Chapter 16
Service Department Costing: An Activity Approach
True/False
1.
T
Medium
In both the direct and step methods of allocating service
department costs, any amount of the allocation base that is
attributable to the service department whose cost is being
allocated is ignored.
2.
F
Medium
The direct method has the disadvantage that it may leave some
service department costs unallocated.
3.
T
Easy
Under the direct method of allocating service department costs,
reciprocal services provided among service departments are
ignored.
4.
F
Medium
If personnel department expenses are allocated on the basis of
the number of employees in various departments, then the number
of employees in the personnel department itself must be
included in the allocation base when the step method is used.
5.
T
Medium
The step method requires that an order of allocation is
established before service department costs can be allocated to
operating departments.
6.
T
Easy
The step method of allocating service department costs takes
into account some, but not all, of the reciprocal services that
service departments provide to each other.
7.
F
Medium
The step method usually begins with the service department that
provides the least amount of service to the other service
departments.
8.
F
Medium
The total amount of a service department's variable cost
allocated to an operating department should usually be the same
at the beginning and at the end of a period.
9.
T
Medium
The total amount of a service department's fixed cost allocated
to an operating department should usually be the same at the
beginning and at the end of a period.
10.
F
Medium
The fixed costs of service departments should be allocated to
operating departments at the end of a period in proportion to
the amount of capacity the service departments actually use
during the period.
Managerial Accounting, 9/e
581
11.
F
Medium
For performance evaluation purposes, actual service department
costs instead of budgeted service department costs should be
allocated to operating departments.
12.
F
Easy
An allocation basis for service department costs should reflect
how much cost the operating departments can bear. For this
reason, the sales of the operating departments is often a good
allocation basis.
13.
F
Medium
Services provided between service departments are known as nonvalue-added activities.
14.
F
Easy
The reciprocal method of allocating service department costs is
much simpler than the direct method and as a consequence is
much more widely used.
15.
F
Medium
All of a service department's actual costs should be allocated
to operating departments to ensure that they are fully
recovered.
Multiple Choice
16.
D
Medium
Reciprocal service department costs are:
a. allocated to producing departments under the direct method
but not allocated to producing departments at all under the
step method.
b. allocated to producing departments under the step method but
not allocated to producing departments at all under the
direct method.
c. not allocated to producing departments under either the
direct or the step methods.
d. allocated to producing departments under both the direct and
step methods.
17.
D
Medium
The step method of allocating service department costs:
a. is a less accurate method of allocation than the direct
method.
b. cannot be used when a company has more than two service
departments.
c. is a simpler allocation than the direct method.
d. ignores some interdepartmental services.
582Managerial Accounting, 9/e
18.
B
Easy
Grant Company has several service departments that provide
services for each other as well as for producing departments
with the company.
The method that would be least accurate in allocating the
company's service department costs would be:
a. by cost behavior.
b. by the direct method.
c. by the step method.
d. by the reciprocal method.
19.
B
Medium
Variable service department costs should be allocated to
operating departments at the end of the period according to the
formula:
a. Budgeted rate X Budgeted activity.
b. Budgeted rate X Actual activity.
c. Actual rate X Actual activity.
d. Budgeted total cost X Percentage of peak-period capacity
required.
20.
D
Medium
It would be best to allocate fixed service department costs to
operating departments at the end of the period according to
which one of the following the formulas?
a. Budgeted rate X Budgeted activity.
b. Budgeted rate X Actual activity.
c. Actual rate X Actual activity.
d. Budgeted total cost X Percentage of peak-period capacity
required.
21.
C
Medium
Piedmont Company has one service department and three operating
departments. During a particular year, a substantial variance
developed between the actual costs and the budgeted costs of
the service department. For performance evaluation purposes,
the variance should be:
a. allocated to the operating departments on a basis of usage.
b. allocated to operating departments, but on some basis other
than usage.
c. kept in the service department, and not charged to the
operating departments at all.
d. none of these.
22.
C
Medium
If a portion of the actual cost incurred by a service
department is not allocated to other departments, at the end of
the period, the unallocated cost should be:
a. allocated equally between the other departments.
b. allocated between the other departments in proportions to
budgeted activity.
c. treated as a variance of the service department.
d. treated as a variance of the other departments.
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23.
B
Medium
The long-run average or peak period needs of operating
departments would be the most suitable base for allocating:
a. the variable element of power costs.
b. the fixed element of power costs.
c. total power costs.
d. none of these.
24.
C
Easy
CMA
adapted
Because this allocation method recognizes that service
departments often provide each other with interdepartmental
services, it is considered to be the most accurate method for
allocating service department costs to operating departments.
This method is:
a. the direct method.
b. the step method.
c. the reciprocal method.
d. the full method.
25.
A
Medium
25. Parker Company has two service departments, cafeteria and
engineering, and two operating departments. The number of
employees in each department is given below:
Cafeteria ...................
Engineering ..................
Operating Department 1 .......
Operating Department 2 .......
10
40
500
200
The costs of the Cafeteria are allocated to other departments
on the basis of the number of employees in the departments. If
these costs are budgeted at $69,375, the amount of cost
allocated to Engineering under the direct method would be:
a. $-0-.
b. $3,700.
c. $3,750.
d. $17,344.
584Managerial Accounting, 9/e
26.
C
Medium
CPA
adapted
Boa Corp. uses the direct method to allocate service department
overhead costs to operating departments. Information for the
month of June follows:
Service Departments
o
Maintenance
Utilities
Departmental costs incurred ..
Service provided to departments:
Maintenance ............
Utilities ..............
Operating - A ...........
Operating - B ...........
$ 20,000
$10,000
10%
20%
40%
40%
30%
60%
The amount of maintenance department costs allocated to
Operating Department A for June would be:
a. $8,000.
b. $8,800.
c. $10,000.
d. $20,000.
27.
C
Medium
Fairview Hospital has a Food Services department which provides
food for patients in all other departments of the hospital. For
May, variable food costs were budgeted at $3 per meal, based on
15,000 meals served during the month. At the end of the month,
it was determined that 16,000 meals had been served at a total
cost of $54,000. How much food cost should be charged to other
departments at the end of the month for performance evaluation
purposes?
a. $45,000
b. $51,200
c. $48,000
d. $50,625
Managerial Accounting, 9/e
585
28.
A
Medium
Swift Company has a Maintenance Department which does
maintenance work on all equipment in operating departments A
and B. The Maintenance Department budgeted variable
maintenance costs of $0.20 per machine hour for June. Actual
variable maintenance costs for the month totaled $15,000.
Budgeted and actual machine hours in the operating departments
for the month were:
Budgeted machine hours .......
Actual machine hours worked ..
Dept. A
22,000
30,000
Dept. B
18,000
20,000
Total
40,000
50,000
How much variable maintenance cost for the month should be
charged to Dept. A at the end of the month for performance
evaluation purposes?
a. $6,000
b. $15,000
c. $8,250
d. $9,000
29.
C
Medium
Wilson Company maintains a cafeteria for its employees. For
June, variable food costs were budgeted at $45 per employee
based on a budgeted level of 200 employees in other
departments. During the month, an average of 190 employees
worked in other departments and actual food costs totaled
$9,250. How much food cost should be charged to other
departments at the end of the month for performance evaluation
purposes?
a. $9,000
b. $9,250
c. $8,550
d. $9,737
30.
A
Medium
The medical services department of Carey Company budgeted $20
of variable medical expenses per employee for May, based on
1,000 employees in operating departments. During May an average
of 1,050 employees were employed in operating departments.
Actual variable medical expenses totaled $23,100 for the month.
How much variable medical expenses should be charged to
operating departments at the end of May for performance
evaluation purposes?
a. $21,000
b. $23,100
c. $20,000
d. $22,000
586Managerial Accounting, 9/e
31.
B
Medium
The fixed costs of Baxter Company's personnel department are
allocated to operating departments on the basis of direct labor
hours. The following data have been provided:
Operating Department
X
Y
Direct labor hours - Long-run average ... 15,000
10,000
Direct labor hours - Actual ............. 10,000
6,000
The fixed costs of the personnel department are budgeted at
$56,000 per year and are incurred in order to support long-run
average requirements. How much of this fixed cost should be
allocated to Operating Department X at the end of the year for
performance evaluation purposes?
a. $35,000
b. $33,600
c. $52,500
d. $22,400
Reference: 16-1
Westmore Company has two service departments and two operating departments.
Budgeted costs and other data relating to these departments are presented
below:
Building
& Grounds
Departmental costs ..... $54,000
Square feet occupied ...
1,000
Number of employees ....
10
Direct labor-hours .....
Personnel
$200,000
3,000
5
Operating Department
A
B
$650,000 $800,000
12,000
15,000
45
55
76,000
92,000
The costs of Building & Grounds are allocated first on the basis of square
feet of space occupied. Personnel costs are allocated on the basis of number
of employees. The departmental costs for the operating departments are
overhead costs. Predetermined overhead rates in the operating departments
are computed on the basis of direct labor-hours.
32.
C
Medium
Refer To:
16-1
Assume that the company uses the direct method of allocating
service department costs to operating departments. How much
Building & Grounds cost would be allocated to Department A?
a. $29,700
b. $21,600
c. $24,000
d. $20,903
Managerial Accounting, 9/e
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33.
D
Medium
Refer To:
16-1
Assume that the company uses the direct method of allocating
service department costs. The predetermined overhead rate that
would be used in Department B would be closest to:
a. $11.50/DLH.
b. $12.00/DLH.
c. $10.00/DLH.
d. $10.22/DLH.
34.
C
Medium
Refer To:
16-1
Assume that the company uses the step method of allocating
service department costs to operating departments and Building
and Grounds costs are allocated first. How much Personnel
Department cost would be allocated to Department B?
a. $0
b. $107,368
c. $112,970
d. $107,590
35.
B
Medium
Refer To:
16-1
Assume again that the company uses the step method. The total
amount of cost allocated from the two service departments to
the operating departments for the year would be:
a. $1,450,000.
b. $254,000.
c. $1,704,000.
d. $850,000.
Reference: 16-2
Russet Company has two service departments and two producing departments.
Budgeted costs and budgeted activity in the various departments for the most
recent year are presented below:
Custodial
Services
Overhead costs ......... $252,000
Square feet of
space occupied .....
1,000
Number of employees ....
20
Machine-hours ..........
Cafeteria
$140,000
2,000
30
Cutting
Department
$600,000
8,000
150
40,000
Assembly
Department
$900,000
10,000
200
60,000
Service Department costs are allocated to producing departments with the
costs of Custodial Services allocated first on the basis of square feet of
space occupied. The costs of the Cafeteria are allocated on the basis of
number of employees. Predetermined overhead rates in the Cutting and
Assembly Departments are based on machine-hours. Round all calculations to
the nearest dollar.
36.
D
Medium
Refer To:
16-2
Under the direct method of allocation, the amount of Custodial
Services cost allocated to the Cutting Department would be:
a. $0.
b. $96,000.
c. $100,800.
d. $112,000.
588Managerial Accounting, 9/e
37.
A
Hard
Refer To:
16-2
Under the direct method of allocation, the predetermined
overhead rate for the year in the Assembly Department would be.
a. $18.67.
b. $18.17.
c. $3.67.
d. $3.17.
38.
C
Medium
Refer To:
16-2
Under the step method of allocation, the amount of Custodial
Services cost allocated to the Assembly Department would be:
a. $0.
b. $120,000.
c. $126,000.
d. $140,000.
39.
B
Medium
Refer To:
16-2
Under the step method of allocation, the amount of cost
allocated from the Cafeteria to the Cutting Department would
be:
a. $0.
b. $70,800.
c. $61,500.
d. $60,000.
40.
A
Medium
Refer To:
16-2
Under the step method of allocation, the amount of cost
allocated from the Cafeteria to Custodial Services would be:
a. $0.
b. $8,260.
c. $7,000.
d. $7,568.
Reference: 16-3
The James Company has four departments with data as follows:
Service Depts.
Cafeteria Maintenance
Budgeted costs .......... $12,000
$10,000
Number of employees .....
12
10
Labor hours .............
1,500
1,250
41.
C
Medium
Refer To:
16-3
Operating Depts. o
Milling
Finishing
$42,000
$38,000
84
66
5,250
4,750
Maintenance Department costs are allocated on the basis of
labor hours. The amount of cost allocated to Milling from
Maintenance under the direct method would be:
a. $5,600.
b. $6,720.
c. $5,250.
d. $5,700.
Managerial Accounting, 9/e
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42.
D
Medium
Refer To:
16-3
Cafeteria costs are allocated on the basis of number of
employees. If the step method is used with costs of the
Cafeteria allocated first, the amount of cost allocated from
the Cafeteria to Maintenance would be:
a. $0.
b. $625.
c. $698.
d. $750.
Reference: 16-4
Anderson Company has two service departments and two producing departments.
The costs of the Personnel Department are allocated to other departments on
the basis of the number of employees in the departments. Departments and
number of employees are as follows:
Personnel Department ...........
Engineering Department .........
Producing Department No. 1 .....
Producing Department No. 2 .....
Total employees ................
Employees
30
90
590
290
1,000
43.
C
Medium
Refer To:
16-4
Costs in the Personnel Department total $900,000 per year.
Under the step method, the costs of the Personnel Department
are allocated before the costs of the Engineering Department
are allocated. The amount of this cost allocated to the
Engineering Department under the step method (rounded to the
nearest dollar) would be:
a. $0.
b. $81,000.
c. $83,505.
d. $92,046.
44.
D
Medium
Refer To:
16-4
The amount of Personnel Department cost that would be allocated
to Producing Department 2 under the direct method would be:
a. $0.
b. $261,000.
c. $269,072.
d. $296,591.
590Managerial Accounting, 9/e
Reference: 16-5
The Toville City Hospital has two service departments--Energy and
Housekeeping. These two departments provide services to the three operating
departments--Pediatrics, Surgery, and Health Care. The fixed costs of the
Energy Department are allocated on the basis of kilowatt hours (KWH), and
the fixed costs of the Housekeeping Department are allocated on the basis of
square footage of space occupied. Data for August are as follows:
Energy
Budgeted fixed
costs .............. $160,000
Actual fixed
costs .............. $162,000
Square footage ........
5,000
Long-run
average KWH ........
2,000
Actual KWH used .......
2,000
Housekeeping
Pediatrics
Surgery
Health
Care
$200,000
--
--
$207,000
5,000
-20,000
-10,000
-70,000
36,000
30,000
90,000
75,000
90,000
60,000
144,000
135,000
--
The hospital allocates service department costs by the step method, starting
with the Energy Department. The Energy Department's budgeted fixed costs are
determined by the long-run average KWH requirements.
45.
B
Medium
Refer To:
16-5
The amount of fixed cost allocated from Housekeeping to
Pediatrics for August would be:
a. $200,000.
b. $43,200.
d. $40,500.
c. $44,640.
46.
D
Medium
Refer To:
16-5
The amount of fixed cost allocated from Energy to Surgery for
August would be:
a. $40,500.
b. $38,900.
c. $42,000.
d. $40,000.
47.
B
Medium
Refer To:
16-5
The amount of fixed cost allocated from Housekeeping to Surgery
for August would be:
a. $22,320.
b. $21,600.
c. $35,980.
d. $25,180.
48.
C
Medium
Refer To:
16-5
The total amount of fixed cost allocated to Health Care from
all service departments for August would be:
a. $221,040.
b. $61,600.
c. $215,200.
d. $175,800.
Managerial Accounting, 9/e
591
Reference: 16-6
The Mohawk-Hudson Company is an electric utility which has two service
departments, Accounting and Maintenance. It has two operating departments,
Generation and Transmission. The company does not distinguish between fixed
and variable service department costs. Maintenance Department costs are
allocated on the basis of maintenance hours of service. Accounting
Department costs are allocated to operating departments on the basis of
accounting hours of service provided. Budgeted costs and other data for the
coming year are as follows:
Budgeted costs ........
Maintenance hours
of service ..........
Accounting hours
of service ..........
Accounting
$100,000
Maintenance Generation
$200,000
$600,000
Transmission
$400,000
--
600
7,200
4,800
500
2,000
4,500
3,500
The step method is used to allocate service department costs, with the
accounting department being allocated first.
49.
B
Medium
Refer To:
16-6
The amount of accounting department costs allocated to the
maintenance department would be:
a. $0.
b. $20,000.
c. $19,048.
d. $18,000.
50.
D
Medium
Refer To:
16-6
The amount of accounting department costs allocated to the
generation department would be:
a. $42,857.
b. $57,143.
c. $38,000.
d. $45,000.
51.
A
Medium
Refer To:
16-6
The amount of maintenance department cost allocated to the
accounting department would be:
a. $0.
b. $69,315.
c. $75,000.
d. $88,000.
52.
A
Medium
Refer To:
16-6
The amount of maintenance department cost allocated to the
generation department would be:
a. $132,000.
b. $123,750.
c. $150,685.
d. $140,000.
592Managerial Accounting, 9/e
Reference: 16-7
Lakeside Nursing Home has two operating departments, Custodial Care and
Rehabilitation. It also has a Housekeeping Department that serves the two
operating departments. The costs of the Housekeeping Department are all
variable and are allocated to the operating departments on the basis of
labor hours. Data for September follow:
Budgeted labor hours ....
Actual labor hours ......
Custodial Care
3,000
3,200
Rehabilitation
1,000
1,600
The budgeted costs of the Housekeeping Department for September were $24,000
and the actual costs were $29,760.
53.
D
Medium
Refer To:
16-7
How much Housekeeping Department cost should be allocated to
Custodial Care at the start of September for flexible budget
planning purposes?
a. $16,000
b. $6,000
c. $8,000
d. $18,000
54.
C
Medium
Refer To:
16-7
How much Housekeeping Department cost should be charged to
Rehabilitation at the end of September for performance
evaluation purposes?
a. $19,840
b. $9,920
c. $9,600
d. $7,440
55.
A
Hard
Refer To:
16-7
How much of the actual Housekeeping Department costs for
September should not be charged to the operating departments
for performance evaluation purposes?
a. $960
b. $5,760
c. $0
d. $1,240
Reference: 16-8
Community General Hospital has a Food Services Department that provides
meals for all patients in the hospital. Budgeted and actual meals served for
the month just ended are:
Pediatrics Department ........
Surgical Department ..........
Total meals ..................
Meals Served
o
Budgeted
Actual
30,000
24,000
50,000
76,000
80,000
100,000
The budgeted variable cost of meals for the month just ended was $100,000;
the actual variable cost of meals for the month was $130,000.
Managerial Accounting, 9/e
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56.
B
Medium
Refer To:
16-8
How much Food Services variable cost should be allocated to the
Pediatrics Department at the beginning of the current year for
planning purposes?
a. $0.
b. $37,500.
c. $39,000.
d. $48,750.
57.
C
Medium
Refer To:
16-8
How much of the $130,000 actual Food Services variable cost
should be allocated to the Surgical Department at the end of
the month just completed?
a. $62,500.
b. $65,000.
c. $95,000.
d. $98,800.
58.
B
Medium
Refer To:
16-8
How much of the $130,000 actual Food Services cost for the
month just completed should be kept in the Food Services
Department and not allocated to the other departments?
a. $30,000.
b. $5,000.
c. $4,000.
d. $0.
Reference: 16-9
Nathan Company has an Equipment Services Department that performs all needed
maintenance work on the equipment in the company's Fabrication and Assembly
Departments. Cost of the equipment Services Department are allocated to the
Fabrication and Assembly Departments on the basis of direct labor-hours.
Data for the year just completed follow:
Budgeted direct labor-hours .....
Actual direct labor-hours .......
Peak-period direct labor-hours ..
Fabrication
20,000
30,000
40,000
Assembly
60,000
70,000
80,000
Total o
80,000
100,000
120,000
For the year just ended, the company budgeted its variable maintenance costs
at $200,000 for the year. Actual variable maintenance costs for the year
totaled $275,000.
59.
B
Medium
Refer To:
16-9
How much of the $200,000 of budgeted variable maintenance cost
should have been allocated to the Fabrication Department at the
beginning of the year just completed?
a. $66,667.
b. $50,000.
c. $60,000.
d. $100,000.
594Managerial Accounting, 9/e
60.
A
Medium
Refer To:
16-9
How much of the $275,000 of actual variable maintenance cost
should be allocated to the Assembly Department at the end of
the year just ended for purposes of measuring performance?
a. $175,000.
b. $116,900.
c. $192,500.
d. $150,000.
61.
C
Medium
Refer To:
16-9
How much (if any) of the $275,000 in variable maintenance cost
should not be allocated to the Fabrication and Assembly
Departments?
a. $0.
b. $75,000.
c. $25,000.
d. $108,000.
Reference: 16-10
Fixed costs budgeted for Caterton's Maintenance Department for last year
totaled $280,000; actual fixed costs for the year totaled $308,000. The
level of budgeted fixed costs is determined by peak-period requirements. The
Milling Department requires 15/35 of the peak-period capacity and the
Assembly Department requires 20/35.
62.
B
Easy
Refer To:
16-10
How much fixed maintenance cost should be allocated to the
Milling department at the beginning of the year for flexible
budget planning purposes?
a. $145,600
b. $120,000
c. $132,000
d. $140,000
63.
A
Medium
Refer To:
16-10
How much fixed maintenance cost should be charged to the
Assembly department at the end of the year for purposes of
measuring performance?
a. $160,000
b. $176,000
c. $173,500
d. $147,800
64.
C
Hard
Refer To:
16-10
How much of the actual fixed maintenance cost for the year
should be kept in the Maintenance department and not charged to
the other departments for performance evaluation purposes?
a. $-0b. $308,000
c. $28,000
d. $280,000
Managerial Accounting, 9/e
595
Reference: 16-11
Mueller Industries has a Maintenance Department that services the company's
Milling and Assembly Departments. Fixed costs of the Maintenance department
are allocated to these departments on the basis of peak-period machine-hour.
Data on machine-hours for the year just ended follow:
Milling
Budgeted machine hours ........... 60,000
Actual machine-hours ............. 50,000
Peak-period machine-hours ........ 100,000
Assembly
140,000
200,000
200,000
Total o
200,000
250,000
300,000
Fixed costs budgeted for the Maintenance Department for the year just ended
totaled $500,000; actual fixed costs for the year totaled $530,000.
65.
B
Medium
Refer To:
16-11
How much of the $500,000 in budgeted fixed costs should be
allocated to the Milling Department at the beginning of the
year for planning purposes? (Round to the nearest dollar.)
a. $100,000.
b. $166,667.
c. $250,000.
d. $83,333.
66.
C
Medium
Refer To:
16-11
How much of the $530,000 in actual fixed costs should be
allocated to the Assembly Department at the end of the year for
purposes of measuring performance? (Round to the nearest
dollar.)
a. $424,000.
b. $371,000.
c. $333,333.
d. $353,333.
67.
D
Medium
Refer To:
16-11
How much of the $530,000 in actual fixed cost for the year
should be kept in the Maintenance Department and not allocated
to the other departments? (Round to the nearest dollar.)
a. $0.
b. $88,333.
c. $95,000.
d. $30,000.
Reference: 16-12
The Sherman Company manufactures and sells rowboats and canoes. The company
has two operating departments, Carpentry and Finishing. The company also has
a Maintenance Department which serves both operating departments. The costs
in the Maintenance Department are budgeted at $120,000 per month plus $0.25
per labor hour. The budgeted fixed costs are determined by the peak-period
requirements. The Carpentry Department requires 62.5% of the peak-period
capacity and the Finishing Department requires 37.5%. For May, Carpentry has
estimated that it will operate 100,000 labor hours and Finishing has
estimated that it will operate 80,000 labor hours.
596Managerial Accounting, 9/e
68.
B
Medium
Refer To:
16-12
How much Maintenance Department cost should be allocated to
Carpentry at the beginning of May for flexible budget planning
purposes?
a. $112,500
b. $100,000
c. $74,537
d. $92,400
69.
D
Medium
Refer To:
16-12
How much Maintenance Department cost should be allocated to
Finishing at the beginning of May for flexible budget planning
purposes?
a. $67,500
b. $65,400
c. $70,000
d. $65,000
Essay
70.
Medium
Central Medical Clinic has two service departments, Building
Services and Energy, and three operating departments, Pediatrics,
Geriatrics, and Surgery. Central allocates the cost of Building
Services on the basis of square footage and Energy on the basis of
patient days. No distinction is made between variable and fixed
costs. Budgeted operating data for the year just completed follow:
Service Departments
Building
Services Energy
Budgeted
costs before
allocation
$20,000
Square footage 1,000
Patient days
-
$10,000
4,000
-
Operating Departments
Pediatrics
$90,000
6,000
5,500
Geriatrics
$60,000
18,000
7,700
o
Surgery
$100,000
12,000
8,800
Required:
a. Prepare a schedule to allocate service department costs to
operating departments by the direct method (round all dollar
amounts to the nearest whole dollar).
b. Prepare a schedule to allocate service department costs to
operating departments by the step method, allocating
Building Services first (round all amounts to the nearest
whole dollar).
Managerial Accounting, 9/e
597
Answer:
a.
Direct Method:
Service Departments
Departments
Operating
o
Building
Services
Surgery
Budgeted costs
before allocation
$20,000
$100,000
Allocation of
Building Services:
(20,000)
Pediatrics:
6,000/36,000 x $20,000
Geriatrics:
18,000/36,000 x $20,000
Surgery:
12,000/36,000 x $20,000
6,667
Allocation of Energy:
Pediatrics:
5,500/22,000 x $10,000
Geriatrics:
7,700/22,000 x $10,000
Surgery:
8,800/22,000 x $10,000 ______
4,000
Costs after allocation $ -0$110,667
Energy
$10,000
Pediatrics Geriatrics
$90,000
$60,000
3,333
10,000
(10,000)
2,500
3,500
_______
_______
_______
$ -0-
$95,833
$73,500
b.
Step Method
Service Departments
Departments
Operating
o
Building
Services
Energy
Surgery
Budgeted costs
before allocation
$20,000 $10,000
$100,000
Allocation of
Building Services:
(20,000)
Energy:
4,000/40,000 x $20,000
2,000
Pediatrics:
6,000/40,000 x $20,000
Geriatrics:
18,000/40,000 x $20,000
Surgery:
12,000/40,000 x $20,000
6,000
598Managerial Accounting, 9/e
Pediatrics Geriatrics
$90,000
$60,000
3,000
9,000
Allocation of Energy: (12,000)
Pediatrics:
5,500/22,000 x $12,000
Geriatrics:
7,700/22,000 x $12,000
Surgery:
8,800/22,000 x $12,000 _______ _______
4,800
Costs after allocation $ -0$ -0$110,800
Managerial Accounting, 9/e
3,000
4,200
_______
_______
$96,000
$73,200
599
71.
Hard
Delta Manufacturing Company has two service departments, Custodial
Services and Maintenance, and three production departments, Cutting,
Milling, and Assembly. Delta allocates the cost of Custodial
Services on the basis of square footage and Maintenance on the basis
of labor-hours. No distinction is made between variable and fixed
costs. Budgeted operating data for the year just completed follow:
Service Departments
Custodial
Services Maintenance
Budgeted costs
before
allocation
$18,000
Square footage
1,000
Labor-hours
-
$ 8,000
10,000
-
Production Departments
Cutting
Milling
Assembly
$80,000
5,000
4,000
$50,000
22,000
8,000
$90,000
13,000
8,000
Required:
a. Prepare a schedule to allocate service department costs to
the production departments by the direct method (round all
dollar amounts to the nearest whole dollar).
b. Prepare a schedule to allocate service department costs to
the production departments by the step method, allocating
Custodial Services first (round all amounts to the nearest
whole dollar).
Answer:
a.
Direct Method:
Service Departments
Production
Departments o
Assembly
Budgeted costs
before allocation
$90,000
Allocation of
Custodial Services:
Cutting:
5,000/40,000 x $18,000
Milling:
22,000/40,000 x $18,000
Assembly:
13,000/40,000 x $18,000
5,850
Custodial
Services Maintenance
Cutting
Milling
$18,000
$80,000
$50,000
(18,000)
Allocation of Maintenance:
Cutting:
4,000/20,000 x $8,000
Milling:
8,000/20,000 x $8,000
Assembly:
8,000/20,000 x $8,000
_____ _
600Managerial Accounting, 9/e
$ 8,000
2,250
9,900
(8,000)
1,600
3,200
_______
_______
_______
o
3,200
Costs after allocation
$99,050
Managerial Accounting, 9/e
$ -0-
$ -0-
$83,850
$63,100
601
b.
Step Method
Service Departments
Production
Departments o
Custodial
Services Maintenance
Assembly
Budgeted costs
before allocation
$18,000
$90,000
Allocation of
Custodial Services:
(18,000)
Maintenance:
10,000/50,000 x $18,000
Cutting:
5,000/50,000 x $18,000
Milling:
22,000/50,000 x $18,000
Assembly:
13,000/50,000 x $18,000
4,680
Allocation of Maintenance:
Cutting:
4,000/20,000 x $11,600
Milling:
8,000/20,000 x $11,600
Assembly:
8,000/20,000 x $11,600 _______
4,640
Costs after allocation $ -0$99,320
72.
Medium
$ 8,000
Cutting
Milling
$80,000
$50,000
3,600
1,800
7,920
(11,600)
2,320
4,640
_______
_______
_______
$ -0-
$84,120
$62,560
Flinders Company has two service departments, Factory
Administration and Maintenance, and two operating departments.
Selected information relating to these departments is given below:
Factory
Administration
Departmental
costs .........
Number of
employees .....
Total labor
hours .........
$113,400
3
4,000
Maintenance
$80,000
Operating Department
X
Y
$700,000
5
40
6,000
80,000
$600,000
60
120,000
The company allocates service department costs by the step method.
Factory Administration costs are allocated first on the basis of
number of employees, and then Maintenance costs are allocated on
the basis of total labor hours.
Required:
Prepare a schedule showing the allocation of service department
costs to other departments.
602Managerial Accounting, 9/e
Managerial Accounting, 9/e
603
Answer:
Factory
Administration
Departmental
costs .........
Allocation:
Factory Admin.
Maintenance ..
Departmental
costs after
allocation ....
73.
Medium
Operating Department
X
Y
Maintenance
$113,400
$80,000
(113,400)
5,400
(85,400)
$
$
-0-
-0-
$700,000
$600,000
43,200
34,160
64,800
51,240
$777,360
$716,040
Hancock Company has two service departments--Factory
Administration and Maintenance--and two producing departments.
Selected information relating to these departments follow:
Factory
Administration
Number of
employees ...
Total labor
hours .......
Overhead costs
Maintenance
Producing Departments
X
Y o
15
25
200
300
20,000
$300,000
30,000
$250,000
400,000
$850,000
600,000
$1,200,000
The company allocates service department costs using the step
method. Costs of Factory Administration are allocated on the basis
of the number of employees. Costs of Maintenance are allocated on
the basis of labor-hours. Allocation begins with the Factory
Administration Department.
Required:
Prepare a schedule showing the allocation of service department
costs to the other departments.
Answer:
Factory
Administration
Overhead costs
$300,000
Allocation:
Factory Admin. ($300,000)
Maintenance .. _________
Overhead costs
after
allocation .... $ -0-
604Managerial Accounting, 9/e
Maintenance
$250,000
$
14,286
(264,286)
$
-0-
Producing Departments
X
Y
850,000 $1,200,000
114,286
105,714
171,428
158,572
$1,070,000
$1,530,000
74.
Medium
Leslie Company operates a cafeteria for the benefit of its
employees. The company subsidizes the cafeteria heavily by
allowing employees to purchase meals at greatly reduced prices.
Budgeted and actual costs in the cafeteria for the year just
ended are as follows:
Budgeted
Variable costs ... $500,000
Fixed costs ...... $340,000
*Unrecovered
Actual
$436,000
$352,000
cost after deducting amounts received from employees.
Costs of the cafeteria are allocated to producing departments
on the basis of the number of employees in these departments.
Fixed costs are allocated on the basis of the peak-period
number of employees. Data on employees in the company's
producing departments follows:
Budgeted number of employees .......
Actual number of employees .........
Peak-period number of employees ....
Machining
300
200
400
Assembly
500
400
600
Total
800
600
1,000
Required:
a. Compute the dollar amount of variable and fixed costs that
should be allocated to each of the producing departments at
the beginning of the year for planning purposes.
b. Compute the dollar amount of variable and fixed costs that
should be allocated to each of the producing departments at
the end of the year for purposes of evaluating performance.
Identify the amount, if any, of actual costs that should not
be allocated to the operating departments.
Answer:
a. Budgeted variable rate:
$500,000  800 employees = $625 per employee.
Fixed costs are allocated on the basis of peak period number
of employees:
Machining, 40%; Assembly, 60%.
Machining
Variable cost allocation:
Machining: 300 x $625 ...
Assembly:
500 x $625 ...
Fixed cost allocation:
Machining: 40% x $340,000
Assembly:
60% x $340,000
Managerial Accounting, 9/e
Assembly
$ 187,500
$312,500
136,000
204,000
605
b. Variable costs are allocated at the budgeted rate of $625
per employee. Fixed costs are allocated in the same predetermined lump-sum amounts as at the beginning of the year.
Machining
Variable cost allocation:
Machining: 200 x $625 ...
Assembly:
400 x $625 ...
Fixed cost allocation:
Machining: 40% x $340,000
Assembly:
60% x $340,000
Assembly
$ 125,000
$250,000
136,000
204,000
The remaining amounts of variable and fixed costs are
variances that should not be allocated:
Actual variable costs ................ $436,000
Amount of variable cost allocated .... 375,000
Variance--not allocated .............. $ 61,000
Actual fixed costs ................... $352,000
Amount of fixed cost allocated ....... 340,000
Variance--not allocated .............. $ 12,000
75.
Medium
Standard Company operates a day-care center for the benefit of
its employees. The company subsidizes the day-care center
heavily. Budgeted and actual costs for the day-care center for
the year just completed are as follows:
Budgeted
Variable costs* .......... $700,000
Fixed costs ............. $420,000
Actual
$740,000
$440,000
*Unrecovered cost after deducting amounts received from employees.
Costs of the day-care center are allocated to operating
departments on the basis of the number of employees in these
departments. Fixed costs of the day-care center are allocated
on the basis of the peak-period number of employees. Data on
employees in the company's operating departments follow:
Budgeted number of employees .....
Actual number of employees .......
Peak-period number of employees ..
Cutting
300
200
400
Assembly
400
300
400
Packaging
300
250
800
Required:
a. Compute the dollar amount of variable and fixed costs that
should be allocated to each of the producing departments at
the beginning of the year for planning purposes.
b. Compute the dollar amount of variable and fixed costs that
should be allocated to each of the producing departments at
the end of the year for purposes of evaluating performance.
Identify the amount, if any, of actual costs that should not
be allocated to the operating departments.
606Managerial Accounting, 9/e
Answer:
a. Budgeted variable rate:
$700,000  1,000 employees = $700 per employee.
Fixed costs are allocated on a basis of peak period number of
employees:
Cutting, 25%; Assembly, 25%; Packaging, 50%
Cutting
Variable cost allocation:
Cutting: 300 x $700 ......... $210,000
Assembly: 400 x $700 ........
Packaging: 300 x $700 ........
Fixed cost allocation:
Cutting:
25% x $420,000 ... 105,000
Assembly: 25% x $420,000 ....
Packaging: 50% x $420,000 ....
Assembly
Packaging
$280,000
$210,000
105,000
210,000
b. Variable costs are allocated at the budgeted rate of $700 per
employee. Fixed costs are allocated in the same predetermined
lump-sum amounts as at the beginning of the year.
Cutting
Variable cost allocation:
Cutting: 200 x $700 ......... $140,000
Assembly: 300 x $700 ........
Packaging: 250 x $700 ........
Fixed cost allocation:
Cutting: 25% x $420,000 ..... 105,000
Assembly: 25% x $420,000 ....
Packaging: 50% x $420,000 ....
Assembly
Packaging
$210,000
$175,000
105,000
210,000
The remaining amounts of variable and fixed costs are
variances that should not be allocated:
Actual variable costs ................... $740,000
Amount of variable cost allocated ....... 525,000
Variance--not allocated ................. $215,000
Actual fixed costs ...................... $440,000
Amount of fixed cost allocated .......... 420,000
Variance--not allocated ................. $ 20,000
Managerial Accounting, 9/e
607
76.
Medium
Gabritz, Inc. has a maintenance department that provides
services to the company's two operating departments. The
variable costs of the maintenance department are allocated on
the basis of the number of maintenance hours logged in each
department. Last year, budgeted variable maintenance costs were
$7.50 per maintenance hour and actual variable maintenance
costs were $7.80 per maintenance hour.
The budgeted and actual maintenance hours for each operating
department for last year appear below:
Operating Departments
A
B
Budgeted maintenance hours ... 3,000
2,500
Actual maintenance hours ..... 3,100
2,700
Required:
a. Compute the amount of variable maintenance department cost
that should have been allocated to each operating department
at the beginning of the year for flexible budget planning
purposes.
b. Compute the amount of variable maintenance department cost
that should have been charged to each operating department
at the end of the year for performance evaluation purposes.
c. Compute the amount of actual variable maintenance department
cost that should NOT have been charged to the operating
departments at the end of the year for performance
evaluation purposes.
Answer:
a. Allocated to Operating Department A:
3,000 x $7.50 ..................... $22,500
Allocated to Operating Department B:
2,500 x $7.50 ..................... $18,750
b. Charged to Operating Department A:
3,100 x $7.50 ..................... $23,250
Charged to Operating Department B:
2,700 x $7.50 ..................... $20,250
c. Total actual variable cost:
(3,100 + 2,700) x $7.80 ............ $45,240
Total charges:
(3,100 + 2,700) x $7.50 ............ 43,500
Total uncharged cost ..................... $ 1,740
608Managerial Accounting, 9/e
77.
Medium
Smurnov Company has a purchasing department that provides
services to two factories in Texas. One is located in Austin
and the other in Belmont. Budgeted costs for the purchasing
department consist of $91,000 per year of fixed costs and $7
per purchase order for variable costs. The level of budgeted
fixed costs is determined by the peak-period requirements. The
Austin factory requires 3/7 of the peak-period capacity and the
Belmont factory requires 4/7.
During the coming year, 2,700 purchase orders are budgeted to
be processed for the Austin factory and 3,900 purchase orders
for the Belmont factory.
Required:
Compute the amount of purchasing department cost that should be
allocated to each factory at the beginning of the period for
flexible budget planning purposes. (The company allocates
fixed and variable costs separately.)
Answer:
Variable cost:
2,700 x $7.00
3,900 x $7.00
Fixed cost:
3/7 x $91,000
4/7 x $91,000
Total allocated
78.
Medium
Austin
Belmont
........... $18,900
...........
$27,300
........... 39,000
...........
cost ...... $57,900
52,000
$79,300
Warehouse Services is a service department in the Werner
Company, providing storage service to three operating
departments. The company allocates the costs of this department
to operating departments on the basis of cubic feet occupied.
Last year, Warehouse Services budgeted variable storage costs
of $0.15 per cubic foot occupied, and fixed costs of $120,000.
Actual storage space occupied during the year, along with longterm storage needs of operating departments, is given below:
X
Operating Dept.
Y
Long-term storage needs in
cubic feet ............... 200,000
Actual storage space used ... 160,000
600,000
590,000
o
Z
800,000
750,000
Actual variable storage costs amounted to $0.16 per cubic foot
occupied. Actual fixed storage costs were $123,000.
Managerial Accounting, 9/e
609
Required:
a. Compute the amount of variable storage cost that should be
charged to each operating department at the end of the year
for performance evaluation purposes.
b. Compute the amount of fixed storage cost that should be
charged to each operating department at the end of the year
for performance evaluation purposes.
Answer:
a. Dept X: 160,000 x $0.15 = $24,000
Dept Y: 590,000 x $0.15 = $88,500
Dept Z: 750,000 x $0.15 = $112,500
b. Dept X: 200/1600 x $120,000 = $15,000
Dept Y: 600/1600 x $120,000 = $45,000
Dept Z: 800/1600 x $120,000 = $60,000
610Managerial Accounting, 9/e