Cost Accounting: A Managerial Emphasis, 6e
Chapter 14 – Period Cost Allocation
Chapter 14 Period Cost Allocation
14.1 Apply relevance as a criterion to decide how to allocate non-manufacturing
(period) costs.
1) The allocation of one particular cost must satisfy all four justifications of cost allocation.
2) Indirect costs typically constitute a large percentage of the costs assigned to cost objects.
3) For the economic decision purpose of cost allocation, the costs in all six functions of the value chain
should be included.
4) The costs of designing and implementing sophisticated cost allocation systems are usually not very
visible.
5) If one is willing to put in the time and expense, it is always possible to identify the specific cause–and-
effect relationship needed for a cost allocation base.
6) Benefits from using a well-designed cost allocation system are highly visible.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 14 – Period Cost Allocation
7) One of the purposes of allocating indirect costs is to justify costs or compute reimbursement amounts.
8) When using the causality criterion, cost drivers are selected as the cost allocation bases.
9) The ability-to-bear criterion is considered superior when the purpose of cost allocation is motivation.
10) To encourage the design of products that are simpler to manufacture or less costly to service, would
be an example of which cost allocation purpose?
A) to provide information for economic decisions
B) to motivate managers and employees
C) to determine employees’ wages
D) to measure income and assets for reporting to external parties
E) to justify costs or compute reimbursements
11) Which of the following illustrates a purpose for allocating costs to cost objects?
A) to provide information for economic decisions
B) to reduce competition
C) to determine employee benefit costs
D) to defer income and reduce taxes payable
E) to motivate employees
Cost Accounting: A Managerial Emphasis, 6e
Chapter 14 – Period Cost Allocation
12) Deciding whether to make a component part or to purchase it, would be an example of which cost
allocation purpose?
A) to provide information for economic decisions
B) to motivate managers
C) to determine employee’s wages
D) to measure income and assets for reporting to external parties
E) to motivate employees
13) For the economic decision purpose
A) the costs in all six business functions should be included.
B) costs for only one function is included.
C) period costs are not allocated.
D) costing is only related to product pricing.
E) only inventoriable costs under GAAP/IFRS should be included.
14) Which of the following criteria subsidizes poor performers at the expense of the best performers?
A) ability to bear
B) benefit received
C) causality
D) fairness and equity
E) benefits expended
15) The belief that a corporate division with higher sales ought to be allocated more of the company’s
advertising costs because it must have derived more benefit from the expenditures than a division with
lower sales, is an example of which criteria for cost allocation decisions?
A) ability to bear
B) benefits expended
C) causality
D) fairness and equity
E) benefit received
Cost Accounting: A Managerial Emphasis, 6e
Chapter 14 – Period Cost Allocation
16) Which of the following is not a common criteria used to guide decisions related to cost allocations?
A) ability to bear
B) benefit received
C) causality
D) fairness and equity
E) stable market prices
17) Which of the following is the first step in the cost-allocation decision process?
A) Calculate the cost-allocation rate for each indirect cost pool.
B) Identify the purpose of the cost allocation.
C) Identify the direct inputs that are already measured.
D) Identify the relevant indirect costs included in the cost pool(s) or numerator(s).
E) Analyze the alternatives and select the best one for the denominator.
18) Which of the following is true concerning cost allocation in a multi-product company?
A) Where the indirect costs are variable and each product is assembled sequentially, the causality
criterion can guide the choice of a cost allocation base.
B) Where the indirect costs are fixed and each product is assembled sequentially, the causality criterion
can guide the choice of a cost allocation base.
C) Where the indirect costs are variable and each product is not assembled sequentially, the causality
criterion can guide the choice of a cost allocation base.
D) Where the indirect costs are fixed and each product is not assembled sequentially, the causality
criterion can guide the choice of a cost allocation base.
E) Where the indirect costs are variable and the products are produced jointly, it is not possible to
identify specific cause-and-effect relationships between work on an individual product and total costs
incurred.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 14 – Period Cost Allocation
19) Which purpose of cost allocation is used to encourage sales representatives to push high-margin
products or services?
A) to provide information for economic decisions
B) to motivate managers and other employees
C) to justify costs
D) to measure income and assets for reporting to external parties
E) to compute reimbursement
20) Which purpose of cost allocation is used to decide on the selling price for a customized product or
service?
A) to provide information for economic decisions
B) to motivate managers and other employees
C) to justify costs
D) to measure income and assets for reporting to external parties
E) to compute reimbursement
Cost Accounting: A Managerial Emphasis, 6e
Chapter 14 – Period Cost Allocation
21) Scarborough Sales, a real estate company specializing in apartment rentals and home sales, is having
difficulty in gathering appropriate cost information for evaluating its operations. It owns several large
apartment complexes and sells homes owned by builders or existing homeowners. As the company’s new
accountant you define cost by major activity. You use this information for allocating costs to cost objects.
Also, cost pools are created for appropriate cost allocations. The owner of the company is interested in
exactly what you have done, and why it appears to be working so smoothly.
Required:
Briefly state the four purposes for allocating costs to cost objects and give two examples of how each can
be used for the real estate company.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 14 – Period Cost Allocation
22) For each item listed, select the appropriate purpose of cost allocation from the list below. A purpose
may be used more than once.
1. To cost a product at a fair price for government contracts
2. To encourage simpler product design
3. To decide on an approprite selling price for a special-order product
4. To cost inventories for reporting on a company’s tax return
5. To encourage the sales department to focus on high-margin products
6. To evaluate a make or buy decision
7. To cost inventories for the balance sheet
8. To decide whether to add or delete a product line
Purposes of cost allocation:
a. To provide information for economic decisions
b. To motivate managers and other employees
c. To justify costs or compute reimbursement amounts
d. To measure income and assets for reports to external parties
23) A company might choose to allocate corporate costs to various divisions within the company for what
four purposes? Give an example of each.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 14 – Period Cost Allocation
24) An electronics manufacturer is trying to encourage its engineers to design simpler products so that
overall costs are reduced.
Required:
Which of the value-chain function costs (R&D, design, production, marketing, distribution, customer
service) should be included in product-cost estimates to achieve the above purpose? Why?
14.2 Evaluate and select between a single- and dual-rate cost method to apply period
costs of IT services.
1) There are multiple cost objects in most costing systems.
2) A cost pool is a grouping of individual cost items.
3) The cost pool is homogeneous if all included activities have the same or similar cause-and-effects or
benefits received relationships between the cost driver and the costs of the activity.
4) When there is a lesser degree of homogeneity, fewer cost pools are required to accurately explain the
use of company resources.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 14 – Period Cost Allocation
5) If a cost pool is homogeneous, the cost allocations using that pool will be the same as they would be if
costs of each individual activity in that pool were allocated separately.
6) Once a cost pool has been established, it should not need to be revisited or revised.
7) The single-rate method is when all indirect costs are combined in one cost pool and allocated to cost
objects via a single rate per unit.
8) One of the important aspects about the dual-rate method is that it allows managers to see how variable
and fixed costs behave differently.
9) The dual cost-allocation method classifies costs into two pools, a budgeted cost pool and an actual cost
pool.
10) The single-rate method makes a distinction between fixed and variable costs.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 14 – Period Cost Allocation
11) Using the single-rate method transforms the fixed costs per hour into a variable cost to users of that
facility.
12) The single-rate cost-allocation method provides better information for decision making than the dual–
rate method.
13) An advantage of the single-rate method is that it is easier and always the most accurate cost-allocation
choice.
14) A grouping of individual cost items is known as
A) a cost pool.
B) an allocation base.
C) grouped direct costs.
D) grouped indirect costs.
E) a homogenous cost group.
15) An organization determines its allocation base depending upon which of the following factors?
A) the purpose served by the cost allocation base
B) the size of the base
C) the number of different items in the base
D) the performance of the denominator activity
E) benchmarking competitor processes
Cost Accounting: A Managerial Emphasis, 6e
Chapter 14 – Period Cost Allocation
16) When all of a cost pool’s individual activities have the same or similar relationships between the cost
driver and the costs of the activity, it is considered
A) a beneficial cost pool.
B) a heterogeneous cost pool.
C) a homogeneous cost pool.
D) a similar cost pool.
E) an assigned cost pool.
17) Which of the following is FALSE concerning homogeneous cost pools?
A) They enable more accurate product, service and customer costs to be obtained.
B) The cost allocations using the pool will be the same as would be made if each individual activity in the
pool were allocated separately.
C) The greater the degree of homogeneity, the fewer cost pools are required to accurately explain
differences in how products use resources.
D) All activities in the pool have the same or similar cause-and-effect relationship between the cost
allocator and the costs of the activity.
E) All activities in the pool have a unique and different benefits-received relationship between the cost
allocator and the costs of the activity.
18) 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.
E) homogeneous cost allocation method.
19) Benefits of the single-rate method include
A) the low cost of implementation.
B) fixed costs that are transformed into variable costs for user decision making.
C) signals regarding how variable and fixed costs behave differently.
D) information that leads to outsourcing decisions that benefit the organization as a whole.
E) there is a stronger cause and effect relationship.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 14 – Period Cost Allocation
20) Benefits of the dual-rate method include
A) variable costs that are transformed into fixed costs for user decision making.
B) the low cost of implementation.
C) avoidance of expensive analysis for categorizing costs as either fixed or variable.
D) information that leads to outsourcing decisions that benefit the organization as a whole.
E) increased costs of implementation.
21) Under which of the following methods of cost allocation is there no distinction between fixed and
variable costs?
A) fixed method
B) dual-rate method
C) homogeneous method
D) standard cost method
E) single-rate method
22) Which cost allocation method differentiates between variable and fixed costs?
A) dual-rate method
B) heterogeneous method
C) single-rate method
D) variable method
E) fixed rate method
Cost Accounting: A Managerial Emphasis, 6e
Chapter 14 – Period Cost Allocation
23) Data Source Media manufactures cassettes and CDs. Management is attempting to set the budget for
the coming year. Two divisions (Cassette and CD) of the company utilize one plant location. The
following data have been prepared for review.
Fixed operation costs
$450,000
Available capacity
1,250 hours
Budgeted long-term usage:
Cassette Department
1,000 hours
CD Department
175 hours
Budgeted variable cost per hour in the 1,000–
hour to 1,250-hour relevant range
$600 per hour
What is the cost per hour of use for the Cassette department and the CD Department assuming budgeted
usage is the allocation base and a single-rate method is used?
A) $960.00
B) $600.00
C) $982.98
D) $1,021.28
E) $1,582.98
Cost Accounting: A Managerial Emphasis, 6e
Chapter 14 – Period Cost Allocation
Use the information below to answer the following question(s).
Data Source Media manufactures cassettes and CDs. Management is attempting to set the budget for the
coming year. Two divisions (Cassette and CD) of the company utilize one plant location. The following
data have been prepared for review.
Fixed operation costs
$900,000
Available capacity
2,500 hours
Budgeted long-term usage:
Cassette Department
2,000 hours
CD Department
350 hours
Budgeted variable cost per hour in the 2,000–
hour to 2,500-hour relevant range
$600 per hour
24) What is the cost per hour of use for the Cassette department and the CD Department assuming
budgeted usage is the allocation base and a single-rate method is used?
A) $960.00
B) $600.00
C) $982.98
D) $1,021.28
E) $1,582.98
25) What is the fixed cost per year and the variable cost per hour, respectively, for the Cassette
Department using the dual-rate method, assuming that the allocation bases are capacity for fixed costs
and actual usage for variable costs?
A) $720,000 and $480
B) $720,000 and $600
C) $765,958 rounded and $480
D) $765,958 rounded and $600
E) $900,000 and $600
Cost Accounting: A Managerial Emphasis, 6e
Chapter 14 – Period Cost Allocation
26) What are the fixed cost per year and the variable cost per hour for the CD Department if the dual-rate
method is used? Assume that the allocation bases are budgeted usage for fixed costs and actual usage for
variable costs.
A) $100,270 and $600
B) $126,000 and $600
C) $134,043 rounded and $89.36
D) $134,043 rounded and $600
E) $900,000 and $600
27) What is the allocated cost to the two departments, respectively, if the single rate is $1,000? Assume
that the Cassette and CD Departments used 1,750 and 200 hours, respectively.
A) $807,692 rounded and $92,308 rounded
B) $900,000 and $200,000
C) $1,750,000 and $200,000
D) $2,800,000 and $320,000
E) $900,000 and $320,000
28) What is the allocated cost to the two departments, respectively, if budgeted usage is the base for fixed
costs and actual usage is the base for variable costs? (Use dual-rate method.) Assume that the Cassette
and CD Departments used 1,750 and 200 hours, respectively.
A) $1,050,000; $120,000
B) $1,787,240; $204,256
C) $1,815,957; $254,043
D) $2,000,126; $294,112
E) $1,787,240; $254,043
Cost Accounting: A Managerial Emphasis, 6e
Chapter 14 – Period Cost Allocation
Answer the following questions using the information below:
The Bonawitz 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 200,000 to 300,000 copies:
Fixed costs per year
$30,000
Variable costs
3 cents (.03) per copy
Budgeted long-run usage in copies per year:
Marketing Department
60,000 copies
Operations Department
190,000 copies
Budgeted amounts are used to calculate the allocation rates.
Actual usage for the year by the Marketing Department was 40,000 copies and by the Operations
Department was 180,000 copies.
29) If a single-rate cost-allocation method is used, what amount of copying facility costs will be budgeted
for the Marketing Department?
A) $9,000
B) $1,800
C) $7,200
D) $28,500
E) $24,600
30) If a single-rate cost-allocation method is used, what amount of copying facility costs will be allocated to
the Marketing Department? Assume budgeted usage is used to allocate fixed copying costs and actual
usage is used to allocate variable copying costs.
A) $8,400
B) $9,000
C) $6,000
D) $4,800
E) $6,655
Cost Accounting: A Managerial Emphasis, 6e
Chapter 14 – Period Cost Allocation
31) If a dual-rate cost-allocation method is used, what amount of copying facility costs will be budgeted for
the Operations Department?
A) $28,500
B) $28,200
C) $30,245
D) $29,945
E) $24,600
32) 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) $30,245
B) $29,945
C) $28,500
D) $28,200
E) $24,600
Cost Accounting: A Managerial Emphasis, 6e
Chapter 14 – Period Cost Allocation
Answer the following questions using the information below:
The Fancy Flier Airplane 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 10,000 to 20,000 technician hours per year:
Fixed costs per year
$600,000
Variable costs
$80 per technician hour
Budgeted long-run usage in hours per year:
Large Plane Department
9,000 technician hours
Small Plane Department
7,000 technician hours
Budgeted amounts are used to calculate the allocation rates.
Actual usage for the year by the Large Plane Department was 6,000 technician hours and by the Small
Plane Department was 6,500 technician hours.
33) If a single-rate cost-allocation method is used, what is the allocation rate per hour used?
A) $80.00
B) $117.50
C) $146.67
D) $100.00
E) $128.00
34) If a dual-rate cost-allocation method is used, what amount of materials laboratory costs will be
budgeted for the Large Plane Department?
A) $1,057,500
B) $822,500
C) $1,880,000
D) $1,600,000
E) $982,500
Cost Accounting: A Managerial Emphasis, 6e
Chapter 14 – Period Cost Allocation
35) If a single-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) $1,057,500
B) $822,500
C) $763,750
D) $705,000
E) $1,476,923
36) 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) $782,500
B) $817,500
C) $822,500
D) $705,000
E) $996,923
37) If a dual-rate cost-allocation method is used, what amount of materials laboratory costs will be
budgeted for the Small Plane Department?
A) $1,057,500
B) $763,750
C) $705,000
D) $822,500
E) $897,500
Cost Accounting: A Managerial Emphasis, 6e
Chapter 14 – Period Cost Allocation
38) 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) $822,500
B) $782,500
C) $817,500
D) $763,750
E) $832,000
39) For each of the following cost pools select an appropriate allocation base from the list below if the
overall cost object is to assign costs to production departments. Each base can be used only once. Assume
a manufacturing company.
Cost pools:
a. Vice-president of finance’s office expenses.
b. Computer operations used in conjunction with manufacturing.
c. Personnel department.
d. Manufacturing machinery cost.
e. Energy costs.
Allocation bases for which the information system can provide data:
1. Number of employees per department.
2. Employee wages and salaries per department.
3. Production facility square metreage.
4. Hours of operation by production department.
5. Machine hours by department.
6. Machines per department.
7. Operations costs of each department.
8. Hours of computer use per month per department.
9. Indirect labour hours per department.