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Practice Examination II
Part I
2. Which of the following is considered both a cost allocation objective and a criterion?
3. Homogeneity is used to
a. develop cost pools in which the costs have the same or similar cost-allocation base.
b. develop cost pools of similar amounts for allocation purposes.
c. develop cost pools based upon similarity of origination of costs to be allocated.
d. develop cost pools only for activity-based costing.
XYZ Inc. has two support departments: (1) Buildings & Grounds and (2) Computer Services
and two operating departments: (1) Signs and (2) Mailers. The support relationships between
the four departments are as follows:
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Used By
Supplied By Building & Grounds Computer Services Signs Mailers
9. Total fixed costs allocated from Buildings & Grounds to the Signs Department, using the
direct allocation method are
a. $37,500
b. $33,333
c. $30,000
d. $25,000
A
= [.60 / (.60 + .20)] * $50,000
= $37,500
10. If a cost is incurred for more than one user, that cost is considered a(n)
a. homogeneous cost
b. common cost
c. stand-alone cost
d. incremental cost
11. Which of the following is often the most basic cause of contract disputes?
a. allowable costs
b. cost-allocation issues
c. use of common costs
d. writing into the contract “rules of the game”
12. For purposes of allocating joint costs to joint products, the sales value at splitoff method
could be used in which of the following situations?
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b. Yes Yes
c. No Yes
d. No No
B
The following data apply to questions 13-14
Brant Corporation manufactures two products out of a joint process—Scout and Andro. The
joint costs incurred are $400,000 for a standard production run that generates 70,000 pounds
of Scout and 30,000 pounds of Andro. Scout sells for $9.00 per pound while Andro sells for
$7.00 per pound.
13. If there are no additional processing costs incurred after the splitoff point, the amount of
joint costs allocated to Scout on a physical-measure basis is
a. $300,000
b. $280,000
c. $120,000
d. $100,000
B
= $400,000 * [70,000 / (70,000 + 30,000)]
= $280,000
14. If there are no additional processing costs incurred after the splitoff point, the amount of
joint costs allocated to Andro on a sales value at splitoff basis is
a. $300,000
b. $225,000
c. $175,000
d. $100,000
D
Sales Value of Scout = 70,000 lbs. * $9.00 = $630,000
Sales Value of Andro = 30,000 lbs. * $7.00 = $210,000
15. Tanner Company manufactures products Katran and Klare from a joint process. Product
Katran has been allocated $7,500 of total joint costs for the 1,500 units produced. Katran
can be sold at the splitoff point for $4 per unit, or it can be processed further with additional
costs of $2,000 and sold for $7 per unit. If Katran is processed further and sold, the result
would be
a. a break-even situation
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b. an overall loss of $1,500
c. a gain of $2,500 from further processing
d. a gain of $1,000 from further processing
C
Incremental Revenue 1,500 units * ($7 - $4) $4,500
Incremental Costs (2,000)
Operating Income $2,500
Part II
A. Departments X and Y use a common facility whose fixed costs of operation are
$90,000. The service provided by the facility to X can be purchased externally
for $60,000. Similarly, Department Y can buy the facility's services externally for
$90,000. Under the Stand-Alone Cost Allocation Method, how much in common
costs would be allocated to Department X?
= $90,000 x [$60,000/($60,000+$90,000)]
= $36,000
B. A firm has two departments (X and Y) that use a central computer network. The
network is expected to incur $4,000 in fixed costs and $3 per hour in variable
costs. X and Y estimated that they would use the network for 500 and 300
hours, respectively; their actual usages were 600 and 200 hours, respectively.
The computer network actually cost $4,500 in fixed costs and $2.75 per hour in
variable costs.
= [$4,000+$3(500+300)]/800 = $8/hr
= $8/hr x 600 hrs = $4,800
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$4,300
Part III
Alphabet Inc. has a manufacturing plant with three service departments (A, B and C)
and a single operating department (D). Following are the hours of service (measured
in direct labor hours) expected to be provided by A, B and C for this year.
Department A $ 8,500
Department B $15,000
Department C $ 7,500
Department D $ 9,000
1. Under the step-down method, using the most popular sequence, which service
departments’ costs will be allocated first, second, and third?
The sequence is B, C, A
2. Carry out the step-down method of allocating the service department costs.
(Show all the steps; Round all allocations to the nearest dollar).
B C A D
Costs $15,000 $7,500 $8,500 $9,000
Allocate B
(1,200/2,000; 600/2,000; 200/2,000) (15,000) 9,000 4,500 1,500
Allocate C
(1,200/2,200; 1,000/2,200) (16,500) 9,000 7,500
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Allocate A (22,000) 22,000
Totals -0- -0- -0- 40,000
3. Write the linear equations you would need to reflect the relationships among the
various service departments using the reciprocal method of allocating service
department costs.
Part IV
Big Red produces precisely engineered components for engines. There are 2
products: Quality and Superior. The existing cost accounting system applies all costs
except direct materials to products based on direct labor hours. During 2001, you
conducted a study of operations and cost drivers that eventually led to the company’s
dividing its sole manufacturing department into 5 activities. The 2002 budgeted support
costs for these activities are as follows:
Support
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Activity Costs Cost Driver
Materials Handling $158,400 Number of parts
Machine Set-ups 120,000 Number of set-ups
Machinery Maintenance 2,460,000 Machine hours
Finishing 2,192,000 Direct labor hours
Packing and shipping 90,000 Number of orders shipped
$5,020,400
1. Calculate the activity cost driver rate for each activity using the chart below:
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Machinery $2,460,000 82,000 $30/mhr
maintenance
Finishing $2,192,000 109,600 $20/dlh
2. Calculate support costs per unit for each product using activity-based costing.
Quality Superior
Materials $.4/part * 300,000 = $120,000 $.4/part * 96,000 = $38,400
Handling
Machine $800/set-up * 100 = $80,000 $800/set-up * 50 = $40,000
Set-up
Machinery $30/mhr * 70,000 = $2,100,000 $30/mhr * 12,000 = $360,000
Maintenance
Finishing $20/dlh * 100,000 = $2,000,000 $20/dlh * 9,600 = $192,000
3. Calculate the budgeted overhead cost per unit for each product using the
existing direct labor hour-based system.
5,020,400
= $45.81/ DLH
109,600
Quality:
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$45.81 x 10 DLH = $458.10/unit
Superior:
Part V
Nedved Labs produces a drug used for the treatment of hypertension. Chemicals are
mixed and heated, creating a reaction; a unique separation process then extracts the
drug from the mixture. A batch yields a total of 25 gallons: 5 gallons of which are sold
to veterinarians and 20 gallons of which are sold for human use.
The costs of mixing, heating, and extracting the drug amount to $1,500 per batch. The
output sold for human use is pasteurized at a cost of $1,200 and is sold for $585 per
gallon. The product sold to veterinarians is irradiated at a cost of $50 and is sold for
$410 per gallon.
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In March, Nedved, which had no opening inventory, processed one batch of chemicals.
It sold 17 gallons of product for human use and 3 gallons of the veterinarian product.
Nedved uses the net realizable value method for allocating joint production costs.
Human Animal
Total Sales Values
(20G*$585; 5G*$410) $11,700 $2,050
Less separable costs (1,200) (50)
Net Realizable Value 10,500 2,000
Weights:
(10,500/12,500; 2,000/12,500) .84 .16
Joint Costs Allocated
($1,500*.84; $1,500*.16) $1,260 $240
Cost per Gallon
(1,260+1,200)/20G $123 per gallon $58 per gallon
(240+50)/5G
Human Animal
Sales ($585 * 17G) ($410 * 3G) 9,945 1,230
COGS: Joint costs 1,260 240
Separable costs 1,200 50
Less EI: ($123 * 3G; $58 * 2G) (369) (116)
Total COGS 2,091 174
Gross Margin 7,854 1,056
Gross Margin % 79% 86%
3. If Nedved were to use the constant gross margin method, what would the gross
margin percentage be for each product?
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GM % ($11,000 / $13,750 80%
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