Cost Accounting: A Managerial Emphasis, 6e
Chapter 14 – Period Cost Allocation
35) Campaign Printing has two service departments, S1 and S2, and two production departments, P1 and
P2. The data for April were as follows:
Services provided to:
Dept.
Activity Costs S1 S2 P1 P2
S1 $90,000 10% 40% 50%
S2 60,000 20% 55% 25%
P1 360,000
P2 520,000
Required:
a. Set up algebraic equations in linear equation form for each department.
b. Using the reciprocal method determine the reciprocated cost for each service department and allocate
the reciprocated costs of each service department to the production departments.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 14 – Period Cost Allocation
36) The manager of the Finishing Department is concerned about how the costs of service departments
are being assigned to the Mixing Department. He knows that his department uses support activities
entirely different from the other production departments. As a matter of fact, when something goes
wrong in the Mixing Department the entire plant has to stop production because of the critical nature of
the chemical processing in that department. Several support departments, such as maintenance and
clean-up stop whatever they are doing and come to help the Mixing Department. However, it appears
that the Mixing Department is not assigned any additional support costs because all support costs are
assigned on the basis of actual outputs.
Required:
Explain the methods available for the allocation of costs from one department to another. Which method
would you recommend for this company and why?
14.5 Analyze cost allocation procedures to apply common costs and justify contractual
reimbursement terms.
1) The incremental common cost allocation method requires that one user be viewed as primary and
other users as incremental.
2) Allowable cost is the cost that the parties to a contract agree to exclude from reimbursed costs.
3) The stand-alone method of allocating common costs emphasizes fairness and equity among users.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 14 – Period Cost Allocation
4) Under the incremental method, the first incremental user usually receives the highest allocation of the
common costs.
5) Without explicit written cost-plus contracts, producer costs can be passed on to the buyer.
6) 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.
7) Which of the following departments is least likely to be a support department for a boat manufacturing
company?
A) personnel
B) moulding and assembly
C) data processing
D) accounting
E) purchasing
8) Which of the following terms describes a cost of operating a facility, operation, activity area, or like cost
object that is shared by two or more users?
A) common cost
B) direct cost
C) fixed cost
D) varying cost
E) sunk cost
Cost Accounting: A Managerial Emphasis, 6e
Chapter 14 – Period Cost Allocation
9) Two entities, Cooper Company and Magic Company, share a common warehouse facility. Total costs
for the facility are budgeted at $2,000,000. Accountants have estimated that if Cooper Company did not
use the facility the cost incurred would be reduced by 30 percent. What amount of the budgeted cost
should be allocated, respectively, to Cooper and Magic if the incremental allocation method is used?
A) $0; $1,400,000
B) $0; $2,000,000
C) $1,400,000; $600,000
D) $700,000; $1,300,000
E) $600,000; $1,400,000
10) Cutler Hammer currently utilizes a manufacturing facility for $200,000 per year. The facility is used at
70 percent capacity. The shipping department has proposed a plan in which it would utilize the other 30
percent plant capacity for the company’s shipping plus handling the shipping of several nearby
businesses. The company’s consulting firm estimated that the overall costs of maintaining the space
would increase by 12 percent.
The shipping manager is interested in the amount that would be allocated under the stand-alone method.
A) $70,000
B) $140,000
C) $84,000
D) $156,800
E) $67,200
Cost Accounting: A Managerial Emphasis, 6e
Chapter 14 – Period Cost Allocation
11) Smith Company and Jones Company currently share an employee dining facility. Jones Company
employs fewer people and believes that they should not be required to pay one–half of the $300,000 costs
incurred for the facility. An independent consulting firm stipulated that Smith Company could receive
the same services for $150,000 while Jones’s employees could receive comparable services for $100,000.
What will be Jones’s allocated cost if the stand-alone method is used?
A) $83,333
B) $100,000
C) $120,000
D) $150,000
E) $180,000
12) Two entities, Burch Company and Carey Company, share a common warehouse facility. Total costs
for the facility are budgeted at $1,000,000. Accountants have estimated that if Burch Company did not use
the facility the cost incurred would be reduced by 30 percent.
What amount of the budgeted cost should be allocated, respectively, to Burch and Carey if the
incremental allocation method is used?
A) $0; $700,000
B) $0; $1,000,000
C) $198,000; $802,000
D) $300,000; $700,000
E) $700,000; $300,000
13) Under the stand-alone method of allocating common costs
A) a ranking is used to allocate costs among the 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) an incentive is created to be the first-ranked user.
E) the parties are interested in being viewed as primary users.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 14 – Period Cost Allocation
14) 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) fairness and equity are emphasized.
D) there is a disincentive to be titled the primary user.
E) no ranking of users is required.
Answer the following questions using the information below:
The Sturgeon Bay Corporation currently uses a manufacturing facility costing $400,000 per year; 80% of
the facility’s capacity is currently being used. A start-up business has proposed a plan that would utilize
the other 20% of the facility and increase the overall costs of maintaining the space by 5%.
15) If the stand-alone method were used, what amount of cost would be allocated to the start-up
business?
A) $20,000
B) $100,000
C) $80,000
D) $84,000
E) $67,200
16) If the incremental method were used, what amount of cost would be allocated to the start-up
business?
A) $20,000
B) $100,000
C) $80,000
D) $84,000
E) $21,000
Cost Accounting: A Managerial Emphasis, 6e
Chapter 14 – Period Cost Allocation
17) Hunt Company and Indio Company are noncompeting lines of business and use a common database
for marketing purposes. The variable costs associated with accessing the database are readily identifiable
and kept in separate cost pools that are charged to each user. The fixed costs of maintaining the database,
however, cannot be identified by user on a cause-and-effect basis. These fixed costs for the next year are
budgeted at $55,000. If Hunt does not use the database, the fixed costs to Indio are $48,000. An outside
vendor offers to provide Hunt access to a comparable database for a fixed fee fo $60,000 per year plus
variable costs of accessing the database. The same vendor offers to provide Indio access to that database
for a fixed fee of $20,000 per year plus variable costs of accessing the database.
Required:
Compute how much of the $55,000 fixed costs of maintaining the database are charged to by each user:
a. Under the stand-alone allocation method.
b. Under the incremental allocation method, assuming Hunt Company is regarded as the primary
user.
18) The maintenance department has been servicing the production of gizmos manufacturing for three
years. During this time its costs have varied very little. Beginning next year the company is adding a
scrap recycling department to recycle the scrap materials from widget processing. It is anticipated that
the maintenance department’s cost will increase from $960,000 to $1,000,000. The recycling department
will utilize 20 percent of the maintenance efforts.
Required:
a. Calculate the allocation of the maintenance costs to gizmos and recycling if the incremental allocation
method is used.
b. Calculate the allocation of the maintenance costs to gizmos and recycling if the stand–alone allocation
method is used.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 14 – Period Cost Allocation
19) John Ebert, a graduating student at a university in Calgary, received an invitation to visit a
prospective employer in Halifax. A few days later, he received an invitation from a prospective employer
in Toronto. He decided to combine his visits, travelling from Calgary to Halifax, Halifax to Toronto, and
Toronto to Calgary.
Ebert received job offers from both companies. On his return, he decided to accept the offer in
Toronto. He was puzzled as to how to allocate his travel costs between the two employers. He gathered
the following data:
Regular Round-Trip Fares with No Stopovers
Calgary to Halifax $1,500
Calgary to Toronto $1,200
Ebert paid $1,900 for his three-leg flight (Calgary to Halifax, Halifax to Toronto, Toronto to Calgary). In
addition, he paid $30 for a limousine from his home to Calgary Airport and another $30 for a limousine
from Calgary Airport to his home when he returned.
Required:
a. Allocate the $1,900 airfare between the employers in Halifax and Toronto using both the stand-alone
and incremental methods?
b. How would you allocate the $60 limousine fare?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 14 – Period Cost Allocation
20) 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?
14.6 Use matrix algebra to apply the reciprocal method to allocating costs of support
divisions.
1) Matrix algebra may be used to solve linear equations.
2) A matrix that is only one column of numbers is called a vector.
3) The vector of constants is the list of cost pools of each support and operating department.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 14 – Period Cost Allocation
4) A matrix is any orderly array of data.
5) Edgar Ltd. is looking at implementing a new costing system to refine its support department
allocations. The company currently has four support divisions: Accounting (Acctg), Research &
Development (R&D), Human Resources (HR) and Information Technology (IT). It has two operating
divisions: Central and Western. In an effort to improve its costing, Edgar wishes to implement reciprocal
cost allocation. The following table summarizes information on the cost pools and usage:
Service Dept
Cost Pool
Acctg
R&D
HR
IT
Central
Western
Acctg
$250,000
N/A
0.05
0.15
0.15
0.45
0.20
R&D
$180,000
0.08
N/A
0.05
0.25
0.32
0.30
HR
$120,000
0.06
0.05
N/A
0.18
0.38
0.33
IT
$480,000
0.12
0.08
.010
N/A
0.42
0.28
Operating costs of the Central and Western Divisions are $1,200,000 and $750,000 respectively.
Required:
a. Use the matrix algebra function in Excel to calculate the inverse of the coefficient matrix for support
divisions.
b. Multiply the inverse of the coefficient matrix by the vector of constants to obtain the artificial costs.
c. Calculate the allocation of costs to the support and operating departments.
Accounting
$363,593
R&D
$262,434
$252,215
Central
Western
Total
Cost Accounting: A Managerial Emphasis, 6e
Chapter 14 – Period Cost Allocation
6) The production manager for Towns Ltd., Scott Busby, has received a request for a special order from a
new customer. Busby is keen to accept the order as volume has been down due to a slowdown in the
economy and he is concerned about meeting performance targets for the year. Furthermore, the customer
is a personal friend of the president of Towns Ltd. The customer has agreed to a price of full
manufacturing cost plus 20%. Manufacturing cost includes allocation of service department costs,
including maintenance and purchasing. Currently maintenance costs are allocated based on maintenance
hours and purchasing costs are allocated based on the number of purchase orders.
Since the price is based on cost plus, Busby is wondering if a change in the cost allocation bases for
maintenance and purchasing are changed to machine hours and number of line items, if the costs of the
job will increase and therefore he would be able to charge more for the job. He contacts the controller,
Samantha White for advice.
White indicates that yes, the changes in the allocation base would increase the job costs by approximately
18%, but is opposed to the change, arguing that the current cost allocation bases were selected based on
cause and effect and appropriately reflect the costs of the job.
Busby argues that any cost allocation base is arbitrary and instructs the controller to cost this job based on
the alternative allocation bases.
Required:
Evaluate the issues raised from the perspectives of Busby, the production manager, White, the controller
and from the company as a whole.