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__________ (1) Investment center
__________ (2) Performance report
__________ (3) Cost center
__________ (4) Departmental contribution to overhead
__________ (5) Profit center
__________ (6) Responsibility accounting system
122. What is a profit center?
123. What is a cost center?
124. What is the main difference between a cost center and a profit center?
125. What is the purpose of a departmental accounting system?
126. What is the purpose of a responsibility accounting system?
127. What is the primary purpose for using a responsibility accounting system?
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128. Explain the difference between direct and indirect expenses in accounting for
departments.
129. How do companies decide what allocation bases to use to allocate indirect costs to
departments?
130. Describe the information found on a responsibility accounting performance report.
131. Define joint costs and explain how joint costs can be allocated.
132. Define an investment center. How are investment centers evaluated?
133. Describe the two-stage allocation of overhead costs.
134. What is the cycle time for a manufacturer? What does it reveal about the manufacturing
process?
135. List the steps required to prepare a departmental income statement.
Problems
136. Leontif Corporation has a Parts Division that does work for other Divisions in the
company as well as for outside customers. The company's Equipment 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 Equipment 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 J789 that it presently is producing. The J789 sells for $34.00 per unit, and requires $22.00
per unit in variable production costs. Packaging and shipping costs of the J789 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 J789 each year. Production
and sales of the J789 would drop by 10% if the new special part is produced for the
Equipment 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 Equipment Division?
b. Is it in the best interests of Leontif Corporation for this transfer to take place? Explain.
137. Eclectic Furniture Company allocates its indirect salaries of $12,500 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 _______________
138. 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?
139. 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……………… $356,250
Department B……………… 641,250
Department C……………… 427,500
How much advertising expense should be allocated to each department?
140. A company produces two joint products (called 101 and 202) in a single operation that
uses one raw material called Casko. Four hundred gallons of Casko were purchased at a cost
of $800 and were used to produce 150 gallons of Product 101, selling for $5 per gallon, and
75 gallons of Product 202, 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?
141. A company produces two products, X and Y, from a single raw material called ZZ. ZZ is
purchased in 55-gallon drums, and the contents of one drum are sufficient to produce 30
gallons of X and 15 gallons of Y. X sells for $10.00 per gallon and Y sells for $30.00 per
gallon. During the current period, the company used 400 drums of ZZ to produce X and Y.
The cost of ZZ was $90 per drum.
Required:
(1) If the cost of ZZ is allocated to the X and Y 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 ZZ is allocated to the X and Y 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?
The relative number of gallons of each product produced or the relative market values of each
product at the point of separation.
142. Laurel and Hardy are managers of two product lines for Keaton 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 assets. Show your calculations and support your answer.
Laurel Hardy
Revenue.................... $412,000 $450,000
Costs........................ 380,000 411,000
Average Assets......... 400,000 600,000
143. Scottie is the manager of an investment center within Hamilton Company. Using the
information below, calculate (a) return on total assets and (b) investment center residual
income.
Net Income…………………… $315,900
Average Invested Assets…….. $2,100,000
Target Net Income…………… 6% of division assets
144. Community Technical 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 $150,000, 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.
145. Texas Toys, a retail store, has four sales departments supported by three service
departments. Cost and operational data for each department follow:
Purch.
Sales Cost of Square Orders
Department Sales Goods Sold Footage 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
4 46,080 27,648 2,592 1,750
Service
Departments Allocation Basis Cost
Advertising……….. Sales $10,000
Maintenance……… Square footage 6,900
Purchasing………... No. of purchase orders issued 12,000
Determine the service department expenses to be allocated to Sales Department 1 for:
Advertising ___________________
Maintenance __________________
Purchasing ___________________
146. Blower 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 C Department
D
Total direct
Department
expenses.. $60,000 $50,000 $ 70,000 $ 80,000
Service department expenses
Department A............
Subtotal........................
Department B............
Total.............................
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147. Precision Brackets, Co. uses a traditional allocation of overhead based on direct labor
hours system. The manager has accumulated the following information on engineering
changes for two of the company's major products:
Automotive
Brackets Computer
Brackets
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.
148. Renton Co. has two operating (production) departments supported by a number of
service departments. The following information was collected for a recent period:
Direct Costs Indirect
Cost
Machining
Department Assembly
Department
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.
