Chapter 4 Accounting

Logan Corporation has 30 employees, 10 in "A-line," and 20 in "B-line." Logan incurred $180,000 in fringe benefits costs last year. How much in fringe benefit costs should be allocated to "A-line"?

$60,000 Cost to be allocated ÷ Allocation Base = Allocation rate × Weight of base = Amount to Allocate $180,000 fringe benefits cost / 30 employees = $6,000 per employee × 10 employees = $60,000

The process of dividing a total cost into parts, and assigning the parts among relevant cost objects is called

Allocation

The process of assigning costs to two or more cost objects requires

Cost Tracing Cost allocation Cost/benefit analysis

Costs that can be traced to objects in a cost-effective manner are called

Direct costs

Direct costs and variable costs are synonymous terms. This statement is

False

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

False Allocation is based on debatable opinions such as selecting the most appropriate allocation base. Therefore most allocation decisions are impacted by emotional and political influences. The math is not the issue. It is the determination of which data to use in the allocation that makes the process subject to manipulation.

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

Indirect costs are frequently called overhead costs. This statement is

True

When there is no cause and effect relationship between a cost driver and the cost to be allocated accountants may be forced to make an arbitrary allocation such as assigning an equal amount of cost to each unit of product. This statement is

True

Which of the following would be classified as an indirect cost when assigning costs to a particular department of a large retail sales store?

Utility costs

The allocation process requires answers to which of the following questions?

What is the amount of the cost to be allocated? Where is the cost going to be allocated? How will the allocation be made?

Saylind Molding paid $280,000 in rent for the year. The company's three departments are Headrests, Armrests, and Floor Mats. The accountant has identified two possible cost drivers. The number of employees in each department and the square footage of space occupied by each department. The number of employees working in each department includes 60 in the Headrest Department, 30 in the Armrest Department and 110 in Floor Mats Department. The departments occupy 5,000, 6,300, and 2,700 square feet, for Headrests, Armrests, and Floor Mats respectively. How much of the rent cost should be allocated to the products made in the Floor Mats department? a. $ 54,000 b. $100,000 c. $126,000 d. $128,000

a. $54,000 The most appropriate cost driver in this case is the number of square feet occupied by each department. In other words, rental fees are normally based on the size of the space rather than the number of people who work in the department. Therefore, the size of the space (square footage) drives the rental fee.$280,000 ÷ 14,000 sq. feet = $20 per sq. foot$20 × 2,700 sq. feet = $54,000

Joint costs occur a. before the split-off point. b. after the split-off point.

a. before the split-off point.

The Science Institute has three departments: Biology, Chemistry, and Physics. The institute's controller wants to estimate the cost of operating each department. He has identified several indirect costs that must be allocated to each department including $42,000 of indirect salaries, $4,000 of office supplies, and $36,000 of office rent. There are 500 students in the biology department, 200 in chemistry and 300 in physics. The director of the Institute wants to know how much of the indirect cost to allocate to each department. Based on this information a. the amount of the cost to be allocated is $82,000. b. the indirect cost is the "allocation base". c. the students are the "cost objects". d. All of the answers are correct.

a. the amount of the cost to be allocated is $82,000. In this case the "cost to be allocated" is the total of the indirect costs. Specifically, $42,000 + $4,000 + $36,000 = $82,000. The object of concern is the cost of operating each department. Accordingly, the departments (not the students) are the cost objects. The number of students is the best available cost driver. The size of the student body drives the need for administrative staff (indirect salaries), the use of supplies, and the size of the rental space needed. Accordingly, the number of students (not the indirect cost) is the allocation base.

The Science Institute has three departments: Biology, Chemistry, and Physics. The institute's controller wants to estimate the cost of operating each department. He has identified several indirect costs that must be allocated to each department including $42,000 of indirect salaries, $4,000 of office supplies, and $36,000 of office rent. There are 500 students in the biology department, 200 in chemistry and 300 in physics (1,000 total students as the allocation base). The amount of cost that should be allocated to the Chemistry Department is a. $41,000. b. $16,400. c. $24,600. d. There is no correct answer.

b. $16,400 Cost to be allocated = $42,000 + $4,000 + $36,000 = $82,000Allocation base = 500 + 300 + 200 = 1,000 total studentsAllocation rate = Cost to be allocated ÷ Allocation base = $82,000 ÷ 1,000 = $82 per studentAllocation to Chemistry Department = $82 per student × 200 = $16,400

The Silver Center (TSC) produces cups and platters. TSC purchases silver and other metals that are processed into silver alloy that is used to make platters and cups. TSC incurred $40,000 of materials cost and $44,000 of labor cost to produce the silver alloy. Platters are made first and the residual alloy is remixed into a lower grade silver plated material that is used to make the cups. Remixing cost amount to $2,000. The recent batch contained 4,000 platters and 1,000 cups. TSC sold the platters for $100,000 and the cups for $12,000. Based on this information the total amount of joint cost is a. $40,000 b. $44,000 c. $84,000 d. $86000

c. $84,000 Explanation: Joint costs are the costs incurred before the split-off point. In this case, these cost amount to $84,000 ($40,000 materials cost + $44,000 processing cost). The $2,000 remixing cost occurs after the split-off point and therefore is not a joint cost. Indeed, it is a cost of further processing that is incurred solely for the purpose of making the cups.

When resolving disputes over allocations, senior management should focus on a. political influence. b. emotional feelings. c. mission of the organization. d. mathematical accuracy.

c. mission of the organization

Which of the following is the most logical cost driver for allocating the telephone bill among four departments? a. square footage of floor space b. direct labor hours c. number of telephones d. sales volume measured in dollars

c. number of telephones

Morehead Manufacturing Company (MMC) makes a screen that is used to manufacture a toy cell phone. All of the screens made by MMC are identical and sold for the same price per unit. Employees of Morehead Manufacturing Company (MMC) made 1,700 screens in January and 1,100 screens in February. Morehead expects to make 18,000 screens during the year. The company incurs $54,000 per year of insurance cost to attain coverage for its manufacturing employees. The company's manufacturing facility contains 24,000 square feet of space. Which of the following is the most appropriate allocation base assuming management is trying to determine the cost of the products made in January? a. The number of months. b. The amount of square footage. c. The number of units. d. None of the choices are more appropriate than the others.

c. the number of units. Explanation: The cost objective is to determine the cost of the products made in January and February. The cost to be allocated is the insurance cost. Unfortunately, there is no identifiable cause and effect relationship between the cost to be allocated and the cost objects. In other words, the total insurance cost does not change when more or less units of product are made and sold. Under these circumstances accountants frequently choose to allocate an equal amount of cost to each product made and sold. Using the number of units as the allocation base would result in an allocation that applies an equal amount of cost to each unit of product. Since the number of units made and sold differs from month to month, using number of units as the allocation base would assign more of the total insurance costs to the months where more units are produced. As proof:Cost to be allocated ÷ Allocation base = Allocation RateAllocation rate = $54,000 ÷ 18,000 screens = $3 per screenJanuary allocation = 1,700 screens × 3 = $5,100February allocation = 1,100 screens × 3 =$3,300

Saylind Molding paid $280,000 in rent for the year. The company's three departments are Headrests, Armrests, and Floor Mats. The number of employees working in each department includes 60 in the Headrest Department, 30 in the Armrest Department and 110 in Floor Mats Department. The Headrest Department occupies 5,000 square feet of space; the Armrest Department occupies 6,300 square feet and the Floor Mats Department occupies 2,700 square feet. What is the most appropriate cost driver (allocation base) for allocating the $280,000 rental cost to each of the departments. a. the number of employees b. the cost of the rental agreement c. the square footage of space d. the number of months

c. the square footage of space Explanation: The number of square feet appears to have the strongest cause and effect relationship with the rental cost. Normally properties rent on the basis of square footage. All other things being equal, larger properties demand higher rent. Also, the amount of square footage is information that is available. Finally, managers may be able to control the size of their operation by transferring space to other departments or in some cases renegotiating rental agreements. Accordingly number of square footage seems to be as the most appropriate cost driver.

To identify the best cost driver for a particular allocation consideration should be given to a. the strength of a cause and effect relationship. b. the availability of information. c. the capacity to control the allocation base. d. All of the choices identify factor that affect the selection of the allocation base.

d. 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? a. political influence b. human emotion c. differences of opinion d. All of the choices represent issues that are commonly found in allocation decision.

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

Of the following statements, which is NOT true concerning indirect costs? a. indirect costs may also be called overhead costs b. an indirect cost is a cost that cannot easily be traced to a cost object c. A cost that could be directly traced may still be treated as an indirect cost. d. An indirect cost may be fixed but cannot be variable.

d. An indirect cost may be fixed but cannot be variable.