Which of the following describes how support department costs are related to production

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Problem 1

Distinguish between the single-rate and the dual-rate methods.

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Numerade Educator

Problem 2

Describe how the dual-rate method is useful to division managers in decision making.

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Numerade Educator

Problem 3

How do budgeted cost rates motivate the support-department manager to improve efficiency?

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Numerade Educator

Problem 4

Give examples of allocation bases used to allocate support-department cost pools to operating departments.

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Numerade Educator

Problem 5

Why might a manager prefer that budgeted rather than actual cost-allocation rates be used for costs being allocated to his or her department from another department?

Problem 6

"To ensure unbiased cost allocations, fixed costs should be allocated on the basis of estimated long-run use by user-department managers." Do you agree? Why?

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Numerade Educator

Problem 7

Distinguish among the three methods of allocating the costs of support departments to operating departments.

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Numerade Educator

Problem 8

What is conceptually the most defensible method for allocating support-department costs? Why?

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Numerade Educator

Problem 9

Distinguish between two methods of allocating common costs.

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Numerade Educator

Problem 10

What are the challenges of using the incremental cost allocation method when allocating common costs and how might they be overcome?

Problem 11

What role does the cost Accounting Standards Board play when companies contract with the U.S. government?

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Numerade Educator

Problem 12

What is one key way to reduce cost-allocation disputes that arise with government contracts?

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Numerade Educator

Problem 13

Describe how companies are increasingly facing revenue-allocation decisions.

Problem 14

Distinguish between the stand-alone and the incremental revenue-allocation methods.

Ameer Said

Numerade Educator

Problem 15

Identify and discuss arguments that individual product managers may put forward to support their preferred revenue-allocation method.

Problem 16

The Cincinnati power plant that services all manufacturing departments of Eastern Mountain Engineering has a budget for the coming year. This budget has been expressed in the following monthly terms:
The expected monthly costs for operating the power plant during the budget year are $\$ 20,000: \$ 8,000$ variable and $\$ 12,000$ fixed.
1. Assume that a single cost pool is used for the power plant costs. What budgeted amounts will be allocated to each manufacturing department if (a) the rate is calculated based on practical capacity and costs are allocated based on practical capacity and (b) the rate is calculated based on expected monthly usage and costs are allocated based on expected monthly usage?
2. Assume the dual-rate method is used with separate cost pools for the variable and fixed costs. Variable costs are allocated on the basis of expected monthly usage. Fixed costs are allocated on the basis of practical capacity. What budgeted amounts will be allocated to each manufacturing department? Why might you prefer the dual-rate method?

Problem 17

Chocolat Inc. is a producer of premium chocolate based in Palo Alto. The company has a separate division for each of its two products:
dark chocolate and milk chocolate. Chocolat purchases ingredients from Wisconsin for its dark chocolate division and from Louisiana for its milk chocolate division. Both locations are the same distance from Chocolat's Palo Alto plant.
Chocolat Inc. operates a fleet of trucks as a cost center that charges the divisions for variable costs (drivers and fuel and fixed costs (vehicle depreciation, insurance, and registration fees) of operating the fleet. Each division is evaluated on the basis of its operating income. For 2017 , the trucking fleet had a practical capacity of 50 round-trips between the Palo Alto plant and the two suppliers. It recorded the following information:
1. Using the single-rate method, allocate costs to the dark chocolate division and the milk chocolate division in these three ways.
a. Calculate the budgeted rate per round-trip and allocate costs based on round-trips budgeted for each division.
b. Calculate the budgeted rate per round-trip and allocate costs based on actual round-trips used by each division.
c. Calculate the actual rate per round-trip and allocate costs based on actual round-trips used by each division.
2. Describe the advantages and disadvantages of using each of the three methods in requirement 1. Would you encourage Chocolat Inc. to use one of these methods? Explain and indicate any assumptions you made.

Problem 18

Chocolat Inc. decides to examine the effect of using the dual-rate method for allocating truck costs to each roundtrip. At the start of $2017,$ the budgeted costs were:
The actual results for the 45 round-trips made in 2017 were:
Assume all other information to be the same as in Exercise $15-17$
1. Using the dual-rate method, what are the costs allocated to the dark chocolate division and the milk chocolate division when (a) variable costs are allocated using the budgeted rate per round-trip and actual round-trips used by each division and when (b) fixed costs are allocated based on the budgeted rate per round-trip and round-trips budgeted for each division?
2. From the viewpoint of the dark chocolate division, what are the effects of using the dual-rate method rather than the single-rate method?

Problem 19

Phoenix Partners provides management consulting services to government and corporate clients. Phoenix has two support departments-administrative services (AS) and information systems (IS)-and two operating departments- government consulting (GOVT) and corporate consulting (CORP). For the first quarter of $2017,$ Phoenix's cost records indicate the following:
1. Allocate the two support departments' costs to the two operating departments using the following methods:
a. Direct method
b. Step-down method (allocate AS first)
c. Step-down method (allocate IS first)
2. Compare and explain differences in the support-department costs allocated to each operating department
3. What approaches might be used to decide the sequence in which to allocate support departments when using the step-down method?

Problem 20

Refer to the data given in Exercise $15-19$
1. Allocate the two support departments' costs to the two operating departments using the reciprocal method. Use (a) linear equations and (b) repeated iterations.
2. Compare and explain differences in requirement 1 with those in requirement 1 of Exercise 15-19. Which method do you prefer? Why?

Problem 21

E-books, an online book retailer, has two operating departments corporate sales and consumer sales-and two support departments - human resources and information systems. Each sales department conducts merchandising and marketing operations independently. E-books uses number of employees to allocate human resources costs and processing time to allocate information systems costs. The following data are available for September 2017 :
1. Allocate the support departments' costs to the operating departments using the direct method.
2. Rank the support departments based on the percentage of their services provided to other support departments. Use this ranking to allocate the support departments' costs to the operating departments based on the step-down method.
3. How could you have ranked the support departments differently?

Problem 22

Consider E-books again. The controller of E-books reads a widely used textbook that states that "the reciprocal method is conceptually the most defensible." He seeks your assistance.
1. Describe the key features of the reciprocal method.
2. Allocate the support departments' costs (human resources and information systems) to the two operating departments using the reciprocal method. Use (a) linear equations and (b) repeated iterations.
3. In the case presented in this exercise, which method (direct, step-down, or reciprocal) would you recommend? Why?

Problem 23

Evan and Brett are students at Berkeley College. They share an apartment that is owned by Brett. Brett is considering subscribing to an Internet provider that has the following packages available:
Evan spends most of his time on the Internet ("everything can be found online now"). Brett prefers to spend his time talking on the phone rather than using the Internet ("going online is a waste of time"). They agree that the purchase of the $\$ 90$ total package is a "win-win" situation.
1. Allocate the $\$ 90$ between Evan and Brett using (a) the stand-alone cost-allocation method, (b) the incremental cost-allocation method, and (c) the Shapley value method.
2. Which method would you recommend they use and why?

Problem 24

Gordon Grimes, a self-employed consultant near Atlanta, received an invitation to visit a prospective client in Seattle. A few days later, he received an invitation to make a presentation to a prospective client in Denver. He decided to combine his visits, traveling from Atlanta to Seattle, Seattle to Denver, and Denver to Atlanta.
Grimes received offers for his consulting services from both companies. Upon his return, he decided to accept the engagement in Denver. He is puzzled over how to allocate his travel costs between the two clients. He has collected the following data for regular round-trip fares with no stopovers:
Grimes paid $\$ 900$ for his three-leg flight (Atlanta-Seattle, Seattle-Denver, Denver-Atlanta). In addition, he paid $\$ 45$ each way $(\$ 90$ total ) for limousines from his home to Atlanta Airport and back when he returned.
1. How should Grimes allocate the $\$ 900$ airfare between the clients in Seattle and Denver using (a) the stand-alone cost-allocation method, (b) the incremental cost-allocation method, and (c) the Shapley value method?
2. Which method would you recommend Grimes use and why?
3. How should Grimes allocate the $\$ 90$ limousine charges between the clients in Seattle and Denver?

Problem 25

Couture Corp sells Samsung 7 cases. It has a Men's Division and a Women's Division. Couture is now considering the sale of a bundled product called Dynamic Duo consisting of Smarty, a men's case, and Sublime, a women's case. For the most recent year, Couture sold equal quantities of Smarty and Sublime and reported the following:
1. Allocate revenue from the sale of each unit of Dynamic Duo to Smarty and Sublime using the following:
a. The stand-alone revenue-allocation method based on selling price of each product
b. The incremental revenue-allocation method, with Smarty ranked as the primary product
c. The incremental revenue-allocation method, with Sublime ranked as the primary product
d. The Shapley value method
2. $0 f$ the four methods in requirement 1 , which one would you recommend for allocating Couture's revenues to Smarty and Sublime? Explain.

Problem 26

Jim Dandy Auto Sales uses all types of media to advertise its products (television, radio, newspaper, Internet, and so on). At the end of 2016 , the company president, Jim McKinnley, decided that all advertising costs would be incurred by corporate headquarters and allocated to each of the company's four sales locations based on number of vehicles sold. Jim was confident that his corporate purchasing manager could negotiate better advertising contracts on a corporate-wide basis than each of the sales managers could on their own. McKinnley budgeted total advertising cost for 2017 to be $\$ 1.6$ million. He introduced the new plan to his sales managers just before the New Year. The managers had already drawn up their advertising plans for 2017 and the corporate plan would do the same advertising for them as they had planned. Total advertising costs for 2017 were $\$ 1,600,000$. If the managers had done this same advertising on their own, their advertising costs would be as follows:
The manager of the East sales location, Tom Stevens, was not happy. He complained that the new allocation method was unfair and increased his advertising costs significantly. The East location sold high volumes of low-priced used cars and most of the corporate advertising budget was related to new car sales.
1. Show the amount of the 2017 advertising cost $(\$ 1,600,000)$ that would be allocated to each of the divisions under the following criteria:
a. McKinnley's allocation method based on number of cars sold
b. The stand-alone method if divisions had done their own advertising
c. The incremental-allocation method, with divisions ranked on the basis of dollars they would have spent on advertising in 2017
2. Which method do you think is most equitable to the divisional sales managers? What other options might President Jim McKinnley have for allocating the advertising costs?

Problem 27

Preston Department Store has a new promotional program that offers a free gift-wrapping service for its customers. Preston's customer-service department has practical capacity to wrap 5,000 gifts at a budgeted fixed cost of $\$ 4,950$ each month. The budgeted variable cost to gift-wrap an item is $\$ 0.35$. During the most recent month, the department budgeted to wrap 4,500 gifts. Although the service is free to customers, a gift-wrapping service cost allocation is made to the department where the item was purchased. The customer-service department reported the following for the most recent month:
1. Using the single-rate method, allocate gift-wrapping costs to different departments in these three ways:
a. Calculate the budgeted rate based on the budgeted number of gifts to be wrapped and allocate costs based on the budgeted use (of gift-wrapping services).
b. Calculate the budgeted rate based on the budgeted number of gifts to be wrapped and allocate costs based on actual usage.
c. Calculate the budgeted rate based on the practical gift-wrapping capacity available and allocate costs based on actual usage.
2. Using the dual-rate method, compute the amount allocated to each department when (a) the fixedcost rate is calculated using budgeted fixed costs and the practical gift-wrapping capacity, (b) fixed costs are allocated based on budgeted fixed costs and budgeted usage of gift-wrapping services, and
(c) variable costs are allocated using the budgeted variable-cost rate and actual usage.
3. Comment on your results in requirements 1 and 2. Discuss the advantages of the dual-rate method.

Problem 28

Fang Inc. produces and sells DVDs to business people and students who are planning extended stays in China. It has been very successful with two DVDs: Beginning Mandarin and Conversational Mandarin. It is introducing a third DVD, Reading Chinese Characters. It has also decided to market its new DVD in two different packages grouping the Reading Chinese Characters DVD with each of the other two language DVDs. Information about the separate DVDs and the packages follow.
1. Using selling prices, allocate revenues from the BegM $+$ RCC package to each DVD in that package using (a) the stand-alone method; and (b) the incremental method, with BegM and RCC in turn as the primary product
2. Using the selling prices, allocate revenues from the ConM $+$ RCC package to each DVD in that package using (a) the stand-alone method; and (b) the incremental method, with ConM and RCC in turn as the primary product.
3. Which method is most appropriate for allocating revenues among the DVDs? Why?

Problem 29

Central University completed construction of its newest administrative building at the end of 2017 . The University's first employees moved into the building on January 1,2018 . The building consists of office space, common meeting rooms (including a conference center), a cafeteria, and even a workout room for its exercise enthusiasts. The total 2018 building space of 250,000 square feet was utilized as follows:
The new building cost the university $\$ 40$ million and was depreciated using the straight-line method over 20 years with zero residual value so $\$ 2,000,000$ per year. At the end of 2018 three departments occupied the building: executive offices of the president, accounting, and human resources. Each department's usage of its assigned space was as follows:
1. How much of the total annual building cost of $\$ 2,000,000$ will be allocated in 2018 to each of the departments, if the cost is allocated to each department on the basis of the following?
a. Actual usage of the three departments
b. Planned office space of the three departments
c. Practical capacity of the three departments
2. Assume that Central University allocates the total annual building cost of $\$ 2,000,000$ in the following manner.
a. All vacant office space is absorbed by the university and is not allocated to the departments.
b. All occupied office space costs are allocated on the basis of actual square footage used by each department.
c. All common area costs are allocated on the basis of a department's practical capacity. Calculate the cost allocated to each department in 2018 under this plan. Do you think the allocation method used here is appropriate? Explain.

Problem 30

The Eastern Summitt Company has prepared department overhead budgets for budgeted-volume levels before allocations as follows:
Management has decided that the most appropriate inventory costs are achieved by using individualdepartment overhead rates. These rates are developed after support-department costs are allocated to operating departments. Bases for allocation are to be selected from the following:
1. Using the step-down method, allocate support-department costs. Develop overhead rates per direct manufacturing labor-hour for machining and assembly. Allocate the costs of the support departments in the order given in this problem. Use the allocation base for each support department you think is most appropriate.
2. Using the direct method, rework requirement 1.
3. Based on the following information about two jobs, determine the total overhead costs for each job by using rates developed in (a) requirement 1 and (b) requirement 2.
4. The company evaluates the performance of the operating department managers on the basis of how well they managed their total costs, including allocated costs. As the manager of the Machining Department, which allocation method would you prefer from the results obtained in requirements 1 and 2? Explain.

Problem 31

The Martinez Company has two products. Product 1 is manufactured entirely in department X. Product 2 is manufactured entirely in department Y. To produce these two products, the Martinez Company has two support departments: A (a materials-handling department) and B (a power generating department). An analysis of the work done by departments $A$ and $B$ in a typical period follows:
The work done in department A is measured by the direct labor-hours of materials-handling time. The work done in department B is measured by the kilowatt-hours of power. The budgeted costs of the support departments for the coming year are as follows:
The budgeted costs of the operating departments for the coming year are $\$ 2,500,000$ for department $X$ and $\$ 1,900,000$ for department $Y$
Supervision costs are salary costs. Depreciation in department $\mathrm{B}$ is the straight-line depreciation of power-generation equipment in its 19 th year of an estimated 25 -year useful life; it is old, but well-maintained, equipment.
1. What are the allocations of costs of support departments $A$ and $B$ to operating departments $X$ and $Y$ using (a) the direct method, (b) the step-down method (allocate department A first), (c) the step-down method (allocate department B first), and (d) the reciprocal method?
2. An outside company has offered to supply all the power needed by the Martinez Company and to provide all the services of the present power department. The cost of this service will be $\$ 80$ per kilowatthour of power. Should Martinez accept? Explain.

Problem 32

Tate Inc. and Booth Inc. are two small manufacturing companies that are considering leasing a cutting machine together. If Tate rents the machine on its own, it will cost $\$ 26,000$. If Booth rents the machine alone, it will cost $\$ 14,000$. If they rent the machine together, the cost will decrease to $\$ 36,000$
1. Calculate Tate's and Booth's respective share of fees under the stand-alone cost-allocation method.
2. Calculate Tate's and Booth's respective share of fees using the incremental cost-allocation method assuming (a) Tate is the primary party and (b) Booth is the primary party.
3. Calculate Tate's and Booth's respective share of fees using the Shapley value method.
4. Which method would you recommend Tate and Booth use to share the fees?

Problem 33

Magic Systems, Inc., sells computer hardware to end consumers. The $\mathrm{CX} 30$ is sold as a "bundle," which includes three hardware products: a personal computer (PC) tower, a 26 -inch monitor, and a color laser printer. Each of these products is made in a separate manufacturing division of Magic Systems and can be purchased individually as well as in a bundle. Magic Systems sells roughly equal quantities of the three products. The individual selling prices and per unit costs are as follows:
1. Allocate the revenue from the computer bundle purchase to each of the hardware products using the stand-alone method based on the individual selling price per unit.
2. Allocate the revenue from the computer bundle purchase to each of the hardware products using the stand-alone method based on cost per unit.
3. Allocate the revenue from the computer bundle purchase to each of the hardware products using the stand-alone method based on physical units (that is, the number of individual units of product sold per bundle).
4. Which basis of allocation makes the most sense in this situation? Explain your answer.

Problem 34

Sportz, Inc., manufactures athletic shoes and athletic clothing for both amateur and professional athletes. The company has two product lines (clothing and shoes), which are produced in separate manufacturing facilities; however, both manufacturing facilities share the same support services for information technology and human resources. The following shows costs (in thousands) for each manufacturing facility and for each support department.
The total costs of the support departments (IT and HR) are allocated to the production departments (clothing and shoes) using a single rate based on the following:
Data on the bases, by department, are given as follows:
1. What are the total costs of the production departments (clothing and shoes) after the support-department costs of information technology and human resources have been allocated using (a) the direct method,
(b) the step-down method (allocate information technology first), (c) the step-down method (allocate human resources first), and (d) the reciprocal method?
2. Assume that all of the work of the IT department could be outsourced to an independent company for $\$ 97.50$ per hour. If Sportz no longer operated its own IT department, $30 \%$ of the fixed costs of the IT department could be eliminated. Should Sportz outsource its IT services?

Problem 35

Boca Resorts (BR) operates a five-star hotel with a worldclass spa. BR has a decentralized management structure, with three divisions:
Starting next month, BR will offer a two-day, two-person "getaway package" for $\$ 1,000$. This deal includes the following:
Jennifer Gibson, president of the spa division, recently asked the CE0 of BR how her division would share in the $\$ 1,000$ revenue from the getaway package. The spa was operating at $100 \%$ capacity. Currently, anyone booking the package was guaranteed access to a spa appointment. Gibson noted that every "getaway" booking would displace $\$ 300$ of other spa bookings not related to the package. She emphasized that the high demand reflected the devotion of her team to keeping the spa rated one of the "Best 10 Luxury Spas in the World" by Travel Monthly. As an aside, she also noted that the lodging and food divisions had to turn away customers during only "peak-season events such as the New Year's period."
1. Using selling prices, allocate the $\$ 1,000$ getaway-package revenue to the three divisions using:
a. The stand-alone revenue-allocation method
b. The incremental revenue-allocation method (with spa first, then lodging, and then food)
2. What are the pros and cons of the two methods in requirement $1 ?$
3. Because the spa division is able to book the spa at $100 \%$ capacity, the company CEO has decided to revise the getaway package to only include the lodging and food offerings shown previously. The new package will sell for $\$ 800$. Allocate the revenue to the lodging and food divisions using the following:
a. The Shapley value method
b. The weighted Shapley value method, assuming that lodging is three times as likely to sell as the food

Problem 36

Ballantine Corporation has two operating departments: Eastern Department and Western Department. Each of the operating departments uses the services of the company's two support departments: Engineering and Information Technology. Additionally, the Engineering and Information Technology departments use the services of each other. Data concerning the past year are as follows:
1. What are the total overhead costs of the operating departments (Eastern and Western) after the support-department costs of Engineering and Information Technology have been allocated using (a) the direct method, $(b)$ the step-down method (allocate Engineering first), (c) the step-down method (allocate Information Technology first), and (d) the reciprocal method?
2. Which method would you recommend that Ballantine Corporation use to allocate service-department costs? Why?

Which of the following are the three commonly used methods for allocating support department costs to production departments?

Which of the following explains why it is difficult to apply support department costs such as janitorial services to products quizlet?