cost-allocation method
2) The dual-rate cost-allocation method classifies costs in each cost pool into a ________.
A) budgeted-cost pool and an actual-cost pool
B) variable-cost pool and a fixed-cost pool
C) direct-cost pool and an indirect-cost pool
D) direct-cost pool and a reciprocal-cost pool
3) The single-rate cost-allocation method may base the denominator choice on ________.
A) master-budget capacity utilization
B) fixed cost utilization
C) variable cost utilization
D) direct-cost utilization
4) When using the dual-rate method, the fixed cost allocation is based on ________.
A) indirect usage
B) budgeted usage
C) incremental cost allocation
D) prime cost allocation
5) Which of the following is an advantage of the single-rate method?
A) It is less costly to implement.
B) It classifies costs as fixed and variable costs.
C) It gives signals regarding how variable and fixed costs behave differently.
D) It helps the managers on short-run and long-run planning due to fixed cost allocation as per budgeted
usage.
6) Which of the following is a disadvantage of single-rate method?
A) It is very costly to implement.
B) It may lead operating department managers to make sub-optimal decisions that are in their own best
interest.
C) It does not signal to department managers how variable costs and fixed costs behave differently.
D) It requires managers to distinguish variable costs from fixed costs, which is often a challenging task.
7) Which of the following is an advantage of a dual-rate method?
A) It is the most widely used method in practice.
B) It is less costly to implement.
C) It avoids the expensive analysis for categorizing costs as either fixed or variable.
D) It allocates fixed cost as per the budgeted usage that helps in short and long-run planning.
8) Which of the following is a disadvantage of a dual-rate method?
A) It allocates fixed costs on the basis of budgeted long-run usage may tempt some managers to
underestimate their planned usage.
B) It may lead operating department managers to make sub-optimal decisions that are in their own best
interest.
C) It allocates fixed and variable-cost pool using the same cost-allocation base, which will mislead
managers in making decisions.
D) It does not guide department managers to make decisions that benefit both the organization as a
whole and each department.
9) The advantage of using practical capacity to allocate costs ________.
A) is that it allows a downward supply spiral to develop
B) is that it focuses management's attention on managing unused capacity
C) is that budgets are much easier to develop
D) is that it results in departments bearing a lower percentage of fixed costs
10) The biggest advantage of using practical capacity to allocate costs is that it ________.
A) focuses the user's division with the costs of overused capacity
B) never causes over or under-allocated overhead
C) burdens the user divisions with the costs of unused capacity
D) focuses management's attention on unused capacity
Answer the following questions using the information below:
The Charmatz Corporation has a central copying facility. The copying facility has only two users, the
Marketing Department and the Operations Department. The following data apply to the coming budget year:
Budgeted costs of operating the copying facility
for 400,000 to 600,000 copies:
Fixed costs per year $60,000
Variable costs 3 cents (.03) per copy
Budgeted long-run usage in copies per year:
Marketing Department 120,000 copies
Operations Department 380,000 copies
Budgeted amounts are used to calculate the allocation rates.
Actual usage for the year by the Marketing Department was 80,000 copies and by the Operations
Department was 360,000 copies.
11) If a single-rate cost-allocation method is used, what amount of copying facility costs will be budgeted
for the Marketing Department?
A) $18,000
B) $3,600
C) $14,400
D) $16,800
12) If a single-rate cost-allocation method is used, what amount of copying facility costs will be allocated
to the Marketing Department? Assume actual usage is used to allocate copying costs.
A) $16,800
B) $18,000
C) $12,000
D) $9,600
13) If a dual-rate cost-allocation method is used, what amount of copying facility costs will be budgeted
for the Operations Department?
A) $57,000
B) $56,400
C) $60,490
D) $59,890
14) If a dual-rate cost-allocation method is used, what amount of copying facility costs will be allocated to
the Operations Department? Assume budgeted usage is used to allocate fixed copying costs and actual
usage is used to allocate variable copying costs.
A) $60,490
B) $59,890
C) $57,000
D) $56,400
Answer the following questions using the information below:
The Speedjet Aircraft Corporation has a central materials laboratory. The laboratory has only two users,
the Large Plane Department and the Small Plane Department. The following data apply to the coming
budget year:
Budgeted costs of operating the materials laboratory
for 100,000 to 200,000 technician hours per year:
Fixed costs per year $8,000,000
Variable costs $70 per technician hour
Budgeted long-run usage in hours per year:
Large Plane Department 80,000 technician hours
Small Plane Department 70,000 technician hours
Budgeted amounts are used to calculate the allocation rates.
Actual usage for the year by the Large Plane Department was 70,000 technician hours and by the Small
Plane Department was 65,000 technician hours.
15) If a single-rate cost-allocation method is used, what is the allocation rate per hour used?
A) $97.33
B) $123.33
C) $146.67
D) $113.33
16) If a dual-rate cost-allocation method is used, what amount of materials laboratory costs will be
budgeted for the Large Plane Department?
A) $9,866,667
B) $8,226,667
C) $9,781,333
D) $9,881,333
17) If a single-rate cost-allocation method is used, what amount of materials laboratory costs will be
allocated to the Large Plane Department? Assume actual usage is used to allocate copying costs.
A) $8,166,666.67
B) $8,766,666.67
C) $8,433,333.33
D) $8,633,333.33
18) If a dual-rate cost-allocation method is used, what amount of materials laboratory costs will be
allocated to the Large Plane Department? Assume budgeted usage is used to allocate fixed materials
laboratory costs and actual usage is used to allocate variable materials laboratory costs.
A) $9,133,333
B) $9,166,667
C) $9,466,667
D) $9,666,667
19) If a dual-rate cost-allocation method is used, what amount of materials laboratory costs will be
budgeted for the Small Plane Department?
A) $10,575,000
B) $9,633,333
C) $8,433,333
D) $8,633,333
20) If a dual-rate cost-allocation method is used, what amount of materials laboratory costs will be
allocated to the Small Plane Department? Assume budgeted usage is used to allocate materials laboratory
costs and actual usage is used to allocate variable materials laboratory costs.
A) $8,225,000
B) $8,050,000
C) $8,483,333
D) $8,783,333
Answer the following questions using the information below:
Illumination Corp operates one central plant that has two divisions, the Flashlight Division and the Night
Light Division. The following data apply to the coming budget year:
Budgeted costs of operating the plant for 2,000 to 3,000 hours:
Fixed operating costs per year $500,000
Variable operating costs $800 per hour
Budgeted long-run usage per year:
Flashlight Division 2,000 hours
Night Light Division 1000 hours
Practical capacity 4,000 hours
Assume that practical capacity is used to calculate the allocation rates.
Actual usage for the year by the Flashlight Division was 1,500 hours and by the Night Light Division was
800 hours.
21) If a single-rate cost-allocation method is used, what amount of operating costs will be budgeted for
the Flashlight Division?
A) $1,850,000
B) $1,560,000
C) $1,740,000
D) $1,950,000
22) If a single-rate cost-allocation method is used, what amount of cost will be allocated to the Flashlight
Division? Assume actual usage is used to allocate operating costs.
A) $1,247,500
B) $1,300,000
C) $1,487,500
D) $1,387,500
23) If a dual-rate cost-allocation method is used, what amount of operating costs will be budgeted for the
Night Light Division?
A) $890,000
B) $900,000
C) $925,000
D) $835,000
24) If a dual-rate cost-allocation method is used, what amount of cost will be allocated to the Night Light
Division? Assume budgeted usage is used to allocate fixed operating costs and actual usage is used to
allocate variable operating costs.
A) $810,000
B) $765,000
C) $790,000
D) $750,000
25) The dual cost-allocation method classifies costs into two pools, a budgeted cost pool and an actual
cost pool.
26) The single cost-allocation method makes no distinction between fixed and variable costs.
27) The single-rate method transforms the direct costs per hour into indirect costs to users of that facility.
28) The dual-rate cost-allocation method provides better information for decision making than the single-
rate method as it differentiates between fixed and variable costs and its allocation.
29) An advantage of the single-rate method is that it is the most accurate method of cost-allocation.
30) The fixed costs of operating the maintenance facility of General Hospital are $4,500,000 annually.
Variable costs are incurred at the rate of $30 per maintenance-hour. The facility averages 40,000
maintenance-hours a year. Budgeted and actual hours per user for 20X3 are as follows:
Budgeted hours Actual hours
Building and grounds 10,000 12,000
Operating and emergency 8,000 8,000
Patient care 21,000 22,000
Administration 1,000 1,200
Total 40,000 43,200
Assume that budgeted maintenance-hours are used to calculate the allocation rates.
Required:
a. If a single-rate cost-allocation method is used, what amount of maintenance cost will be budgeted for
each department?
b. If a single-rate cost-allocation method is used, what amount of maintenance cost will be allocated to
each department based on actual usage?
c. If a dual-rate cost-allocation method is used, what amount of maintenance cost will be budgeted for
each department?
d. If a dual-rate cost-allocation method is used, what amount of maintenance cost will be allocated to
each department based on actual usage? Based on budgeted usage for fixed operating costs and actual
usage for variable operating costs?
12
31) The Alex Miller Corporation operates one central plant that has two divisions, the Flashlight Division
and the Night Light Division. The following data apply to the coming budget year:
Budgeted costs of the operating the plant
for 10,000 to 20,000 hours:
Fixed operating costs per year $240,000
Variable operating costs $10 per hour
Practical capacity 20,000 hours per year
Budgeted long-run usage per year:
Lamp Division 800 hours × 12 months = 9,600 hours per year
Flashlight Division 450 hours × 12 months = 5,400 hours per year
Assume that practical capacity is used to calculate the allocation rates. Further assume that actual usage
of the Lamp Division was 700 hours and the Flashlight Division was 400 hours for the month of June.
Required:
a. If a single-rate cost-allocation method is used, what amount of operating costs will be budgeted for
the Lamp Division each month? For the Flashlight Division each month?
b. For the month of June, if a single-rate cost-allocation method is used, what amount of cost will be
allocated to the Lamp Division? To the Flashlight Division? Assume actual usage is used to allocate
operating costs.
c. If a dual-rate cost-allocation method is used, what amount of operating costs will be budgeted for the
Lamp Division each month? For the Flashlight Division each month?
d. For the month of June, if a dual-rate cost-allocation method is used, what amount of cost will be
allocated to the Lamp Division? To the Flashlight Division? Assume budgeted usage is used to allocate
fixed operating costs and actual usage is used to allocate variable operating costs.
32) The Pitt Corporation has been outsourcing data processing in the belief that such outsourcing would
reduce costs and increase corporate profitability. In spite of this, there has been no meaningful increase in
corporate profitability.
Previously, Pitt used a single-rate method to allocate data processing costs. A per unit cost for data
processing was computed and compared to the price of the outside supplier. The price of the outside
supplier was lower and thus, the outside bid was accepted.
Required:
Formulate a possible reason why Pitt's profitability has not shown improvement in terms of the cost
allocation method used.
33) What is an operating department and how is it different from a support department? Give examples
of each.
34) Van Meter Fig Company has substantial fluctuations in its production costs because of the seasonality
of figs.
Would you recommend an actual or budgeted allocation base? Why? Would you recommend calculating
monthly, seasonal, or annual allocation rates? Why?
Objective 15.2
1) When budgeted cost-allocations rates are used ________.
A) user departments are not informed about the charges until the end of the period
B) the manager of the supplier division bears the risk of unfavorable cost variances
C) user divisions pay for costs that exceed budgeted amounts
D) user divisions pay for inefficiencies of the supplier department
2) When actual cost-allocations rates are used ________.
A) user divisions pay for costs that exceed budgeted amounts
B) managers of the supplier division are motivated to improve efficiency
C) user divisions are unaware of the allocated amounts until the end of the budget period
D) managers know with certainty the rates to be used in that budget period
3) Under the dual-rate cost-allocation method, when fixed costs are allocated based on actual usage then
________.
A) user-division managers are motivated to make accurate long-run usage forecasts
B) user-division managers can better plan for the short-run and for the long-run
C) the costs of unused capacity are highlighted
D) variations in one division's usage affect another division's allocation
4) The costs of unused capacity are highlighted when ________.
A) actual usage based allocations are used
B) budgeted usage allocations are used
C) practical capacity-based allocations are used
D) the dual-rate cost-allocation method allocates fixed costs based on actual usage
5) To discourage unnecessary use of a support department, management might ________.
A) allocate user department costs based upon support department usage
B) allocate support department costs based upon user department usage
C) allocate a fixed amount of support department costs to each and every department
D) allocate a fixed amount of user department costs to each and every department
6) When actual cost-allocation rates are used, user-division managers face uncertainty about the
allocation rates for that budget period.
7) When actual cost-allocation rates are used, managers of the supplier division are motivated to improve
efficiency.
8) When budgeted cost-allocation rates are used, variations in actual usage by one division affect the costs
allocated to other divisions.
9) Because the variable costs are directly and causally linked to usage, charging them as a function of the
actual usage is appropriate.
10) When budgeted fixed costs are allocated based on actual usage, user departments will not know their
fixed-cost allocations until the end of the budget period.
11) Foodiez Inn is a fast-food restaurant that sells burgers and hot dogs in a 1980s environment. The fixed
operating costs of the company are $10,000 per month. The controlling shareholder, interested in product
profitability and pricing, wants all costs allocated to either the burgers or the hot dogs. The following
information is provided for the operations of the company:
Burgers Hot Dogs
Sales for January 4,000 2,500
Sales for February 6,500 2,500
Required:
a. What amount of fixed operating costs is assigned to the burgers and hot dogs when actual sales are
used as the allocation base for January? For February?
b. Hot dog sales for January and February remained constant. Did the amount of fixed operating costs
allocated to hot dogs also remain constant for January and February? Explain why or why not. Comment
on any other observations.
12) Marvelous Motors is a small motor supply outlet that sells motors to companies that make various
small motorized appliances. The fixed operating costs of the company are $300,000 per year. The
controlling shareholder, interested in product profitability and pricing, wants all costs allocated to the
motors and wants to review the company status on a quarterly basis. The shareholder is trying to
determine whether the costs should be allocated each quarter based on the 25% of the annual fixed
operating costs ($75,000) or by using an annual forecast budget to allocate the costs. The following
information is provided for the operations of the company:
Forecast Actual
Sales for First Quarter 5,000 4,850
Sales for Second Quarter 8,000 7,900
Sales for Third Quarter 8,000 8,125
Sales for Fourth Quarter 3,000 3,125
Required:
a. What amount of fixed operating costs are assigned to each motor by quarter when actual sales are
used as the allocation base and $75,000 is allocated?
b. How much fixed cost is recovered each quarter under requirement a.?
c. What amount of fixed operating costs are assigned to each motor by quarter when forecast sales are
used as the allocation base and the rate is calculated annually as part of the budgetary process?
d. How much fixed cost is recovered each quarter under requirement c.?
e. Which method seems more appropriate in this case? Explain.
13) Jonathan has managed a downtown store in a major metropolitan city for several years. The firm has
ten stores in varying locations. In the past, senior management noticed Jonathan's work and he has
received very good annual evaluations for his management of the store.
This year his store has generated steady growth in sales, but earnings have been deteriorating. After
examining the monthly performance report generated by the company budgeting department, he noticed
that increasing fixed costs is causing the decrease in earnings.
Administrative corporate costs, primarily fixed costs, are allocated to individual stores each month based
on actual sales for that month. Two of these stores are currently growing at a rapid pace, while four other
stores are having operating difficulties.
Required:
From the information presented, what do you think is the cause of Jonathan's reported decrease in
earnings? How can this be corrected?
14) Why do organizations use budgeted rates instead of actual rates to allocate the costs of support
departments to each other and to user departments and divisions? Explain.
Objective 15.3
1) Special cost-allocation problems arise when ________.
A) support department costs exceed budgetary estimates
B) practical capacity is used as the allocation base
C) support departments provide reciprocal services to each other and operating departments
D) the same cost-allocation base is used among various support departments
2) Which of the following departments is a support department for a boat manufacturing company?
A) production
B) molding
C) assembling
D) accounting
3) The direct allocation method ________.
A) allocates support-department costs to operating departments by fully recognizing the mutual services
provided among all support departments
B) allocates support-department costs to other support departments and to operating departments in a
sequential manner that partially recognizes the mutual services provided among all support departments
C) allocates each support-department's costs to operating departments only
D) requires managers to rank the support departments in the order that the step-down allocation is to
proceed
4) The method that allocates costs by explicitly including all the services rendered among all support
departments is the ________.
A) direct method
B) step-down method
C) reciprocal method
D) sequential method
