Chapter 4 Homework Assignment (Mandatory)

The unit of an activity selected for the purposes of calculating an allocation rate is known as the

cost driver A cost driver represents a unit of activity that causes a change in the total cost of the activity. For example, the number of billable hours for a service firm would be an appropriate cost driver for allocating overhead as the more billable hours a firm incurs, the more overhead cost it is likely to incur. Once a cost driver has been selected, it can be used to determine the allocation rate. The allocation rate can then be utilized to allocate costs from support departments to operating departments.

Allocation is a mathematical procedure that cannot be manipulated by the parties involved in making the allocation. This statement is

false.

Which of the following is the most logical cost driver for allocating the telephone bill among four departments?

number of telephones Explanation There is normally a strong cause and effect relationship between the number of phones and the cost shown on the phone bill. The more phones in use the higher the cost of phone service. Further, the number of phones is readily available. Phones are easy to count. Finally, the number of phones is usually a controllable item. In other words a manager could easily decrease or increase the number of phones used in their department by adding or discontinuing service. In summary the number of phones provides strongest match with all three criteria.

Indirect costs are frequently called overhead costs. This statement is

true

The following information was drawn from the accounting records of Marlin Manufacturing Co. Product 1Product 2Product 3Direct Material Cost$25,000 $30,000 $35,000 Direct Labor Cost$30,000 $40,000 $50,000 Direct Labor Hours 1,200hours 1,800hours 2,000hours Factory overhead is estimated to be $30,000 and is applied on a basis of direct labor dollars. This overhead cost is not traceable to any particular product. Factory overhead allocated to Product 2 is

$10,000 Explanation Allocation Base = $30,000 + $40,000 + $50,000 = $120,000 Total Direct Labor CostAllocation Rate = $30,000 Overhead Cost / $120,000 Total Direct Labor Cost = $0.25 Per Direct Labor DollarAllocation Amount = $0.25 × $40,000 Direct Labor Dollars in Product 2 = $10,000 to be Allocated to Product 2

Vernon Services Company has 62 employees, 31 of whom are assigned to Division A and 31 to Division B. Vernon incurred $383,780 of fringe benefits cost during year 2.RequiredDetermine the amount of the fringe benefits cost to be allocated to Division A and to Division B.

A: 191,890 B: 191,890 Explanation Step 1 is to determine the allocation rate: Allocation rate=Fringe benefit cost=$383,780=$6,190 per employeeNo. of employees62 (Cost driver) Step 2 is to assign the cost by multiplying the allocation rate by the weight of the base (i.e., cost driver) for each division: Allocation Weight of AllocatedDivisionRate×Base=CostA$6,190 × 31 = $191,890 B$6,190 × 31 = 191,890 Total allocated cost $383,780

To identify the best cost driver for a particular allocation consideration should be given to

All of the choices identify factor that affect the selection of the allocation base.

Which of the following is normally present in an allocation decision?

All of the choices represent issues that are commonly found in allocation decision.

As a result of the cost/benefit concept, a cost that could be traced directly to a cost object may still be treated as an indirect cost. This statement is

true Many costs that can be traced directly are treated as indirect cost because directly tracing the cost is not worth the effort necessary to do the tracing. For example, a furniture manufacturer could count the drops of glue used to produce each piece of furniture. However, there is no benefit in knowing that a few drops more or less of glue were used on one piece of furniture versus another piece. As a result, glue and other minor supplies are frequently treated as indirect cost rather than expending the effort necessary to directly trace their use to each individual product.

Production workers for Zachary Manufacturing Company provided 5,500 hours of labor in January and 2,900 hours in February. The company, whose operation is labor intensive, expects to use 48,900 hours of labor during the year. Zachary paid a $107,580 annual premium on July 1 of the prior year for an insurance policy that covers the manufacturing facility for the following 12 months.RequiredBased on this information, how much of the insurance cost should be allocated to the products made in January and to those made in February? (Do not round intermediate calculations.)

Explanation Step 1 is to determine the allocation rate: Allocation rate=Insurance cost=$107,580=$2.20 per hourNo. of labor hours48,900 (Cost driver) Step 2 is to assign the cost by multiplying the allocation rate by the weight of the base (cost driver) for each month: Allocation Weight of AllocatedMonthRate×Base=CostJanuary$2.20 ×5,500=$12,100 February 2.20 ×2,900= 6,380

Benson Chemical Company makes three products, B7, K6, and X9, which are joint products from the same materials. In a standard batch of 386,300 pounds of raw materials, the company generates 73,200 pounds of B7, 166,700 pounds of K6, and 146,400 pounds of X9. A standard batch costs $2,317,800 to produce. The sales prices per pound are $5, $15, and $20 for B7, K6, and X9, respectively.Required Allocate the joint product cost among the three final products using weight as the allocation base. Allocate the joint product cost among the three final products using market value as the allocation base.

Explanation a.Step 1 is to determine the allocation rate. Allocation rate =Joint product costs=$2,317,800= $6 per poundTotal weight386,300 b.The market value of the three products: Price Per Weight by ProductPound×Pound=Market ValueB7$5 × 73,200 = $366,000 K6 15 × 166,700 = 2,500,500 X9 20 × 146,400 = 2,928,000 Total market value $5,794,500 Step 1 is to determine the allocation rate. Allocation rate =Joint product costs=$2,317,800= $0.40 per $ of market valueTotal market value$5,794,500

Campbell Hats Corporation manufactures three different models of hats: Vogue, Beauty, and Glamour. Campbell expects to incur $600,000 of overhead cost during the next fiscal year. Other budget information follows. Vogue Beauty Glamour Total Direct labor hours 2,600 4,600 7,800 15,000 Machine hours 1,500 1,400 850 3,750 Required Use direct labor hours as the cost driver to compute the allocation rate and the budgeted overhead cost for each product. Use machine hours as the cost driver to compute the allocation rate and the budgeted overhead cost for each product.

Explanation a.Step 1 is to determine the allocation rate: Allocation rate for overhead cost=Overhead cost=$600,000=$40 per direct labor hourDirect labor hours15,000 b.Step 1 is to determine the allocation rate: Allocation rate for overhead cost=Overhead cost=$600,000=$160 per machine hourMachine hours3,750

Gibson Corporation's computer services department assists two operating departments in using the company's information system effectively. The annual cost of computer services is $531,000. The production department employs 34 employees, and the sales department employs 25 employees. Gibson uses the number of employees as the cost driver for allocating the cost of computer services to operating departments.RequiredAllocate the cost of computer services to operating departments.

Production: 306,000 Sales: 225,000 Explanation Step 1 is to determine the allocation rate: Allocation rate =Service department cost=$531,000= $9,000 per employeeNumber of employees59 (Allocation Base) Step 2 is to assign the cost by multiplying the allocation rate by the weight of the base for each department: Allocation Weight of AllocatedDepartmentRate×Base=CostProduction$9,000 × 34 = $306,000 Sales 9,000 × 25 = 225,000 Total allocated cost $531,000

Patterson Lawn Co. is the primary provider of lawn care maintenance in the city of Jasper. The Company has two operating departments, one that performs lawn care services for commercial properties and one that services residential properties. Both operating departments are supported by two service departments, administrative and machine maintenance. Costs for each of these supporting departments are as follows: Administrative Machine Maintenance Total cost$150,000 $225,000 The following estimates that are related to the operating departments as follows: Commercial Residential Total properties properties# of employees 40 20 60 # of customers 125 160 285 # of billable hours 3,000 2,000 5,000 Total overhead cost*$425,000 $350,000 $775,000 *Note that total overhead cost includes costs allocated from service departments and other overhead costs. The Company uses the direct method to allocate service department cost to the operating departments. In order to allocate administrative costs, the Company has elected to use the # of employees as the cost driver. To allocate machine maintenance costs, the Company uses the # of billable hours as the cost driver. Based on the information provided, how much of the administrative cost will be allocated to the residential properties operating department?

$50,000

The following information was drawn from the accounting records of Marlin Manufacturing Co. Product 1Product 2Product 3Direct Material Cost$25,000 $30,000 $35,000 Direct Labor Cost$30,000 $40,000 $50,000 Direct Labor Hours 1,200hours 1,800hours 2,000hours Factory overhead is estimated to be $30,000 and is applied on a basis of direct labor dollars. This overhead cost is not traceable to any particular product. The total cost of Product 1 is

$62,500 Explanation Allocation Base = $30,000 + $40,000 + $50,000 = $120,000 Total Direct Labor CostAllocation Rate = $30,000 Overhead Cost / $120,000 Total Direct Labor Cost = $0.25 Per Direct Labor Dollar