Exam 14: Period Cost Allocation

Blaster Drive-In is a fast-food restaurant that sells burgers and hot dogs in a 1950s environment.The fixed operating costs of the company are $5,000 per month.The controlling shareholder, interested in product profitability and pricing, wants all costs allocated to the burgers and hot dogs.The following information is provided for the operations of the company: Required: a.What amount of fixed operating costs is assigned to the burgers and hot dogs when actual sales are used as the allocation base for January? For February? b.Hot dog sales for January and February remained constant.Did the amount of fixed operating costs allocated to hot dogs also remain constant for January and February? Explain why or why not.Comment on any other observations.

For each item listed, select the appropriate purpose of cost allocation from the list below.A purpose may be used more than once. A)To provide information for economic decisions B)To motivate managers and other employees C)To measure income and assets for reports to external parties D)To justify costs or compute reimbursement amounts -To decide on an appropriate selling price for a special-order product

Which of the following terms describes a cost of operating a facility, operation, activity area, or like cost object that is shared by two or more users?

Use the information below to answer the following question(s).Joe's Tire Company has two support departments, Personnel and Maintenance.The Maintenance Department costs of $80,000 are allocated on the basis of standard service hours used.The Personnel Department costs of $20,000 are allocated based on the number of employees.Costs of Departments A and B are $40,000 and $60,000, respectively.Data on standard service hours and number of employees are as follows: -What is the cost of the support departments allocated to Department A using the step-down method if the Personnel Department is allocated first?

For each item listed, select the appropriate purpose of cost allocation from the list below.A purpose may be used more than once. A)To provide information for economic decisions B)To motivate managers and other employees C)To measure income and assets for reports to external parties D)To justify costs or compute reimbursement amounts -To cost a product at a fair price for government contracts

The stand-alone method of allocating common costs emphasizes fairness and equity among users.

Full product costing requires the recovery of all costs generated by all business functions in the value chain.

For the economic decision purpose

The costs of designing and implementing sophisticated cost allocation systems are usually not very visible.

Brandy has been manager of the downtown branch of General Bank for several years.During this time she has received very good annual evaluations for her management of the branch.However, during the current year (it is now July)she has been upset with the monthly performance report generated by the budgeting department at the home office.Her branch has been making steady progress with controlled growth during the year and she knows of no reason why the report has such widely fluctuating variances.One item that she suspects is causing some of the problem is that most of the costs of the bank are fixed, with each branch getting an allocation of home office expenses each month.The bank also has some branches which are fast growing and some of which are having operating difficulties.Required:From the information presented, what do you suggest as a possible cause of the reporting problems?

Use the information below to answer the following question(s).The owner of Hi-Tech Fiberglass Fabricators Inc.is interested in using the reciprocal allocation method.The following data from operations were collected for analysis.Budgeted manufacturing overhead costs: Service furnished: By Plant Maintenance (budgeted labour hours) By Data Processing (budgeted computer time) -What is the complete reciprocated cost of the Data Processing and the Plant Maintenance, respectively?

The allocation of one particular cost must satisfy all four justifications of cost allocation.

Which of the following is TRUE concerning cost allocation in a multi-product company?

When using the causality criterion, cost drivers are selected based on a cause-and-effect relationship between the business functions.

Marvelous Motors is a small motor supply outlet that sells motors to companies that make various small motorized appliances.The fixed operating costs of the company are $300,000 per year.The controlling shareholder, interested in product profitability and pricing, wants all costs allocated to the motors and wants to review the company status on a quarterly basis.The shareholder is trying to determine whether the costs should be allocated each quarter based on the 25% of the annual fixed operating costs ($75,000)or by using an annual forecast budget to allocate the costs.The following information is provided for the operations of the company: Required: a.What amount of fixed operating costs are assigned to each motor by quarter when actual sales are used as the allocation base and $75,000 is allocated? b.How much fixed cost is recovered each quarter under requirement a.? c.What amount of fixed operating costs are assigned to each motor by quarter when forecast sales are used as the allocation base and the rate is calculated annually as part of the budgetary process? d.How much fixed cost is recovered each quarter under requirement c.? e.Which method seems more appropriate in this case? Explain.

The ability-to-bear criterion is considered superior when the purpose of cost allocation is motivation.

When budgeted cost allocation rates are used, managers of the supplier division are motivated to improve efficiency.

Answer the following questions using the information below: The Salmon Bay Corporation currently uses a manufacturing facility costing $200,000 per year; 80% of the facility's capacity is currently being used.A start-up business has proposed a plan that would utilize the other 20% of the facility and increase the overall costs of maintaining the space by 5%. -If the stand-alone method were used, what amount of cost would be allocated to the start-up business?

Gotham University offers only high-tech graduate-level programs.Gotham has two principal operating departments, Engineering and Computer Sciences, and two support departments, Facility and Technology Maintenance and Enrollment Services.The base used to allocate facility and technology maintenance is budgeted total maintenance hours.The base used to allocate enrollment services is number of credit hours for a department.The Facility and Technology Maintenance budget is $350,000, while the Enrollment Services budget is $950,000.The following chart summarizes budgeted amounts and allocation-base amounts used by each department: Required: Use the direct method to allocate support costs to each of the two principal operating departments, Engineering and Computer Sciences.Prepare a schedule showing the support costs allocated to each department.

The narrower the scope of service provided by, for example, R&D, the more important it is to allocate costs proportionately to the benefits received by the internal users.