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NFCPAR
FOH ALLOCATION: TRADITIONAL AND ACTIVITY-BASED COSTING
● Traditional Methods versus Activity-Based Costing
⮚ Traditional methods of costing are viewed as being too simplistic and inaccurate. But activity-based costing,
while more accurate, is also significantly more expensive than traditional costing.
⮚ Which Method to Use: A Cost-Benefit Decision: Managers have to do a cost-benefit analysis of which method
to use. The decision is typically made in one of three ways:
1. Managers reject activity analysis and stay with the simpler traditional methods.
2. They use activity-based costing because they want information that will help them be competitive.
3. They use activity-based costing as a special analysis, but not as an ongoing information system
● Cost Pools: Plant versus Department versus Activity Center:
⮚ Managers who use traditional costing have a choice between two methods depending on which cost pool
they use.
1. plantwide allocation, which uses the entire plant as a cost pool (plant doesn’t only refer to a
manufacturing facility and could refer to a store, department, etc.).
2. department allocation method where there is a separate cost pool for each department.
⮚ Both these methods are traditional costing methods where overheads are allocated using one activity (direct
labor hours or other direct input which is typically not a causal cost driver).
● Activity-Based Costing
⮚ ABC assigns costs first to activities, then to products based on each product’s use of activities.
⮚ The goal of ABC is to get a better estimate of the costs of different products or product lines or departments.
⮚ Activity-based costing:
1. identify the activities that consume resources, and assign costs to those activities.
2. to identify the cost driver or drivers associated with each activity. A cost driver is a factor that causes, or
drives, the activity's costs. (Each activity could have multiple cost drivers.)
3. compute a cost rate per cost driver unit.
4. assign the cost to products by multiplying the cost driver rate times the volume of cost drivers consumed
by the product.
⮚ There are four activity categories:
1. Unit-level
2. Batch-level
3. Product-level (sustaining)
4. Facility-level
Unit-level activities are those that are performed each time a unit is produced. Examples of unit-level
activities include power and machine hours (both of these are used each time a unit is produced). Direct
materials and direct labor activities are also unit-level activities, even though they are not overhead
costs.
Batch-level activities are those that are performed each time a batch of products is produced. Examples
of batch-level activities include setups, inspections, purchasing, and material-handling costs.
Product-level activities (also known as sustaining activities) are those activities performed that enable
the various products of a company to be produced. These activities and their costs tend to increase as
the number of different products increases. Examples of product-level activities include engineering
changes, developing product-testing procedures, introducing new products, and expediting goods.
Facility-level activities are those that sustain a factory's general manufacturing processes. Examples of
facility-level activities include plant management, landscaping, maintenance, security, property taxes,
and plant depreciation.
PROBLEMS
1. Gibson Company uses a predetermined overhead rate of P5 per machine hour to apply overhead. During the
year, 32,500 machine hours were worked. Actual manufacturing overhead cost for the year was P187,500.
Company records showed the following account balances at the end of the year:
Materials
Work in process
P 22,500
37,500
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Finished goods
Cost of goods sold
50,000
112,500
Required:
a.
b.
Determine the amount of underapplied or overapplied overhead.
Assuming the amount of underapplied or overapplied overhead is material, determine
underapplied or overapplied overhead that would be allocated to the following accounts
if the allocation is made using ending account balances:
Work in Process
Finished Goods
Cost of Goods Sold
c.
Assuming the amount of underapplied or overapplied overhead is material, calculate the
new balance of the following accounts after underapplied or overapplied overhead has
been allocated:
Work in Process
Finished Goods
Cost of Goods Sold
d.
Determine the balance of Cost of Goods Sold if underapplied or overapplied overhead is
immaterial.
2. Kramer Company has decided to use a predetermined rate to assign factory overhead to production. The
following predictions have been made for 2015:
Total factory overhead costs
Direct labor hours
Direct labor costs
Machine hours
P150,000
40,000 hours
P200,000
60,000 hours
Required:
a.
Compute the predetermined factory overhead rate under three different bases: (1) direct
labor hours, (2) direct labor costs, and (3) machine hours.
b.
Assume that actual factory overhead was P152,500 and that Kramer elected to apply
factory overhead to Work in Process based on direct labor hours. If actual direct labor
was 42,000 hours for 2015, was factory overhead overapplied or underapplied? By how
much?
c.
Kramer Company follows the policy of writing off any under- or overapplied factory
overhead balance to Cost of Goods Sold at the end of the year. Make the entry necessary at
the end of 2015 to dispose of the factory overhead balance determined in Part (b).
3. The June plant produces two calculators and has two production departments: assembly and packaging.
Information for the products is given below:
Units produced
Prime costs
Direct labor hours
Number of setups
Machine hours
Inspection hours
Number of moves
Deluxe
20,000
P160,000
20,000
60
10,000
2,000
180
Regular
200,000
P1,500,000
160,000
40
80,000
16,000
120
Total
P1,660,000
180,000
100
90,000
18,000
300
The following table presents activity information about the departments and products:
Assembly
Packaging
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Direct labor hours:
Deluxe
Regular
Total
Machine hours:
Deluxe
Regular
Total
Overhead Costs:
Setting equipment
Moving material
Machining
Inspection
Total
10,000
150,000
160,000
10,000
10,000
20,000
20,000
160,000
180,000
2,000
8,000
10,000
8,000
72,000
80,000
10,000
80,000
90,000
P120,000
60,000
20,000
16,000
P216,000
P 120,000
60,000
180,000
144,000
P504,000
P240,000
120,000
200,000
160,000
P720,000
Required:
a.
b.
c.
d.
e.
f.
Compute the predetermined overhead rate for each department if Assembly uses labor hours and
Packaging uses machine hours.
Calculate the per unit cost for each product if departmental overhead rates are used. (Round to 2
decimal places.)
Compute the predetermined plant-wide overhead rate based on direct labor hours.
Calculate the per unit cost of each product if a plantwide overhead rate is used. (Round to 2 decimal
places.)
Calculate the overhead rates for each overhead activity.
Calculate the per unit cost of each product if activity rates are used to assign overhead. (Round to 2
decimal places.)
4. Rachel's Pet Supply Corporation manufactures two models of grooming stations, a standard and a deluxe
model. The following activity and cost information has been compiled:
Product
Standard
Deluxe
Number of
Setups
3
7
Number of
Components
30
50
Overhead costs
P40,000
P120,000
Number of
Direct Labor Hours
650
150
Assume a traditional costing system applies the P160,000 of overhead costs based on direct labor hours.
a. What is the total amount of overhead costs assigned to the standard model?
b. What is the total amount of overhead costs assigned to the deluxe model?
Assume an activity-based costing system is used and that the number of setups and the number of
components are identified as the activity-cost drivers for overhead.
c. What is the total amount of overhead costs assigned to the standard model?
d. What is the total amount of overhead costs assigned to the deluxe model?
5. The July plant has two production departments: molding and assembly. The plant produces two products: A
and B. Cost information for the production departments is given below:
Molding
Assembly
P360,000
750,000
The following table presents activity information about the departments and products:
Direct labor hours:
A
B
Total
Molding
Assembly
Total
10,000
10,000
20,000
20,000
30,000
50,000
30,000
40,000
70,000
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Machine hours:
A
B
Total
Required:
a.
b.
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5,000
15,000
20,000
1,000
2,000
3,000
6,000
17,000
23,000
Compute the predetermined overhead rate for each department if Molding uses machine hours and
Assembly uses labor hours.
Calculate the per unit overhead rate for each product if 80,000 units of A were produced and 90,000
units of B were produced.
MULTIPLE CHOICE:
1. How does activity-based management treats fixed costs?
a. As costs which vary directly with volume.
b. As costs which cannot be controlled over the long-run.
c. As costs which may vary for reasons other than volume.
d. As sunk costs which have no future economic benefit.
2. Activity-based costing first assigns costs to activities, then to
a. the products based on each product's use of activities.
b. the plant based on each plant's use of activities.
c. the departments based on each department's use of activities.
d. the industry based on each industry's use of activities.
3. Which one of the following activities is appropriate as a cost driver for material handling costs?
a. Number of direct labor hours used
c. Number of raw material moves
b. Number of machine hours used
d. Number of units produced
4. Factory Company makes two products, X and Z. X is being introduced this period, whereas Z has been in
production for 2 years. For the period about to begin, 1000 units of each product are to be manufactured.
Assume that the only overhead item is the cost of engineering change orders; that X and Z are expected to
require eight and two change orders, respectively; that X and Z are expected to require 2 and 3 machine hours,
respectively; and that the cost of change order is P600. If Factory applies overhead on the basis of machine
hours, the cross-subsidy per unit arising from this peanut-butter costing approach is:
a. P1.20
b. P2.40
c. P3.60
d. P4.80
Next three questions are based on the following information.
A company has identified the following overhead costs and cost drivers for the coming year:
Overhead Item
Cost Driver
Budgeted Costs
Budgeted Activity Level
Machine setup
Number of setups
P 20,000
200
Inspection
Number of inspections
P130,000
6,500
Material handling
Number of material moves
P 80,000
8,000
Engineering
Engineering hours
P 50,000
1,000
P280,000
The following information was collected on three jobs that were completed during the year:
Job 101
Job 102
Job 103
Direct materials
P5,000
P12,000
P8,000
Direct labor
2,000
2,000
4,000
Units completed
100
50
200
Number of setups
1
2
4
Number of material moves
30
10
50
Number of inspections
20
10
30
Engineering hours
10
50
10
Budgeted direct labor cost was P100,000 and budgeted direct material cost was P280,000.
5. If the company uses activity-based costing, how much overhead cost should be allocated to Job 101?
a. P1,300
b. P2,000
c. P5,000
d. P5,600
6. If the company uses activity-based costing, compute the cost of each unit of Job 102.
a. P340
b. P300
c. P440
d. P520
7. The company prices its products at 140% of cost. If the company uses activity-based costing, the price of each
unit of Job 103 would be:
a. P98
b. P100
c. P116
d. P140
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8. Which of the following costs are not unit activities in the product cost hierarchy?
a. Energy to run machines.
c. Machine setups.
b. Direct materials.
d. Piecework labor costs.
9. In comparison with firms that use traditional costing, which of the following statements is true for firms that
adopt activity-based costing (ABC)?
a. Firms using ABC only experience better cost control.
b. Firms using ABC only experience better asset utilization.
c. Firms using ABC experience better cost control and asset utilization.
d. There is no appreciable difference in cost control or asset utilization for firms using ABC.
Next three questions are based on the following:
Bianca Pottery Company is noted for a full line of quality vases. The company operates one of its plants in
Bukidnon. That plant produces two types of vases: Blue and White design and Contemporary. Mary Viza, the
president of the company, recently decided to change from a volume-based costing system to an activity-based
cost system. Before making the change company wide, she wanted to assess the effect on the product costs of
the Bukidnon plant. This plant was chosen because it produces only two types of vases. Most other plants
produce at least a dozen. To assess the effect of the change, the following data have been gathered (costs are
expressed in pesos):
Prime Machine Material
Vase
Quantity
Costs
Hours
Moves
Setups
Blue & White
200,000 P700,000
50,000 700,000
100
Contemporary
50,000 150,000
12,500 100,000
50
Peso value-P850,000 P250,000 * P300,000 P450,000
* the cost of maintenance
Under the current system, the costs of maintenance, material handling, and setups are assigned to the vases on
the basis of machine hours. Assume the same level of output and prime costs as in the current system.
10. The
unit
cost
of
each
vase
using
the
current
unit-based
approach
is
a. Blue and White – P7.50: Contemporary – P7.00
c. Blue and White – P7.31: Contemporary – P7.75
b. Blue and White – P7.35: Contemporary – P7.60
d. None
of
the
above
11. The
unit
cost
of
each
vase
using
the
activity-based
costing
approach
is
a. Blue and White – P7.50: Contemporary – P7.00
c. Blue and White – P7.31: Contemporary –
b. Blue and White – P7.35: Contemporary – P7.60
P7.75
d. None
of
the
above
12. Assume that Mary decides to install JIT manufacturing. Two manufacturing cells are created – one for each
vase (the B & W –cell and the C – cell). the overhead costs traceable to each cell are as follows:
Material
Cell
Maintenance Handling
Setups
Total
B & W – Cell
P210,000 P260,000 P300,000 P770,000
C – cell
40,000
40,000 150,000 230,000
The
unit
costs
of
each
vase
in
the
JIT
system
is
a. Blue and White – P7.50: contemporary – P7.00
b. Blue and white – P7.35: contemporary – P7.60
c. Blue and White – P7.31: contemporary – P7.75
d. None of the above
13. Hoger Corporation accumulated the following cost information for its two products, A and B:.
A
B
Total
Production Volume
2,000
1,000
Total direct manual labor hours (DMLH)
5,000
20,000
P1,000
P2,000
100
50
Setup cost per batch
Batch size
Total setup costs incurred
DMLH per unit
25,000
P20,000 P40,000 P60,000
2
5
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A traditional costing system would allocate setup costs on the basis of DMLH. An ABC system would trace costs
by spreading the costs per batch over the units in a batch.
What is the setup cost per unit of product A under each costing system?
Traditional
a.
ABC
P4.80
P10.00
b. P2.40
P10.00
c.
P40.00
d. P4.80
P200.00
P20.00
14. The New Wave Company is considering a new method for allocating overhead to its two products, regular and
premium coffee beans. Currently New Wave is using the traditional method to allocate overhead, in the cost
driver is direct labor costs. However, it is interested in using two different drivers: machine hours (MH) for
separating and roasting beans, and pounds of coffee for packing and shipping. Machine hours for the current
month are 700 hours, direct labor cost per pound of coffee is P1.25 and direct materials cost pound of coffee is
P1.50. There are 1,000 pounds of coffee packed and shipped for the current month. The following data are
also available:
Regular
Overhead for the current month
Premium
P5,000.00
Cost pool for separating and roasting beans P3,500.00 150MH
Cost pool for packing and shipping
550MH
P1,500.00 500 pounds 500 pounds
What is the total cost per pound for the premium coffee using the new activity – based costing?
a. P5.00
b. P5.75
c. P7.75
d. P9.75
Next two questions are based on the following:
Believing that its traditional system maybe providing misleading information, an organization is considering and
activity-based costing (ABC) approach. It now employs a full cost system and has been applying its manufacturing
overhead on the basis of machine hours.
The organization plans on using 50,000 direct labor hours and 30,000 machine hours in the coming year. The
following data show the manufacturing overhead that is budgeted.
ACTIVITY
Materials handling
Setup Costs
Machining costs
Quality control
COST DRIVER
No. of parts handled
No. of set ups
Machine hours
No. of batches
BUDGETED
ACTIVITY
6,000,000
750
30,000
500
Total manufacturing cost
BUDGETED
COST
P720,000
315000
540,000
225000
P1,800,000
Cost, sales and production data for one of the organization’s products for the coming year are as follows:
Prime costs:
Direct materials cost
P4.40
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Direct labor cost per unit .05 DLH at P15/DLH
Total pime costs
Sales and production data:
Expected sales
Batch size
Setups
Total parts per finished unit
Machine hours required
.75
P5.15
20,000 units
5,000 units
2 per batch
5 parts
80 MH per batch
15. If the organization uses the full cost system, the cost per unit for this product for the coming year will be:
a. P5.39
b. P5.44
c. P6.11
d. P6.95
16. If the organization employs an activity-based costing system, the cost per unit for the product for the coming
year will be:
a. P6.00
b. P6.08
c. P6.21
d. P6.30
17. Jones Construction currently uses traditional costing where overhead is applied based on direct labor hours.
Using traditional costing, the applied overhead rate is P20 per direct labor hour.
They are considering a switch to activity-based costing (ABC). The company controller has come up with
preliminary overhead rates for each of the following activities:
Activity
Material delivery and handling
Inspections
Supervision
Purchasing
Allocation Base
Number of deliveries
Number of inspections
Hours of supervisor time
Number of purchase orders
Overhead rate
P100 per delivery
P75 per inspection
P30 per supervisor hour
P60 per purchase order
One of the company's current jobs has the following information available:
Direct labor hours
Number of deliveries
Number of inspections
Hours of supervisor time
Number of purchase orders
50 hours
2
3
2
5
Which of the following statements is true when comparing the total overhead allocated to the job using
traditional versus ABC costing?
a. ABC costing will yield P215 less in overhead cost being allocated to the job.
b. ABC costing will yield P735 less in overhead cost being allocated to the job.
c. ABC costing will yield P545 more in overhead cost being allocated to the job.
d. ABC costing will yield P785 more in overhead cost being allocated to the job.
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NEXT FOUR QUESTIONS ARE BASED ON THE FOLLOWING:
Zela Company is preparing its annual profit plan. As part of its analysis of the profitability of individual products,
the controller estimates the amount of overhead that should be allocated to the individual product lines from the
information provided below.
Budgeted material handling costs: P50,000
18. Under a traditional costing system that allocates overhead on the basis of direct labor hours, the materials
handling costs allocated to one unit of wall mirrors would be
a. P1,000
b. P500
c. P2,000
d. P5,000
19. Under a traditional costing system that allocates overhead on the basis of direct labor hours, the materials
handling costs allocated to one unit of specialty windows would be
a. P1,500
b. P500
c. P2,000
d. P5,000
20. Under an activity-based costing (ABC) system, the materials handling costs allocated to one unit of wall
mirrors would be
a. P625.00
b. P312.50
c. P833.33
d. P1,000.00
21. Under an activity-based costing (ABC) system, the materials handling costs allocated to one unit of specialty
windows would be
a. P1,875.00
b. P937.50
c. P312.50
d. P1,500.00
22. Shift premium and overtime premium that results from random scheduling is charged to:
a. factory overhead
b. work in process inventory
c. included as a period cost
d. none of the above
23. Normal costing is a method of
a. recording actual factory overhead costs.
b. Recording standard factory overhead costs
c. Recording budgeted factory overhead costs.
d. Recording factory overhead costs at a predetermined rate.
24. The productive capacity most commonly used because it remains constant for all periods, and does not change
because of changes in production, seasonal demand or customer demand is:
a. theoritical or ideal
b. practical or realistic
c. normal or long-run
d. expected or short run
25. The formula for calculating the factory overhead application rate is:
a. estimated factory overhead costs divided by estimated base at denominator activity.
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b. Estimated base at denominator activity divided by estimated factory overhead costs.
c. Estimated base at denominator activity divided by estimated manufacturing costs.
d. None of the above.
Questions 26 to 30 relate to the following facts:
Factory overhead costs
Expected production in units
Estimated machine hours
Estimated direct labor hours
Estimated direct labor costs
Estimated materials cost
P 750,000
25,000
25,000
25,000
P 1,000,000
P 250,000
Calculate the factory overhead application rate based on each of the following bases:
26. Direct materials cost:
a. P300
b. 300% of direct materials cost
c. P3
d. 300% of estimated factory overhead
27. Units of production:
a. P30 per unit
b. P30 per production hour
c. P300
d. 30% of units produced
28. Direct labor hours:
a. P30 per unit
b. P30 per direct labor hour
c. 30% per direct labor hour
d. P300
29. Machine hours
a. 30% of estimated factory overhead
b. 30% of machine cost
c. P30 per machine hour
d. P30 per peso of machine cost
30. Direct labor cost:
a. 133% of direct labor cost
b. P1.33
c. 75% of direct labor cost
d. P75
31. Generally, individual departmental rates rather than a plant-wide rate for applying overhead would be used if:
a. A company wants to adopt a standard cost system.
b. A company’s manufacturing operations are all highly automated.
c. Manufacturing overhead is the largest cost component of its product cost.
d. The manufactured products differ in the resources consumed from the individual departments in the
plant.
32. Units of production is an appropriate allocation base when:
a. Several well-differentiated products are manufactured.
b. Direct labor costs are low.
c. Direct materials are large relative to direct labor costs incurred.
d. Only one product is manufactured.
ALLOCATION OF SERVICE DEPARTMENT COST
●
Service departments provide services to other departments in the organization. Examples of service
departments and what they do:
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a. Personnel, accounting, and purchasing departments provide services to production departments.
b. An information systems department provides support for information technology support to other
departments.
c. A human resources department provides hiring and training services to other departments.
●
Three methods to allocate service department overhead costs are:
(1) Direct method,
(2) Step method, and
(3) Reciprocal method.
●
Service department costs are allocated for two purposes:
(1) To determine the cost to produce and market products or services.
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(2) To encourage operating department managers to monitor service department costs (cross-department
monitoring).
●
Each service department is an intermediate cost center whose costs are recorded as incurred and then
distributed to other cost centers.
● An important decision in cost allocation is to choose which allocation base to use. The usual criteria are cause
and effect, reasonableness, and fairness..
1. A producing department’s overhead consists of:
a. overhead directly associated with the producing departments
b. overhead allocated to the producing department from support departments
c. overhead directly associated with the producing departments and allocated from support departments
d. overhead costs and selling expenses
2. Alden Company has several support departments that provide services for each other as well as for producing
departments. The method that would be the most accurate in allocating the company’s support department
costs would be by:
a. direct method
b. step method
c. sequential method
d. reciprocal method
3. Which method ignores services provided by one support department to another support department?
a. direct method
b. step method
c. reciprocal method
d. all methods ignore services provided by one support department to another
4. The Monter Company has one service department, Maintenance and Cafeteria, and three producing
departments. The number of employees in each department is given as follows:
Maintenance
Cafeteria 5
Assembly 250
Finishing 100
Packaging 75
50
The costs of the cafeteria are allocated to other departments on the basis of the number of employees in other
departments. If the costs of the cafeteria are budgeted at P69,600, the amount of cost allocated to the
Maintenance under the direct method would be:
a. P0
b. P7,250
c. P7,326
d. P14,652
5. The Monter Company has one service department, Maintenance and Cafeteria, and three producing
departments. The number of employees in each department is given as follows:
Maintenance
Cafeteria 5
Assembly 250
Finishing 100
Packaging 75
50
The costs of the Cafeteria are allocated to other departments on the basis of the number of employees in other
departments. If the costs of the Cafeteria are budgeted at P69,600 and the costs of Maintenance are budgeted
at P200,000, the amount of Cafeteria cost allocated to the Maintenance under the step method would be:
a. P0
b. P7,250
c. P7,326.32
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d. P14,652.63
6. Della Company has a cafeteria for its employees. For the month of January, variable food costs were budgeted
at P50 per employee based on a budgeted level of 400 employees in other departments. During January, an
average of 395 employees worked in other departments and actual food costs totaled P18,550. How much food
cost should be charged to other departments at the end of the month for performance evaluation purposes?
a. P18,550
b. P20,000
c. P19,750
d. P18,318
7. In allocating factory service department costs to producing departments, which one of the following items
would most likely use an activity base?
a. Units of product sold
b. Salary of service department employees
c. Units of electric power consumed
d. Direct materials usage
NEXT TWO QUESTIONS ARE BASED ON THE FOLLOWING.
The Photocopying Department provides photocopy services for both departments A and B and has prepared its
total budget using the following information for the next year:
Fixed costs
Available capacity
Budgeted usage:
Department A
Department B
Variable cost
P 100,000
4,000,000 pages
1,200,000 pages
2,400,000 pages
P .03 per page
8. Assume that the single rate method of cost allocation is used and the allocation base is budgeted usage. How
much photocopying cost will be allocated to Department B in the budget year?
a. P72,000
b. P122,000
c. P132,000
d. P138,667
9. Assume that the dual rate cost allocation method is used and the allocation base is budgeted usage for fixed
costs and actual usage for variable cost. How much cost would be allocated to Department A during the year if
actual usage for department A is P1,400,000 pages and actual usage for Department B is 2,100,000 pages?
a. P42,000
b. P72,000
c. P75,333
d. P82,000
QUESTIONS 10 AND 11 ARE BASED ON THE FOLLOWING INFORMATION.
M and P Tool has three service departments that support the production area. Outline below is the estimated
overhead by the department for the upcoming year.
Service departments
Receiving
Repair
Tool
Estimated Overhead
P25,000
P35,000
P10,000
No. of employees
2
2
1
Producing departments
Assembly
Bolting
25
12
The repair department supports the greatest number of departments, followed by the Tool Department. Overhead
cost is allocated to department based upon the number of employees.
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R.D.BALOCATING
10. Using the direct method of allocation, how much of the Repair Department’s overhead will be allocated to the
Tool
department.
a. zero
b. P875
c. P7,000
d. P11,667
11. Using the step-down method of allocation, the allocation from the Repair Department to the Tool Department
would
be:
a. zero
b. P875
c. P7,000
d. P11,667
12. A company has two service departments (S1 and S2) and two production departments (P1 and P2).
Departmental data for January were as follows:
S1
P27,000
Cost incurred
Service provided to:
S1
S2
P1
P2
S2
P18,000
20%
10%
50%
40%
30%
50%
What are the total allocated service department costs to P2 if the company uses the reciprocal method of
allocating its service department costs? (Round all calculations to the nearest whole number.)
a. P19,800
b. P21,949
c. P22,500
d. P23,051
QUESTIONS 13 AND 14 ARE BASED ON THE FOLLOWING INFORMATION.
Fabricating and Finishing are the two production departments of manufacturing company. Building Operations
and Information Services are service departments that provide support to the two production departments as well
as to each other. The company employs department overhead rates in the two production departments to allocate
the service department costs to the production departments. Square footage is used to allocate building
operations, and computer time is used to allocate information services. The costs of the service departments and
relevant operating data for the departments are as follows:
Labor and benefit
Costs
Other traceable
Costs
Total
Square feet occupied
Computer time (hrs)
Building Operations
Information Services Fabricating
P 200,000
P 300,000
P 350,000
P 550,000
P 900,000
P1,200,000
5,000
200
10,000
16,000
1,200
Finishing
24,000
600
13. If the company employs the direct method to allocate the costs of the service departments, then the amount of
the
building
operations
costs
allocated
to
Fabricating
should
be
a. P140,000
b. P160,000
c. P176,000
d. P220,000
14. If the company employs the step method to allocate the cost of the service departments and if Information
Services costs are allocated firsts, then the total amount of service department costs (Information Services and
Building
Operations)
allocated
to
Finishing
would
be
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AFAR_18_May_2022
a.
b.
c.
d.
NFCPAR
R.D.BALOCATING
P675,000
P681,600
P730,000
P762,000
QUESTIONS 15 TO 19 ARE BASED ON THE FOLLOWING INFORMATION.
The managers of Rochester Manufacturing are discussing ways to allocate the cost of service departments such as
Quality Control and Maintenance to the production departments. To aid them in this discussion, the controller has
provided the following information:
Budget overhead
Before allocation
Budgeted machine
Hours
Budgeted direct
Labor hours
Budgeted hours
Of service
Quality control
Maintenance
Quality
Control
Maintenance
Machining
Assembly
Total
P 350,000
P 200,000
P 400,000
P 300,000
P 1,250,000
50,000
10,000
7,000
21,000
18,000
50,000
25,000
25,000
7,000
12,000
35,000
40,000
15. If Rochester Manufacturing uses the direct method of allocating service department costs, the total service
costs
allocated
the
Assembly
department
would
be
a. P80,000
b. P87,500
c. P120,000
d. P167,500
16. Using the direct method, the total amount of overhead allocated to each machine hour at Rochester
Manufacturing
would
be
a. P 2.40
b. P 5.25
c. P 8.00
d. P
15.65
17. If the Rochester Manufacturing uses the step down method of allocating service costs beginning with Quality
Control,
the
maintenance
costs
allocated
to
the
Assembly
Department
would
be
a. P 70,000
b. P 108,000
c. P 162,000
d. P
200,000
18. If Rochester Manufacturing uses the reciprocal method of allocating service costs, the total amount of quality
control costs (rounded to the nearest dollar) to be allocated to the departments would be
a. P 284,211
b. P 336,842
c. P 350,000
d. P
421,053
19. If Rochester Manufacturing decides not to allocate service costs to the production departments, the overhead
allocated
to
each
direct
labor
hour
in
the
Assembly
Department
would
be
a. P 3.20
c. P 12.00
b. P 3.50
d. P
16.00
20. If two service departments service the same number of departments, which service department's costs should
be allocated first when using the step method?
a. The service department that provides the most service to other service departments.
b. The service department that provides the most service to the user departments.
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c. The service department with the least cost.
d. The service department that provides the least service to other service departments.
e. The service department that provides the least service to the user departments.
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