Exam 14: Period Cost Allocation

John Peters is drafting the provisions of a cost-plus contract and is concerned with ironing out any possible misunderstandings during the life of the contract. What advice can you provide to reduce contract disputes over reimbursement amounts based on costs?

Answer the following questions using the information below: The Fancy Flier Airplane Corporation has a central materials laboratory. The laboratory has only two users, the Large Plane Department and the Small Plane Department. The following data apply to the coming budget year: Budgeted amounts are used to calculate the allocation rates. Actual usage for the year by the Large Plane Department was 6,000 technician hours and by the Small Plane Department was 6,500 technician hours. -If a dual-rate cost-allocation method is used, what amount of materials laboratory costs will be budgeted for the Large Plane Department?

If the stand-alone method were used, what amount of cost would be allocated to the start-up business?

The cost of operating the quality control department of Ames Manufacturing includes $608,000 of fixed costs and $400,000 of variable costs. The department normally budgets 21,000 inspection hours a year. Two departments receive quality control checks, fabrication and assembly. Fabrication is budgeted at 1,000 hours a month, while assembly is budgeted the remainder. Required: a. In July, fabrication used 1,000 inspection hours and assembly used 800 hours. How much did each department receive in quality control costs assuming a single rate is used based on budgeted hours? b. In August, fabrication used 1,200 inspection hours and assembly used 900 hours. How much did each department receive in quality control costs assuming a dual rate is used with budgeted usage for fixed costs and actual usage for variable costs?

The production manager for Towns Ltd., Scott Busby, has received a request for a special order from a new customer. Busby is keen to accept the order as volume has been down due to a slowdown in the economy and he is concerned about meeting performance targets for the year. Furthermore, the customer is a personal friend of the president of Towns Ltd. The customer has agreed to a price of full manufacturing cost plus 20%. Manufacturing cost includes allocation of service department costs, including maintenance and purchasing. Currently maintenance costs are allocated based on maintenance hours and purchasing costs are allocated based on the number of purchase orders. Since the price is based on cost plus, Busby is wondering if a change in the cost allocation bases for maintenance and purchasing are changed to machine hours and number of line items, if the costs of the job will increase and therefore he would be able to charge more for the job. He contacts the controller, Samantha White for advice. White indicates that yes, the changes in the allocation base would increase the job costs by approximately 18%, but is opposed to the change, arguing that the current cost allocation bases were selected based on cause and effect and appropriately reflect the costs of the job. Busby argues that any cost allocation base is arbitrary and instructs the controller to cost this job based on the alternative allocation bases. Required: Evaluate the issues raised from the perspectives of Busby, the production manager, White, the controller and from the company as a whole.

Which purpose of cost allocation is used to decide on the selling price for a customized product or service?

For the economic decision purpose of cost allocation, the costs in all six functions of the value chain should be included.

The dual cost-allocation method classifies costs into two pools, a budgeted cost pool and an actual cost pool.

Seacrest Corp. allocates support department overhead costs to operating departments X and Y by means of the reciprocal allocation method. Information for the current month is as follows: Services provided to departments: Required: Provide the linear equation to be used in the allocation of A's costs:

A matrix is any orderly array of data.

Answer the following questions using the information below: The Fancy Flier Airplane Corporation has a central materials laboratory. The laboratory has only two users, the Large Plane Department and the Small Plane Department. The following data apply to the coming budget year: Budgeted amounts are used to calculate the allocation rates. Actual usage for the year by the Large Plane Department was 6,000 technician hours and by the Small Plane Department was 6,500 technician hours. -If a dual-rate cost-allocation method is used, what amount of materials laboratory costs will be budgeted for the Small Plane Department?

The Alex Miller Corporation operates one central plant that has two divisions, the Flashlight Division and the Lamp Division. The following data apply to the coming budget year: Budgeted costs of the operating the plant for 10,000 to 20,000 hours: Budgeted long-run usage per year: Assume that practical capacity is used to calculate the allocation rates. Further assume that actual usage of the Lamp Division was 700 hours and the Flashlight Division was 400 hours for the month of June. Required: a. If a single-rate cost-allocation method is used, what amount of operating costs will be budgeted for the Lamp Division each month? For the Flashlight Division each month? b. For the month of June, if a single-rate cost-allocation method is used, what amount of cost will be allocated to the Lamp Division? To the Flashlight Division? Assume actual usage is used to allocate operating costs. c. If a dual-rate cost-allocation method is used, what amount of operating costs will be budgeted for the Lamp Division each month? For the Flashlight Division each month? d. For the month of June, if a dual-rate cost-allocation method is used, what amount of cost will be allocated to the Lamp Division? To the Flashlight Division? Assume budgeted usage is used to allocate fixed operating costs and actual usage is used to allocate variable operating costs.

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

The direct allocation method provides key information for outsourcing decisions regarding support services.

The method that allocates costs in each cost pool using the same rate per unit is known as the

Which of the following is not a common criteria used to guide decisions related to cost allocations?

To discourage unnecessary use of a support department, management might

Scarborough Sales, a real estate company specializing in apartment rentals and home sales, is having difficulty in gathering appropriate cost information for evaluating its operations. It owns several large apartment complexes and sells homes owned by builders or existing homeowners. As the company's new accountant you define cost by major activity. You use this information for allocating costs to cost objects. Also, cost pools are created for appropriate cost allocations. The owner of the company is interested in exactly what you have done, and why it appears to be working so smoothly. Required: Briefly state the four purposes for allocating costs to cost objects and give two examples of how each can be used for the real estate company.

A budgeted rate helps to motivate the manager of a support department.

Allowable cost is the cost that the parties to a contract agree to exclude from reimbursed costs.