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Exam 4: Cost Accumulation, Tracing, and Allocation

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Question 61

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Cost allocation is the process of dividing a total cost into its fixed and variable components.

A) True
B) False

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Question 62

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Select the incorrect statement from the following.

A) The difference between a direct cost and an indirect cost is that a direct cost relates to a given cost object while an indirect cost does not.
B) Actual costs are useful for evaluating managerial performance.
C) Actual costs are not relevant in many decisions because actual costs cannot be determined until after the decision has been made.
D) When accumulating the cost of a specific cost object, the indirect costs are allocated to the cost object.

E) A) and B)
F) A) and C)

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Question 63

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The amount of joint costs allocated to a product must be considered when deciding whether to sell a joint product at the split-off point or later after additional processing.

Parr Corporation makes three products, X, Y, and Z. Expected overhead costs for the coming year include: Parr uses direct labor hours as the cost driver to allocate overhead costs. Budgeted direct labor hours for each product are: Product X, 15,000 direct labor hours Product Y, 10,000 direct labor hours Product Z, 5,000 direct labor hours $\begin{array} { | l | r | } \hline \text { Depreciation on factory building } & \$ 140,000 \\\hline \text { Factory utility costs } & 160,000 \\\hline \text { Supervisory salanies } & 250,000 \\\hline \text { Factory supplies } & 50,000 \\\hline \text { Total } & \$ 600,000 \\\hline\end{array}$ Required: 1) Determine the amount of manufacturing overhead that should be allocated to each of the three products.2) Assume that each unit of Product X requires $40 in direct materials and 3 direct labor hours at a rate of $15 per hour. Calculate the budgeted or expected cost of each unit of X.

The split-off point is the point at which individual products resulting from a joint process can be identified.

State University's College of Business is divided into three departments, accounting, marketing, and management. Relevant information for each department is provided below: The Dean of the College of Business is trying to assign funds from the operating budget to the three departments. Assuming that the chair of each department is trying to attain the highest funding possible for his/her department, which of the following most accurately describes the allocation base that each chair will favor? $\begin{array} { | l | l | l | l | } \hline \text { Cost Driver } & \text { Accounting } & \text { Marketing } & \text { Management } \\\hline \text { Number of students } & 700 & 400 & 200 \\\hline \begin{array} { l } \text { Number of classes per } \\\text { semester }\end{array} & 32 & 18 & 14 \\\hline \text { Number of faculty } & 10 & 12 & 5 \\\hline\end{array}$

Overhead costs include:

Blanton Company wishes to allocate rent expense of $24,000 to its three operating departments, A, B, and C. Assuming the three departments occupy 10,000, 20,000 and 30,000 square feet respectively, the cost allocation rate for Department C is $0.80 per square foot.

Danforth Manufacturing Company uses a cost-plus pricing strategy. At the beginning of the year, Danforth estimated that total annual fixed overhead costs would amount to $60,000. Further, Danforth estimated that the annual volume of production would be 1,000 units of product. Based on these estimates, Danforth computed a predetermined overhead rate that was used to allocate overhead cost to the products made throughout the year. As predicted, the actual volume of production amounted to 1,000 units of product. However, actual fixed overhead costs amounted to $56,000. Based on this information alone:

All of the following are examples of indirect costs that can be classified as being variable costs except:

Craig Manufacturing Company operates its three production departments within a single facility. Each department produces its own products and maintains its own production equipment. Although they share a common facility, each department is overseen by a separate supervisor. Which one of the following costs is a direct cost of each department?

Assume that factory depreciation for the year is $240,000.What problem could result from dividing that amount by 12 and assigning $20,000 in depreciation to the products made each month?

A factor having a "cause and effect" relationship with a cost object is called a(n) :

The selection of the most appropriate cost driver often requires considerable judgment in the absence of a strong cause-and-effect relationship.

The direct method of allocating service department costs allocates those costs to operating departments only.

Which of the followings statements is correct regarding direct and indirect costs?

A number of costs that are commonly allocated are listed in the following table followed by two alternative cost allocation bases. $\begin{array} { | l | l | l | } \hline \text { Cost Description } & { \text { Allocation Base Altematives } } \\\hline \text { Cafetena costs } & \text { Direct labor costs } & \text { Number of employees } \\\hline \text { Computer system costs } & \text { Number of departments } & \text { Amount of computer time used } \\\hline \text { Indirect labor costs } & \text { Direct labor hours } & \text { Number of supervisors } \\\hline \text { Indirect materials } & \text { Direct labor hours } & \text { Drrect material dollars } \\\hline \text { Factory rent } & \text { Number of departments } & \text { Square footage } \\\hline \text { Fringe benefits costs } & \text { Number of departments } & \text { Number of employees } \\\hline \text { Housekeeping costs } & \text { Square footage } & \text { Number of employees } \\\hline \text { Joint costs } & \text { Number of joint products } & \text { Sales value at split-off } \\\hline \text { Maintenance costs } & \text { Machine hours } & \text { Number of employees } \\\hline \text { Personnel department costs } & \text { Number of employees } & \text { Number of departments } \\\hline\end{array}$ Required: For each cost listed, circle the cost allocation base that you believe would be more appropriate for allocating the cost.

Alleghany Community College operates four departments. The square footage used by each department is shown below.Alleghany's annual building rental cost is $320,000.What amount of rent expense that should be allocated to the Technology Department? $\begin{array} { | l | r | } \hline { \text { De partment } } & \text { Square Footage } \\\hline \text { Accounting } & 3,000 \\\hline \text { Marketing } & 4,000 \\\hline \text { Technology } & 6,000 \\\hline \text { Sciences } & 3,000 \\\hline \text { Total } & \mathbf { 1 6 , 0 0 0 } \\\hline\end{array}$

Sturbridge Company manufactures fine furniture and grandfather clocks. Sturbridge has an excellent reputation, and each grandfather clock sells for several thousand dollars. Which of the following should not be treated as direct costs, assuming the cost object is individual clocks?

The College of Business Administration needs to distribute $12,000 received from an anonymous donor and earmarked for three business student organizations, Beta Alpha Psi (BAP), Delta Sigma Pi (DSP), and Beta Gamma Sigma (BGS). Relevant information is provided below: $\begin{array} { | l | r | r | r | } \hline \text { Possible Cost Driver } & \text { BAP } & \text { DSP } & { \text { BGS } } \\\hline \text { Number of students } & 30 & 40 & 100 \\\hline \text { Budgeted expenses } & \$ 5,500 & \$ 4,000 & \$ 500 \\\hline \begin{array} { l } \text { Number of } \\\text { organizations }\end{array} & 1 & 1 & 1 \\\hline\end{array}$ Assume that each organization wishes to obtain the highest funding possible.Required: 1) Which cost driver will each organization recommend be used to distribute the funds? 2) Which cost driver would you recommend and why?