Chapter 16: Allocation of Support-Department Costs, Common Costs, and Revenues

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.

It allocates fixed cost as per the budgeted usage that helps in short and long-run planning.

The method that allocates each department's budgeted costs to operating departments only is called ________. A) direct method B) step-down method C) reciprocal method D) sequential method

direct method

Which of the following is not one of the methods used to to allocate the revenues of a bundled product? A) direct revenue method B) stand-alone selling prices method C) Stand-alone physical units method D) incremental revenue method

direct revenue method

A company sells a software suite that includes a word processor and spreadsheet applications. The suite sells for $250 and the items are also available separately for $200 (spreadsheet) and $170 (word processor). The spreadsheet app is by far the best seller of the standalone product sales. Using the incremental-revenue allocation method and assuming that the spreadsheet is the primary product, how much of the $250 revenue from the bundled product sale would be allocated to the spreadsheet and to the word processing products? A) $200 of revenue for the spreadsheet and $50 for the word processor B) $200 of revenue for the spreadsheet and $0 for the word processor C) $135 of revenue for the spreadsheet and $115 for the word processor D) $250 of revenue for the spreadsheet and $0 for the word processor

$200 of revenue for the spreadsheet and $50 for the word processor

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, which 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.

It allocates fixed costs on the basis of budgeted long-run usage, which may tempt some managers to underestimate their planned usage.

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.

It may lead operating department managers to make sub-optimal decisions that are in their own best interest.

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

allocate support department costs based upon user department usage

Which of the following is an example of a bundled product? A) a checking account B) A complete mechanics tool kit C) an accounting textbook with an access code to a homework/study system D) Microsoft Excel

an accounting textbook with an access code to a homework/study system

Which of the following departments would not be considered a service or support department? A) assembly B) information systems C) shipping D) plant maintenance

assembly

When using the dual-rate method, the fixed cost allocation is based on ________. A) actual rate B) budgeted usage C) incremental cost allocation D) prime cost allocation

budgeted usage

Corny Solutions processes various corn related food items. One of its facilities located in Iowa, performs some initial processing of corn on the cob once it arrives from the corn fields. The corn from that facility will be further processed elsewhere into corn for popping and corn meal. The costs incurred at the Iowa plant would be considered ________. A) combined costs B) distinct costs C) fixed costs D) common costs

common costs

Which of the following would be an explicit agreement of reimbursement on a contract? A) contractor will produce a bill at the end of the contract without having disclose costs B) contractor will seek payment for contract without having to submit a bid or disclose a mark-up C) contractor agrees with customer before the project begins, on a set price D) Contractor will bill the customer based on what the contractor perceives to be the going rate

contractor agrees with customer before the project begins, on a set price

Which of the following would be the case under the stand-alone method of allocating common costs? A) the individual users of a cost object are ranked in the order of users least responsible for the common cost and then uses this ranking to allocate cost among those 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) the individual users of a cost object are ranked in the order of users most responsible for the common cost and then uses this ranking to allocate cost among those users

each party bears a proportionate share of the total costs in relation to their individual stand-alone costs

Which of the following would be considered the biggest advantage of using practical capacity to allocate costs? 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

focuses management's attention on unused capacity

The reciprocal allocation method ________. A) is the most widely used because of its simplicity B) requires the ranking of support departments in the order that the allocation is to proceed C) fully incorporates interdepartmental relationships into the support-department cost allocations D) 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

fully incorporates interdepartmental relationships into the support-department cost allocations

Which of the following methods ranks individual products in a bundle for revenue allocation? A) stand-alone revenue-allocation method B) incremental revenue-allocation method C) unit-cost weighting method D) physical-unit weighting method

incremental revenue-allocation method

Which of the following is an 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

is that it focuses management's attention on managing unused capacity

Which of the following describes who the direct allocation method allocates support-department costs? A) it allocates support-department costs to operating departments by fully recognizing the mutual services provided among all support departments B) it 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) it allocates each support-department's costs to operating departments only D) it requires managers to rank the support departments in the order that the step-down allocation is to proceed

it allocates each support-department's costs to operating departments only

Which of the following statements is true about the step-down method? A) it partially recognizes the services provided among support departments B) it does not recognize the total services that support departments provide to each other C) it is conceptually the most precise method D) it results in allocating only the support costs used by operating departments

it does not recognize the total services that support departments provide to each other

In certain high-cost defense contracts involving new weapons and equipment, contracts are rarely subject to competitive bidding because ________. A) the government taxes the defense companies at a higher level than that of other public sector companies B) there is an implicit agreement among defense contractors to "share contracts" C) all defense contractors have essentially the same cost structure D) no contractor is willing to assume all the risk of receiving a fixed price for the contract

no contractor is willing to assume all the risk of receiving a fixed price for the contract

When using the direct allocation method, a cost accountant would ________. A) not allocate support department costs to other support departments B) use information about reciprocal services provided among support departments and therefore could generate inaccurate estimates of the cost of operating departments C) allocate complete reciprocated costs D) allocate support department costs to other support departments

not allocate support department costs to other support departments

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

practical capacity-based allocations are used

Which of the following is an example of a revenue object? A) suppliers B) products C) labor D) duration to complete a given task

products

Revenue allocation is used when ________. A) revenues cannot be estimated but can be traced to specific cost objects B) revenues are related to a particular revenue object but cannot be traced to it in an economically feasible way C) revenues are not related to a particular object but can be traced to that object in an economically feasible way D) revenue optimization is the goal

revenues are related to a particular revenue object but cannot be traced to it in an economically feasible way

The best method to determining weights for the stand-alone revenue-allocation method is ________. A) selling prices revenue-allocation method because the weights explicitly consider the prices customers are willing to pay for the individual products B) unit cost revenue-allocation method because it can be used on all occasions C) the direct revenue-allocation method since selling prices or unit costs are difficult to calculate for individual products D) physical-units revenue-allocation method because the physical units explicitly value the prices customers are willing to pay for the individual products

selling prices revenue-allocation method because the weights explicitly consider the prices customers are willing to pay for the individual products

Which of the following is one of the methods of allocating support department costs to operating departments that partially recognizes mutual service provided among all support departments? A) dual-cost allocation method B) direct method C) sequential allocation method D) single-rate cost allocation method

sequential allocation method

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

single-rate cost allocation method

To give more weight to the product that most likely drives the sales of the bundled product, the revenue allocation should be weighted using ________. A) selling prices B) unit costs C) physical units D) stand-alone product revenues

stand-alone product revenues

If management wants to choose a method of revenue allocation that best captures the "benefits received" by customers then they would use ________ to allocate revenue to products in a bundle. A) stand-alone revenue -allocation based on unit costs B) stand-alone revenue-allocation based on selling prices C) stand-alone revenue-allocation based on physical units D) stand-alone revenue-allocation based on unit costs

stand-alone revenue-allocation based on selling prices

Under which allocation method are one-way reciprocal support services recognized? A) direct method B) artificial cost method C) reciprocal method D) step-down method

step-down method

Which of the following is an example of an allowable cost considered by U.S. government contract? A) supervision costs B) costs of lobbying activities C) costs of alcoholic beverages D) costs of vacation for executives

supervision costs

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

support departments provide reciprocal services to each other and operating departments

Which of the following describes reciprocal support? A) the accounting department provides services to production B) molding provides services to production and accounting provides services to both molding and production C) assembling department provides services to three other departments D) the materials management department provides support to all departments including the production control department which also provides services to the materials management department

the materials management department provides support to all departments including the production control department which also provides services to the materials management department

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) the first-incremental user bears a higher proportion of the cost in comparison with the primary user D) the primary user bears the maximum of the total cost

the primary user bears the maximum of the total cost

Cost-plus contracts negotiated with suppliers of the government usually involves ________. A) a price that allows the contractor to break-even B) a price that covers the contract's cost plus other noncash benefits C) the supplier's cost to perform the contact (provide the product or service) plus a fee D) a price that covers the contractor's direct costs plus an amount to cover overhead costs

the supplier's cost to perform the contact (provide the product or service) plus a fee

Contract disputes regarding cost allocation can be reduced by defining which of the following? A) the material items allowed for production B) the terms used, such as what constitutes direct labor C) permissible tax deductions D) minimum profit level the company should earn

the terms used, such as what constitutes direct labor

Which of the following statements is false with regards to departmental cost allocations? A) amounts allocated to departments will most likely differ depending on the cost allocation method used B) the total amount allocated among departments will differ in total depending on the cost allocation method used C) the reciprocal method is usually the most conceptually precise method because it considers mutual services provided among all support departments D) the step-down and direct methods are simple for managers to compute and understand relative to the reciprocal method

the total amount allocated among departments will differ in total depending on the cost allocation method used

When budgeted cost-allocations rates are used ________. A) user departments are not informed about the charges until the end of the period which makes decision making during the period difficult B) user departments can determine the amount of service to request and if allowed, can determine whether to use an internal or external resource C) user divisions pay for costs that exceed budgeted amounts D) user divisions pay for inefficiencies of the supplier department

user departments can determine the amount of service to request and if allowed, can determine whether to use an internal or external resource

When actual cost-allocations rates are used, which of the following would be true? 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

user divisions are unaware of the allocated amounts until the end of the budget period

Which of the following best describes the stand-alone revenue-allocation method? A) uses product-specific information on the products in the bundle as weights for allocating the bundled revenues to the individual products B) ranks individual products in a bundle according to criteria determined by management C) ranks individual products in a bundle according to costs allocated to the products D) survey customers about the importance of each of the individual products in their purchase decision

uses product-specific information on the products in the bundle as weights for allocating the bundled revenues to the individual products

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

variable-cost pool and a fixed-cost pool

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

variations in one division's usage affect another division's allocation

Managers of supplier departments ________. A) view the budgeted rates positively if unfavorable cost variances occur due to price decreases outside of their control B) view the budgeted rates negatively if favorable cost variances occur due to price decreases outside of their control C) view the budgeted rates negatively if unfavorable cost variances occur due to price increases outside of their control D) view the budgeted rates negatively if unfavorable cost variances occur due to price decreases outside of their control

view the budgeted rates negatively if unfavorable cost variances occur due to price increases outside of their control