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Cost Accounting A Managerial Emphasis

Charles T. Horngren, Srikant M. Datar, Madhav V. Rajan

Chapter 15

Allocation of Support-Department Costs, Common Costs, and Revenues - all with Video Answers

Educators

Chapter Questions

03:15

Problem 1

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

Ameer Said
Ameer Said
Numerade Educator
02:27

Problem 2

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

Ameer Said
Ameer Said
Numerade Educator
02:04

Problem 3

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

Ameer Said
Ameer Said
Numerade Educator
01:17

Problem 4

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

Ameer Said
Ameer Said
Numerade Educator
02:04

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?

Ameer Said
Ameer Said
Numerade Educator
02:35

Problem 6

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

Ameer Said
Ameer Said
Numerade Educator
05:36

Problem 7

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

Ameer Said
Ameer Said
Numerade Educator
00:51

Problem 8

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

Ameer Said
Ameer Said
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02:08

Problem 9

Distinguish between two methods of allocating common costs.

Ameer Said
Ameer Said
Numerade Educator
01:22

Problem 10

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

Ameer Said
Ameer Said
Numerade Educator
01:34

Problem 11

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

Ameer Said
Ameer Said
Numerade Educator
01:01

Problem 12

Describe how companies are increasingly facing revenue-allocation decisions.

EA
Erwin Antoni
Numerade Educator
01:26

Problem 13

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

Ameer Said
Ameer Said
Numerade Educator
04:28

Problem 14

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

Anas Venkitta
Anas Venkitta
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02:16

Problem 15

How might a dispute over the allocation of revenues of a bundled product be resolved?

Lottie Adams
Lottie Adams
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06:52

Problem 16

The Chicago power plant that services all manufacturing departments of MidWest 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 $\$ 15,000: \$ 6,000$ variable and $\$ 9,000$ 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?

Sheh Lit Chang
Sheh Lit Chang
University of Washington
08:27

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 2012 , 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.

Jacquelyn Trost
Jacquelyn Trost
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01:24

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 2012 , the budgeted costs were as follows:
The actual results for the 45 round-trips made in 2012 were as follows:
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 methods?

Breanna Ollech
Breanna Ollech
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00:01

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 2012 , 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?

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
02:53

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?

James Kiss
James Kiss
Numerade Educator
00:01

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 2012 :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?

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
00:18

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.
3. In the case presented in this exercise, which method (direct, step-down, or reciprocal) would you recommend? Why?

Coach Rye
Coach Rye
Numerade Educator
02:07

Problem 23

Ben and Gary are students at Berkeley College. They share an apartment that is owned by Gary. Gary is considering subscribing to an Internet provider that has the following packages available:
Ben spends most of his time on the Internet ("everything can be found online now"). Gary 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 $\$ 65$ total package is a "win-win" situation.
1. Allocate the $\$ 65$ between Ben and Gary 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?

Breanna Ollech
Breanna Ollech
Numerade Educator
00:01

Problem 24

Sunny Gunn, a self-employed consultant near Sacramento, received an invitation to visit a prospective client in Baltimore. A few days later, she received an invitation to make a presentation to a prospective client in Chicago. She decided to combine her visits, traveling from Sacramento to Baltimore, Baltimore to Chicago, and Chicago to Sacramento.
Gunn received offers for her consulting services from both companies. Upon her return, she decided to accept the engagement in Chicago. She is puzzled over how to allocate her travel costs between the two clients. She has collected the following data for regular round-trip fares with no stopovers:
Gunn paid $\$ 1,600$ for her three-leg flight (Sacramento-Baltimore, Baltimore-Chicago, Chicago-Sacramento). In addition, she paid $\$ 40$ each way for limousines from her home to Sacramento Airport and back when she returned.
1. How should Gunn allocate the $\$ 1,600$ airfare between the clients in Baltimore and Chicago 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 Gunn use and why?
3. How should Gunn allocate the $\$ 80$ limousine charges between the clients in Baltimore and Chicago?

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
01:23

Problem 25

Yves Parfum Company blends and sells designer fragrances. It has a Men's Fragrances Division and a Women's Fragrances Division, each with different sales strategies, distribution channels, and product offerings. Yves is now considering the sale of a bundled product consisting of a men's cologne and a women's perfume. For the most recent year, Yves reported the following:
1. Allocate revenue from the sale of each unit of L'Amour to Monaco and Innocence using the following:
a. The stand-alone revenue-allocation method based on selling price of each product
b. The incremental revenue-allocation method, with Monaco ranked as the primary product
c. The incremental revenue-allocation method, with Innocence ranked as the primary product
d. The Shapley value method, assuming equal unit sales of Monaco and Innocence
2. Of the four methods in requirement 1, which one would you recommend for allocating L'Amour's revenues to Monaco and Innocence? Explain.

Carson Merrill
Carson Merrill
Numerade Educator
02:18

Problem 26

Jim Dandy Auto Sales uses all types of media to advertise its products (television, radio, newspaper, etc.). At the end of 2011 , the company president, Jim Dandridge, decided that all advertising costs would be incurred by corporate headquarters and allocated to each of the company's three 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. Dandridge budgeted total advertising cost for 2012 to be $\$ 1.8$ million. He introduced the new plan to his sales managers just before the New Year.
The manager of the east sales location, Tony Snider, was not happy. He complained that the new allocation method was unfair and would increase his advertising costs significantly over the prior year. The east location sold high volumes of low-priced used cars and most of the corporate advertising budget was related to new car sales.
Following Tony's complaint, Jim decided to take another hard look at what each of the divisions were paying for advertising before the new allocation plan. The results were as follows:
1. Using 2011 data as the cost bases, show the amount of the 2012 advertising cost $(\$ 1,800,000)$ that would be allocated to each of the divisions under the following criteria:
a. Dandridge's allocation method based on number of cars sold
b. The stand-alone method
c. The incremental-allocation method, with divisions ranked on the basis of dollars spent on advertising in 2011
2. Which method do you think is most equitable to the divisional sales managers? What other options might President Jim Dandridge have for allocating the advertising costs?

Manasvee Singh
Manasvee Singh
Numerade Educator
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Problem 27

Perfection Department Store has a new promotional program that offers a free gift-wrapping service for its customers. Perfection's customerservice department has practical capacity to wrap 7,000 gifts at a budgeted fixed cost of $\$ 6,650$ each month. The budgeted variable cost to gift wrap an item is $\$ 0.40$. 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 fixed-cost rate is calculated using budgeted costs and the practical gift-wrapping capacity, (b) fixed costs are allocated based on 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.

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
01:27

Problem 28

Lee Shu-yu 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 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 the selling prices, allocate revenues from the BegM $+$ RCC package to each DVD in that package using (a) the stand-alone method; (b) the incremental method, in either order; and (c) the Shapley value method.
2. Using the selling prices, allocate revenues from the ConM $+$ RCC package to each DVD in that package using (a) the stand-alone method; (b) the incremental method, in either order; and (c) the Shapley value method.
3. Which method is most appropriate for allocating revenues among the DVDs? Why?

Jennifer Stoner
Jennifer Stoner
Numerade Educator
00:01

Problem 29

State University completed construction of its newest administrative building at the end of 2011 . The University's first employees moved into the building on January 1,2012 . 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 2012 building space of 125,000 square feet was utilized as follows:
The new building cost the university $\$ 30$ million and was depreciated using the straight-line method over 20 years. At the end of 2012 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 building cost will be allocated in 2012 to each of the departments, if allocated on the basis of the following?
a. Actual usage
b. Planned usage
c. Practical capacity
2. Assume that State University allocates the total annual building cost 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.
c. All common costs are allocated on the basis of a department's practical capacity. Calculate the cost allocated to each department in 2012 under this plan. Do you think the allocation method used here is appropriate? Explain.

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
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Problem 30

The Central Valley 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.

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
00:01

Problem 31

The Manes 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 Manes 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 $\$ 1,500,000$ for department $X$ and $\$ 800,000$ 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 wellmaintained, 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 Manes Company and to provide all the services of the present power department. The cost of this service will be $\$ 40$ per kilowatt-hour of power. Should Manes accept? Explain.

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
02:34

Problem 32

Wright Inc. and Brown Inc. are two small clothing companies that are considering leasing a dyeing machine together. The companies estimated that in order to meet production, Wright needs the machine for 800 hours and Brown needs it for 200 hours. If each company rents the machine on its own, the fee will be $\$ 50$ per hour of usage. If they rent the machine together, the fee will decrease to $\$ 42$ per hour of usage.
1. Calculate Wright's and Brown's respective share of fees under the stand-alone cost-allocation method.
2. Calculate Wright's and Brown's respective share of fees using the incremental cost-allocation method. Assume Wright to be the primary party.
3. Calculate Wright's and Brown's respective share of fees using the Shapley value method.
4. Which method would you recommend Wright and Brown use to share the fees?

Prashant Bana
Prashant Bana
Numerade Educator
04:19

Problem 33

MaxSystems, Inc., sells computer hardware to end consumers. Its most popular model, the $\mathrm{CX} 30$ is sold as a "bundle," which includes three hardware products: a personal computer (PC) tower, a 23-inch monitor, and a color laser printer. Each of these products is made in a separate manufacturing division of MaxSystems and can be purchased individually, as well as in a bundle. 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 standalone 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.

Vishal Parmar
Vishal Parmar
Numerade Educator
00:01

Problem 34

Spirit Training, 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 total costs 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 Spirit Training no longer operated its own IT department, $30 \%$ of the fixed costs of the IT department could be eliminated. Should Spirit outsource its IT services?

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
09:18

Problem 35

Exclusive Resorts (ER) operates a five-star hotel with a championship golf course. ER has a decentralized management structure, with three divisions:
Jenny Lee, president of the recreation division, recently asked the CEO of ER how her division would share in the $\$ 1,000$ revenue from the getaway package. The golf course was operating at $100 \%$ capacity. Currently. anyone booking the package was guaranteed access to the golf course. Lee noted that every "getaway" booking would displace $\$ 375$ of other golf bookings not related to the package. She emphasized that the high demand reflected the devotion of her team to keeping the golf course rated one of the "Best 10 Courses in the World" by Golf 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 recreation first, then lodging, and then food)
2. What are the pros and cons of the two methods in requirement $1 ?$
3. Because the recreation division is able to book the golf course 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 $\$ 900$. 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.

Jon Southam
Jon Southam
Numerade Educator