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Exam 21: Cost Allocation and Performance Measurement

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Question 1

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Burien, Inc., operates a retail store with two departments, A and B. Its departmental income statement for the current year follows: Burien allocates building depreciation, maintenance, and utilities on the basis of square footage. Office expenses are allocated on the basis of sales. Management is considering an expansion to a three-department operation. The proposed Department C would generate $120,000 in additional sales and have a 17.5% contribution to overhead. The company owns its building. Opening Department C would redistribute the square footage to each department as follows: A, 19,040; B, 21,760 sq. ft.; C, 13,600. Increases in indirect expenses would include: maintenance, $500; utilities, $3,800; and office expenses, $1,200. Complete the following departmental income statements, showing projected results of operations for the three sales departments. (Round amounts to the nearest whole dollar.)

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* $3,300 + $500 = $3,800 ** $12,520 + $3,800 = $16,320 *** $3,800 + $1,200 = $5,000 11eaaaf8_6d9c_69d5_812b_5f626d578c49_TB6309_00 11eaaaf8_6d9c_69d6_812b_b17b4e6c48b2_TB6309_00 11eaaaf8_6d9c_69d7_812b_ffb832c03e1e_TB6309_00

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A department can never be considered to be a profit center.

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B) False

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Question 3

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Samm's Department Store operates three departments (A, B and C). If total costs of $4,500 are to be allocated on the basis of square feet of space (Dept. A = 1,500 Sq. Ft.; Dept. B = 900 Sq. Ft.; Dept. C = 600 Sq. Ft.) then Dept A's share (in percent) of the $4,500 cost would be __________%; Dept. B would be ________%, and Dept C would be ____________%. The amount of cost allocated to Dept. C would be $__________.

A department's direct expenses can be entirely avoided if the department manager carefully controls and monitors operations.

The salaries of employees who spend all their time working in one department are:

Departmental contribution to overhead is calculated as revenues of the department less:

Yoho Company reported the following financial numbers for one of its divisions for the year; average total assets of $5,800,000; sales of $5,375,000; cost of goods sold of $3,225,000; and operating expenses of $1,147,000. Compute the division's return on assets:

If a firm uses activity-based costing to allocate costs, it must:

Costs that the manager has the power to determine or at least strongly influence are called:

Unit costs can be significantly different when using activity-based costing compared to traditional cost allocation methods.

The following is taken from Ames Company's internal records of its factory with two operating departments. The cost driver for indirect labor is direct labor costs, and the cost driver for the remaining items is number of hours of machine use. Compute the total amount of overhead allocated to Dept.2 using activity-based costing.

In the two-stage cost allocation, ______________________ costs are allocated to operating departments, and the operating department costs are allocated to ______________.

Under traditional cost allocation methods, low-volume complex products are often __________________ and high-volume simpler products are likely to be ______________.

The ________________________________ is a report of the amount of sales less direct expenses for a department.

A cost center does not directly generate revenues.

A _________________ is a factor that causes the cost of an activity to go up and down.

Activity-based costing attempts to better allocate costs to the proper users of overhead by focusing on activities.

Renton Co. has two operating (production) departments supported by a number of service departments. The following information was collected for a recent period: Indirect costs are allocated as follows: salaries on the basis of sales, office expenses on the basis of the number of employees, and all other costs on the basis of square footage. Additional information about the production departments follows: Sales for the Machining Department are $724,404 and sales for the Assembly Department are $356,796. Determine the departmental contribution to overhead and the departmental net income for each production department.

Return on investment is a useful measure to evaluate the performance of a cost center manager.

A company rents a small building with 10,000 square feet of space for $100,000 per year. The rent is allocated to the company's three departments on the basis of the value of the space occupied by each. Department One occupies 1,500 square feet of ground-floor space, Department Two occupies 3,500 square feet of ground-floor space, and Department Three occupies 5,000 square feet of second-floor space. If rent for comparable floor space in the neighborhood averages $15.00 per sq. ft. for ground-floor space and $10.00 per sq. ft. for second-floor space, what annual rent expense should be charged to each department?