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Exam 12: Cost Accumulation, Tracing, and Allocation

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Question 41

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Why is a company's selection of cost allocation methods important to individual managers?

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The method chosen to allocate costs can ...

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Question 42

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Sheddon Industries produces two products. The products' identified costs are as follows: $\begin{array} { | l | l | l | } \hline & \text { Product A } & \text { Product B } \\\hline \text { Direct materials } & \$ 20,000 & \$ 15,000 \\\hline \text { Direct labor } & 12,000 & 24,000 \\\hline\end{array}$ The company's overhead costs of $108,000 are allocated based on direct labor cost. Assume 4,000 units of product A and 5,000 units of Product B are produced. What is the cost per unit for product B? (Do not round your intermediate calculations.)

A) $7.80
B) $22.20
C) $16.80
D) None of these answers is correct.

E) None of the above
F) A) and C)

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Question 43

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What are cost objects? List examples of cost objects.

Wayne Company wishes to allocate overhead costs in a heavily automated production department. Direct labor hours would be a less appropriate cost driver than machine hours.

The following information was gathered for Company J, a manufacturing company with three departments, A, B, and C: Manufacturing supplies cost is expected to be $300,000. Possible cost drivers are direct labor hours, direct materials cost, and number of units completed and sold. The three departments have varying amounts for these items. $\begin{array} { | l | r | r | r | } \hline & \text { Department A } & \text { Department B } & \text { Department C } \\\hline \text { Direct labor hours } & 15,000 & 40,000 & 45,000 \\\hline \text { Direct materials cost } & \$ 500,000 & \$ 2,500,000 & \$ 2,000,000 \\\hline \text { \# of units expected to be } & & & \\\text { completed and sold } & 80,000 & 30,000 & 40,000 \\\hline\end{array}$ Based on this information, indicate whether each of the following statements is true or false. 1. If number of units completed and sold is selected as the cost driver, the allocation rate for manufacturing supplies cost would be $2 per unit. 2. If direct labor hours is selected as the cost driver, the manufacturing supplies cost allocated to Department B would be $100,000. 3. The manufacturing supplies cost allocated to Department C would be unaffected by the choice of the cost driver. 4. If the amount of bonuses to department managers is based on income after all expenses, the manager for Department A would prefer that direct materials cost be selected as the cost driver. 5. If the amount of bonuses to department managers is based on income after all expenses, the manager for Department B would prefer that direct labor hours be selected as the cost driver.

A chair manufacturer makes custom chairs using hand tools, wood, glue, and varnish. Which of the following statements is true?

Bank's Department Store has three departments: Men's, Women's and Children's. The store incurred $50,000 of store rental costs in 2013. The departments identified the following cost drivers for 2013: $\begin{array} { | l | r | r | r | } \hline & \text { Men's } & \text { Women's } & \text { Children's } \\\hline \text { Labor dollars } & \$ 530,000 & \$ 775,000 & \$ 240,000 \\\hline \text { Number of employees } & 10 & 20 & 4 \\\hline \text { Square footage } & 3,000 & 8,000 & 1,000 \\\hline \text { Number of sales transactions } & 300,000 & 900,000 & 90,000 \\\hline\end{array}$ Using the most appropriate cost driver, how much rental cost (rounded to the nearest dollar) should be allocated to the Women's Department? (Do not round your intermediate calculations.)

Custom Quilters makes decorative comforters, quilted garments, and other products in a small sewing factory. In 2014, the company expects to make 2,000 comforters. With respect to the comforters, how would the wages of sewing machine operators be classified?

Alleghany Community College operates four departments. The square footage used by each department is shown below. $\begin{array}{|l|r|}\hline{\text { De partment }} & \text { Square Footage } \\\hline \text { Accounting } & 3,000 \\\hline \text { Marketing } & 4,000 \\\hline \text { Technology } & 6,000 \\\hline \text { Sciences } & 3,000 \\\hline {\text { Total }} & \mathbf{1 6 , 0 0 0} \\\hline\end{array}$ Alleghany's annual building rental cost is $320,000. What amount of rent expense that should be allocated to the Technology Department?

The terms "cost tracing" and "cost allocation" may be used interchangeably because they mean the same thing.

Which of the following statements is true regarding the salary of the manager of a fast food hamburger restaurant?

Preston Company has three divisions. The company should consider a cost to be a direct cost of a division if:

A predetermined overhead rate is calculated using estimated or predicted cost and volume data.

Biden Department Store has four departments: men's, women's, children's, and electronics. The following information is provided: $\begin{array} { | l | l | l | l | l | } \hline & \text { Men's } & \text { Women's } & \text { Children's } & \text { Electronics } \\\hline \text { Floor space } & 10,000 \text { sq. ft. } & 20,000 \text { sq. ft. } & 8,000 \text { sq. ft. } & 2,000 \text { sq. ft. } \\\hline \text { Sales } & \$ 35,000 & \$ 75,000 & \$ 20,000 & \$ 12,000 \\\hline\end{array}$ The company's accountant needs to allocate the store's annual rent of $160,000. Required: 1) Compute the allocation rate that should be used to allocate the rent cost to the four departments. 2) Compute the amount of rent that should be allocated to each of the four departments. 3) Currently, the managers are paid a bonus based on sales. As you can see from the above table, the women's department manager will receive the largest bonus. Do you believe this bonus plan is fair to all four department managers? Why or why not?

Select the false statement from the following.

Great Outdoors Company makes two types of camping tents. Making a standard camping tent requires 4 hours of labor while making a deluxe camping tent requires 10 hours of labor. During the most recent accounting period the company made 2,000 standard camping tents and 500 deluxe camping tents. Indirect manufacturing costs amounted to $52,000 and are allocated based on labor hours. Based on this information:

Marsden Company has three departments occupying the following amount of floor space: $\begin{array} { | l | l | } \hline \text { Department 1 } & 15,000 \text { sq. ft. } \\\hline \text { Department 2 } & 10,000 \text { sq. ft. } \\\hline \text { Department } 3 & 25,000 \text { sq. ft. } \\\hline\end{array}$ How much store rent should be allocated to Department 3 if total rent is equal to $200,000? (Do not round your intermediate calculations.)

Jefferson Company expects to incur $450,000 in manufacturing overhead costs during 2014. Other budget information follows: $\begin{array} { | l | r | r | r | } \hline & \text { Department A } & \text { Department B } & \text { Department C } \\\hline \text { Direct labor hours } & 15,000 & 5,000 & 20,000 \\\hline \text { Machine hours } & 8,000 & 10,000 & 12,000 \\\hline\end{array}$ Required: 1) Use direct labor hours as the cost driver to compute the allocation rate. Determine the amount of budgeted overhead cost for each department. 2) Use machine hours as the cost driver to compute the allocation. Determine the amount of budgeted overhead cost for each department. 3) Assume that Department A manufactured a product that required 160 direct labor hours and 85 machine hours. If overhead is allocated based on direct labor hours, how much overhead would be allocated to this product? 4) Assume that Department A manufactured a product that required 160 direct labor hours and 85 machine hours. If overhead is allocated based on machine hours, how much overhead would be allocated to this product?

Vance Electronics expects to make 100,000 Bluetooth speakers during 2014. Direct materials cost per unit are estimated at $12, and direct labor cost is expected to be $4 per unit. The total manufacturing overhead for the year is budgeted at $850,000. Required: 1) Calculate the amount of overhead that should be allocated to each speaker during the year. 2) Assume that, during the month of October, Vance made and sold 8,000 speakers. What would the cost of goods sold be for the month? 3) Assume that the company sells the speakers at cost plus 40% of cost. What would be the selling price for each speaker?

Indicate whether each of the following statements is true or false. 1.A predetermined overhead rate should not be used to allocate overhead costs when volume varies during the year. 2. A predetermined overhead rate is calculated using estimated cost and volume data. 3. A predetermined overhead rate is calculated by dividing costs by volume, using a measure of volume such as direct labor hours or direct materials cost. 4. A company may need to allocate overhead costs to products to make pricing decisions for the products. 5. Accounting reports at the end of the fiscal year are based on estimated costs rather than actual costs.