166) What is a cost center and how is its performance evaluated?
167) What is the main difference between a cost center and a profit center?
168) What is the purpose of a departmental accounting system?
169) What is the purpose of a responsibility accounting system?
170) What is an investment center and how is its performance evaluated?
171) Explain the difference between direct and indirect expenses in accounting for departments.
172) How do companies decide what allocation bases to use to allocate indirect costs to
departments?
173) Describe the information found on a responsibility accounting performance report.
174) Define joint costs and explain how joint costs can be allocated.
175) In the process of preparing department income statements, a company uses there are three
steps before the statements can be completed. Describe those steps.
176) What is the cash conversion cycle and what does it indicate about the company?
177) Riu Corporation has a Parts Division that does work for other Divisions in the company as
well as for outside customers. The company’s Repair Division has asked the Parts Division to
provide it with 2,000 special parts each year. The special parts would require $17.00 per unit in
variable production costs. The Repair Division has a bid from an outside supplier for the special
parts at $28.00 per unit. In order to have time and space to produce the special part, the Parts
Division would have to cut back production of another part-the B83 that it presently is
producing. The B83 sells for $34.00 per unit, and requires $22.00 per unit in variable production
costs. Packaging and shipping costs of the B83 are $4.00 per unit. Packaging and shipping costs
for the new special part would be only $0.50 per unit. The Parts Division is now producing and
selling 10,000 units of the B83 each year. Production and sales of the B83 would drop by 10% if
the new special part is produced for the Repair Division.
Required:
a. What is the range of transfer prices within which both the Divisions’ profits would increase as
a result of agreeing to the transfer of 2,000 special parts per year from the Parts Division to the
Repair Division?
b. Is it in the best interests of Riu Corporation for this transfer to take place? Explain.
178) Regal Furniture Company allocates its indirect salaries of $22,500 on the basis of sales.
Determine the indirect salaries allocated to Departments 1 and 2 using the following information.
Dept.1
Dept.2
Combined
Revenues from sales……..
$182,000
$78,000
$260,000
Direct salaries……………..
42,250
22,750
65,000
Salaries allocated to Dept. 1 ________
Salaries allocated to Dept. 2 ________
179) A company rents a small building with 10,000 square feet of space for $100,000 per year.
The rent is allocated to the company’s three departments on the basis of the value of the space
occupied by each. Department One occupies 1,500 square feet of ground-floor space,
Department Two occupies 3,500 square feet of ground-floor space, and Department Three
occupies 5,000 square feet of second-floor space. If rent for comparable floor space in the
neighborhood averages $15.00 per sq. ft. for ground-floor space and $10.00 per sq. ft. for
second-floor space, what annual rent expense should be charged to each department?
180) A retail store has three departments, A, B, and C, each of which has four full-time
employees. The store does general advertising that benefits all departments. Advertising expense
totaled $90,000 for the current year, and departmental sales were:
Department A……………… $308,000
Department B……………… 644,000
Department C……………… 448,000
Total sales…………………. $1,400,000
Calculate the amount of advertising expense that should be allocated to each department?
181) A company produces two joint products (called 301 and 302) in a single operation that uses
one raw material called Fruge. Four hundred gallons of Fruge were purchased at a cost of $800
and were used to produce 150 gallons of Product 301, selling for $5 per gallon, and 75 gallons of
Product 302, selling for $15 per gallon. How much of the $800 cost should be allocated to each
product, assuming that the company allocates cost based on sales revenue?
182) A company produces two products, XX and YY, from a single raw material called Zub.
Zub is purchased in 55-gallon drums, and the contents of one drum are sufficient to produce 30
gallons of XX and 15 gallons of YY. XX sells for $10.00 per gallon and YY sells for $30.00 per
gallon. During the current period, the company used 400 drums of Zub to produce XX and YY.
The cost of Zub was $90 per drum.
Required:
(1) If the cost of Zub is allocated to the XX and YY products on the basis of the number of
gallons produced, how much of the total cost of the 400 drums should be charged to each
product?
(2) If the cost of Zub is allocated to the XX and YY products in proportion to their market
values, how much of the total cost of the 400 drums should be charged to each product?
(3) Which basis of allocating the cost is most likely to be used by the company?
183) Karl and Grady are managers of two product lines for Brewster Company. One of them is a
candidate for promotion based on performance. Using the data below, determine who had the
better performance using performance measures such as net income, profit margin, and return on
investment. Show your calculations and support your answer.
Karl
Grady
Revenue………………..
$412,000
$450,000
Costs……………………
380,000
411,000
Average Assets………
400,000
600,000
NI ($412,000-380,000) = 32,000
($450,000-411,000) = $39,000
Average total assets $400,000
$600,000
Return on Investment 8%
6.5%
184) Use the Hamilton Company’s investment center information below to calculate (a) return on
total investment and (b) investment center residual income.
Net Income…………………… $315,900
Average Invested Assets…….. $2,100,000
Target Net Income…………… 6% of division assets
112
185) City Park College allocates administrative costs to its teaching departments based on the
number of students enrolled, while maintenance and utilities are allocated based on square feet of
classrooms. Based on the information below, what is the total amount of expenses allocated to
each department (rounded to the nearest dollar) if administrative costs for the college were
$180,000, maintenance expenses were $70,000, and utilities were $85,000?
Teaching Size of
Department Students Classroom
Electronics……………. 117 900 sq. ft.
Automotive…………… 156 750 sq. ft.
Computers……………. 429 1,200 sq. ft.
Plumbing…………….. 78 150 sq. ft.
186) Arkansas Toys, a retail store, has three sales departments supported by two service
departments. Cost and operational data for each department follow:
Sales
Deptartment
Sales
Cost of
Goods Sold
Square
Footage
Purch.
Orders
Issued
1
$92,160
$36,864
1,728
1,260
2
69,120
32,832
3,024
1,680
3
80,640
32,256
1,296
2,310
Service
Departments
Allocation Basis
Cost
Advertising………..
Sales
$10,000
Purchasing…………
No. of purchase orders issued
12,000
Determine the service department expenses to be allocated to Sales Department 1 for (round
answers to whole dollars):
Advertising ________
Purchasing ________
187) Chancellor Company is divided into four departments. Departments A and B are service
departments and Departments 1 and 2 are operating (production) departments. The services of
the two service departments are used by the other departments as follows:
Dept. A
Dept. B
Dept. 1
Dept. 2
Services of:
Department A…………
50%
20%
30%
Department B…………
40%
60%
Direct costs incurred by each
department
$60,000
$50,000
$70,000
$80,000
Complete the following table:
Allocation of Expenses to Departments
Department A
Department
B
Department 1
Department
2
Total direct
Department expenses..
$60,000
$50,000
$ 70,000
$ 80,000
Service department expenses
Department A…………
Subtotal……………………
Department B…………
Total………………………..
A
B
1
2
Total direct
Department expenses
$60,000
$50,000
Service department
expenses
Department A…………
30,000
18,000
Subtotal……………………
80,000
98,000
Department B…………
48,000
Total………………………..
188) Sturdivant Fasteners, Co. uses a traditional allocation of overhead based on direct labor
hours. The manager has accumulated the following information on engineering changes, which
are indirect cost of their products, for two of the company’s major products:
Automotive
Fasteners
Computer
Fasteners
Total units produced
5,000
2,500
Cost per engineering change
$400
$ 400
Number of engineering changes
5
25
Direct labor hours per unit
4
4
Compute the cost per unit using: The traditional two-stage allocation of the costs of engineering
changes based on direct labor hours.
117
189) Nesbit Co. has two operating (production) departments supported by a number of service
departments. The following information was collected for a recent period:
Direct Costs
Machining
Department
Assembly
Department
Indirect
Cost
Salaries
$122,400
$ 85,700
$36,700
Insurance
20,200
11,000
5,500
Utilities
23,900
13,900
2,000
Depreciation
20,700
11,500
13,800
Maintenance
7,000
4,700
29,400
Office expenses
–
0-
-0-
71,100
Cost of goods sold
327,600
121,200
Indirect costs are allocated as follows: salaries on the basis of sales, office expenses on the basis
of the number of employees, and all other costs on the basis of square footage. Additional
information about the production departments follows:
Square Number of
Footage Employees
Machining 14,535 78
Assembly 4,845 52
Sales for the Machining Department are $724,404 and sales for the Assembly Department are
$356,796. Determine the departmental contribution to overhead and the departmental net
income for each production department.