Exam 8: Measuring and Assigning Support Department Costs

A firm allocates the cost of electricity to its operating departments based upon the number of electrical outlets in each department. The actual cost for electricity is $20,000 per period plus $0.02 per kilowatt-hour (KWH). The $20,000 is related to the amount of capacity needed, and capacity is reasonably estimated by the number of outlets. The firm has a total of 1,000 outlets and typically uses 700,000 KWH per period. Department W has 25 outlets and typically uses 15,000 KWH per period. If the firm switches from a single allocation rate based upon capacity to dual rates based upon capacity and actual use, Department W's cost will:

Bronson, Inc. has two support departments, Personnel and Maintenance, whose costs are to be allocated to the operating department's overhead for budgeting and inventory costing purposes. Projected amounts for the next year follow: If the reciprocal method is used, the cost of personnel allocated to maintenance will be:

Under the step-down method of allocation:

The personnel department provides service to operating departments A and B. Personnel's budget is based on 250 employees (100 in department A and 150 in department B). The budget calls for $40,000 in fixed costs, plus $140 per employee. During a recent month the personnel department incurred $41,000 in fixed costs and $42,200 in variable costs. The two operating departments, A and B, had 120 and 140 employees, respectively. How much would be charged to department A if actual costs were allocated based on number of employees?

Under dual-rate allocation, costs are separated into support and operating pools before being allocated.

If product costs plus allocated support costs are used to set prices: I. Prices increase as the volume of production decreases II. Price increases cause further decreases in quantity demanded, causing production to decrease III. The company may eventually go out of business

When managers use dual-rate allocation, they separate which kinds of costs into different pools?

The accountants for Elliot, Inc. are preparing the operating departments overhead budgets. The Maintenance department direct costs are $12,000, and the Administration department direct costs are $54,000. The following data have been collected about use of services: Use the reciprocal method. The cost of Administration department after support cost allocations but before allocation to the operating departments is:

A problem with charging other departments for allocated support costs is: I. The charge is often perceived to be very high II. Support services are likely to be underused III. Other departments may choose to replicate or outsource internal services

Operating departments:

Quinlan, Inc. has two support departments (Maintenance and Personnel) and two operating departments (Tables and Chairs). The Maintenance department provides more services to the Personnel department than the Personnel department provides to Maintenance. Once the support department costs have been allocated to the operating departments, each operating department allocates its total costs to units produced. A Assume the direct method is used. The cost per unit in the Chair department would be:

The step-down method does not recognize services provided between support departments.

Departments are often used as cost pools when allocating support department costs because:

Bronson, Inc. has two support departments, Personnel and Maintenance, whose costs are to be allocated to the operating department's overhead for budgeting and inventory costing purposes. Projected amounts for the next year follow: If the reciprocal method is used, the total cost of maintenance will be:

PIR Corporation has 2 support departments and 2 operating departments. Number of employees is used as an allocation base for personnel support costs, and square metres are used for janitorial support costs. A breakdown of their costs, along with other operating information, is shown below for a recent accounting period: If PIR uses single-rate allocation and the direct method, the total cost (including support department costs) for Product Assembly will be: