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Part I. Allocation of Support or Service Department Costs (Chapter 15)
Part I. Multiple Choice – select the best answer for each question
There are two methods for allocation of service department cost to cost objects – single-rate cost method and dual-rate cost-allocation method. Which of the following is an advantage of the single-rate method?
A) It is less costly to implement.
B) It classifies costs as fixed and variable costs.
C) It gives signals regarding how variable and fixed costs behave differently.
D) It helps the managers on short-run and long-run planning due to fixed cost allocation as per budgeted usage.
2) 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
3) When using the dual-rate method, the fixed cost allocation is based on ________.
A) indirect usage
B) budgeted usage
C) incremental cost allocation
D) prime cost allocation
4) The biggest advantage of using budgeted capacity to allocate costs is that it ________.
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
5) 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
6) The direct allocation method ________.
A) allocates support-department costs to operating departments by fully recognizing the mutual services provided among all support departments
B) 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) allocates each support-department’s costs to operating departments only
D) requires managers to rank the support departments in the order that the step-down allocation is to proceed
7) The method that allocates costs by explicitly including all the services rendered among all support departments is the
A) direct method
B) step-down method
C) reciprocal method
D) sequential method
8) The step-down method ________.
A) partially recognizes the services provided among support departments
B) does not recognize the total services that support departments provide to each other
C) is conceptually the most precise method
D) results in allocating only the support costs used by operating departments
9) The direct allocation method does not allocate support department costs to other support departments.
A) True B) False
10) Under the step-down method, once a support department’s costs have been allocated, all subsequent support-department costs are allocated back to it.
A) True B) False
Part Two: Problems
P1. Goldfarb’s Book and Music Store has two service departments, Warehouse and Data Center. Warehouse Department costs of $350,000 are allocated on the basis of budgeted warehouse-hours. Data Center Department costs of $150,000 are allocated based on the number of computer log-on hours. The costs of operating departments Music and Books are $250,000 and $300,000, respectively. Data on budgeted warehouse-hours and number of computer log-on hours are as follows:
| Support Dept. | Production Dept. | |||
| Warehouse | Data Center | Music | Books | |
| Budgeted costs | 350000 | 150000 | 125000 | 150000 |
| Budgeted warehouse | NA | 500 | 1,000 | 1,500 |
| Computer hours | 200 | NA | 800 | 1,000 |
a. Allocate service department costs to operating departments using the direct method.
b. Allocate service department costs to operating departments using the step-down method (the warehouse department is allocated first).
c. Allocate service department costs to operating departments using the reciprocal method.
P2. Konosh Medical Clinic has two service departments, Building Services and Energy, and three operating departments, Pediatrics, Geriatrics, and Surgery. Konosh allocates the cost of Building Services on square footage and Energy on patient days. No distinction is made between variable and fixed costs. Budgeted operating data for last year follow:
| Service Dept | Operating Dept. | ||||
| Building Services | Ene | Pedi | Geria | Sur | |
| Budgeted costs before allocation | 18000 | 8000 | 80000 | 50000 | 90000 |
| Square footage | 1,000 | 4,000 | 6,000 | 18,000 | 12,000 |
| Patient days | — | — | 5,500 | 7,700 | 8,800 |
a. Allocate service department costs to operating departments using the direct method.
b. Allocate service department costs to operating departments using the step-down method (the building service department is allocated first).
c. Allocate service department costs to operating departments using the reciprocal method.
P3. 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 2013, Phoenix’s cost records indicate the following:
a. Allocate service department costs to operating departments using the direct method.
b. Allocate service department costs to operating departments using the step-down method (allocated AS first).
c. Allocate service department costs to operating departments using the step-down method (allocated IS first).
d. Allocate service department costs to operating departments using the reciprocal method.
P4. The operating cost of the maintenance facility of General Hospital for year was $5,796,000 – fixed costs $4,500,000 and variable costs $1,296,000. Budgeted (initial request/plan) and actual hours of operations per user/units for the year were as follows:
| Budgeted Hours | Actual Hours | |
| Building and grounds | 10,000 | 12,000 |
| Operating and emergency | 8,000 | 8,000 |
| Patient care | 21,000 | 22,000 |
| Administration | 1,000 | 1,200 |
| Total | 40,000 | 43,200 |
Required:
a. Assume a single-rate cost-allocation method is used based on actual hours. Compute the amount of operating maintenance cost allocated to each units of the hospital.
b. Assume a single-rate cost-allocation method is used based on budgeted hours. Compute the amount of operating maintenance cost allocated to each units of the hospital.
c. Assume a dual-rate cost-allocation method is used. Compute the amount of operating maintenance cost allocated to each units of the hospital.
Part II: Allocation of Joint Costs (Chapter 16)
Part One: Multiple Choice
1) What type of cost is the result of an event that results in more than one product or service simultaneously?
A) byproduct cost B) joint cost C) main cost D) separable cost
2) Which of the following statements best define splitoff point in joint costing?
A) It is the point at which managers decide to discontinue one or more of the products.
B) It is the point at which the managers decide to outsource some of its production processes.
C) It is the juncture in a joint production process when two or more products become separately identifiable.
D) It is the juncture at which decisions determining joint costs of various products to be produced are taken.
3) Which of the following statements is true of joint production process and its components?
A) Distribution costs incurred beyond the splitoff point assignable to each of the specific products identified at the splitoff point are considered as joint costs.
B) Decisions relating to the sale or further processing of each identifiable product can be made independently of decisions about the other products beyond the splitoff point.
C) When a joint production process yields two or more products with low total sales values relative to the total sales values of other products, those products are called joint products.
D) The primary purpose of joint costing is to allocate the separable costs to the individual products that are eventually sold.
4) The focus of joint costing is on allocating costs to individual products ________.
A) before the splitoff point B) after the splitoff point
C) at the splitoff point D) at the end of production
5) Which of the following statements is true of joint costing?
A) The costs of a production process that yields multiple products simultaneously are called joint costs.
B) Distribution costs incurred beyond the splitoff point that are assignable to each of the specific products identified at the splitoff point are considered as joint costs.
C) The primary purpose of joint costing is to allocate the separable costs to the individual products that are eventually sold.
D) Joint costing is less useful for companies which manufacture multiple products simultaneously from the same production process.
6) When a single manufacturing process yields two products, one of which has a relatively high sales value compared to the other, the two products are respectively known as ________.
A) joint products and byproducts
B) joint products and scrap
C) main products and byproducts
D) main products and joint products
7) Which of the following statements best define joint products?
A) When one product has a high total sales value compared with the total sales value of other products of the process, that product is called a joint product.
B) Product of a joint production process that have the same sales value compared with the total sales value of the by- products is called a joint product.
C) When one product has a low total sales value compared with the total sales value of other products of the process, that product is called a joint product.
D) When a joint production process yields two or more products with high total sales values relative to the total sales values of other products, those products are called joint products.
8) The products of a joint production process that have low total sales values compared with the total sales value of the main product are called ________.
A) primary products B) joint products
C) byproducts D) waste products
9) ________ is the differentiating factor while classifying a product as a main product or byproduct.
A) Number of units per processing period
B) Weight or volume of outputs per period
C) Percentage of total sales value
D) Joint costs incurred up to the splitoff point
10) In joint costing, which of the following changes may lead to a change in product classification?
A) main product sales price increases due to a new application
B) byproduct sales price decreases due to a new government regulation
C) main product becomes technologically obsolete
D) byproduct loses its market due to a new invention
11) Products with a relatively low sales value are known as ________.
A) primary products B) main products
C) joint products D) byproducts
12) Which of the following statements is true of main products and byproducts?
A) A byproduct will never become a main product.
B) A main product will never become a byproduct.
C) Product classifications may change over time.
D) Product classifications remains constant over time.
13) Outputs with a negative sales value are ________.
A) added to cost of goods sold
B) added to joint production costs and allocated to joint or main products
C) added to joint production costs and allocated to byproducts and scrap
D) subtracted from product revenue
14) Which of the following is a possible reason to allocate joint costs to individual products?
A) rate regulation requirements
B) to prepare financial statements
C) for product design decisions
D) to determine tax rates
15) A business which enters into a contract to purchase a product which compensates the manufacturer under a cost reimbursement agreement should take an active part in the determination of how joint costs are allocated because ________.
A) the manufacturer may allocate a large portion of its other costs to these products
B) the business need those information for its tax reporting purposes
C) the FASB requires the business to participate in the cost allocation process
D) it is an opportunity for the business to enhance its market knowledge
16) Which of the following statements is true of the methods for allocating joint costs?
A) Constant gross-margin percentage method results in same joint production cost per unit for all products.
B) Estimated net realizable value method results in same gross margin percentage for all products.
C) Present value allocation method is the least preferred method due to its complex calculations.
D) Sales value at splitoff method uses the sales value of the entire production of the accounting period to allocate costs.
17) An example of allocating joint costs using physical measures is allocating joint costs based on ________.
A) sales value at splitoff point
B) volume of the products
C) constant gross-margin percentage
D) net realizable value
18) In joint costing, which of the following is a market-based approach to allocating costs?
A) sales units
B) units of production
C) physical measures
D) net realizable value
19) The sales value at splitoff method ________.
A) allocates joint costs to joint products on the basis of the relative total sales value at the split-off point
B) allocates joint costs to joint products on the basis of a comparable physical measure at the split-off point
C) allocates joint costs to joint products on the basis of relative NRV
D) allocates joint costs to joint products in a way that each product has an identical gross-margin percentage
20) A reason why a physical-measure to allocate joint costs is less preferred than the sales value at splitoff is because ________.
A) a physical measure such as volume is difficult to estimate than sales value
B) physical volume usually has little relationship to the revenue producing power of products
C) a physical measure usually results in less costs being allocated to the product that weighs the most
D) customers will easily understand that the products are overpriced
Part Two: Short Essay
1. What is a Joint Cost and Separable Cost?
2. What is the difference between a Joint Product and Byproduct?
3. When does it come necessary to allocate Joint Cost?
4. Provide examples of joint products from different general industries?
5. After reading the chapter, for each of the following methods of allocating joint costs, give a positive and a negative aspect of selecting each one to allocate joint costs.
a. sales value at split-off method
b. estimated net realizable value method (NRV method)
c. the constant gross margin method
d. a physical measure such as volume
Part Three: Problems
P1. Zenon Chemical, Inc., processes pine rosin into three products: turpentine, paint thinner, and spot remover. During May, the joint costs of processing were $240,000. Production and sales value information for the month were as follows:
| Units | Sales Value at | Additional | |||
| Produced | Split-off Point | Processing Costs | Units Sold | Final Price | |
| Product | |||||
| Turpen | 6,000 | $10 | $4 | 5400 | 18 |
| Paint thinner | 6,000 | $8 | $5 | 5000 | 12 |
| Spot remover | 3,000 | $6 | $3 | 2600 | 15 |
Required:
a. Determine the amount of joint cost allocated to each product, unit cost, cost of goods inventory, and cost of ending inventory if the physical-measure method is used.
b. Assume there is no market for products at the split-off point. Determine the amount of joint cost allocated to each product, unit cost, cost of goods inventory, and cost of ending inventory if the estimated Net Realizable Value (estimated sales value at split-off) method is used.
P2. Quality Chicken grows and processes chickens. Each chicken is disassembled into five main parts. Information pertaining to production in July 2017 is as follows:
| Wholesale Selling Price per Pound | ||
| Parts | Pounds of Product | When Product ids Complete |
| Breasts | 100 | $0.55 |
| Wings | 20 | $0.20 |
| Thighs | 40 | $0.35 |
| Bones | 80 | $0.10 |
| Feathers | 10 | $0.05 |
Joint cost of production in July 2017 was $50.
A special shipment of 40 pounds of breasts and 15 pounds of wings has been destroyed in a fire. Quality Chicken’s insurance policy provides reimbursement for the cost of the items destroyed. The insurance company permits Quality Chicken to use a joint-cost-allocation method. The split-off point is assumed to be at the end of the production process.
Required:
1. Compute the cost of the special shipment destroyed using the following:
a. Sales value at split-off method
b. Physical-measure method (pounds of finished product)
2. What joint-cost-allocation method would you recommend Quality Chicken use? Explain.
P3. The Wood Spirits Company produces two products—turpentine and methanol (wood alcohol)—by a joint process. Joint costs amount to $120,000 per batch of output. Each batch totals 10,000 gallons: 25% methanol and 75% turpentine. Both products are processed further without gain or loss in volume. Separable processing costs are methanol, $3 per gallon, and turpentine, $2 per gallon. Methanol sells for $21 per gallon. Turpentine sells for $14 per gallon.
Required:
1. How much of the joint costs per batch will be allocated to turpentine and to methanol, assuming that joint costs are allocated based on the number of gallons at splitoff point?
2. If joint costs are allocated on an NRV basis, how much of the joint costs will be allocated to turpentine and to methanol?
3. Prepare product-line income statements per batch for requirements 1 and 2. Assume no beginning or ending inventories.
4. The company has discovered an additional process by which the methanol (wood alcohol) can be made into a pleasant-tasting alcoholic beverage. The selling price of this beverage would be $60 a gallon. Additional processing would increase separable costs $9 per gallon (in addition to the $3 per gallon separable cost required to yield methanol). The company would have to pay excise taxes of 20% on the selling price of the beverage. Assuming no other changes in cost, what is the joint cost applicable to the wood alcohol (using the NRV method)? Should the company produce the alcoholic beverage? Show your computations.