Deck 21: Cost Allocation and Performance Measurement

Question 1

Generally, it does not matter how cost allocations are designed and explained, because most managers do not care whether the allocations appear to be fair or not.

Answer 1

False

Question 2

Investment center is another name for profit center.

Answer 2

False

Question 3

A cost center does not directly generate revenues.

Answer 3

True

Question 4

Evaluation of the performance of a department involves only financial measures.

Question 5

Joint costs can be allocated either using a physical basis or a value basis.

Question 6

A selling department is usually evaluated as a profit center.

Question 7

A responsibility accounting performance report usually compares actual costs to budgeted costs amounts.

Question 8

Departmental information is important and always disclosed to the public as part of the company's annual report and footnotes.

Question 9

Joint costs are a group of several costs incurred in producing or purchasing a single product.

Question 10

Advertising expense can be reasonably allocated to departments on the basis of sales.

Question 11

Indirect expenses should be allocated to departments based upon the benefits received by each department.

Question 12

Controllable costs are the same as direct costs.

Question 13

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

Question 14

Direct costs require allocation across departments.

Question 15

The number of hours that a department uses equipment and machinery is a reasonable basis for allocating depreciation.

Question 16

The concepts of direct costs and controllable costs are essentially the same; also, indirect costs and uncontrollable costs are essentially the same.

Question 17

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

Question 18

Evaluation of the performance of managers of profit centers assumes that the managers can control or influence both costs and revenue generation.

Question 19

A department that is responsible for maximizing revenues is known as a profit center.

Question 20

Departmental wage expenses are direct expenses of that department.

Question 21

Investment center managers are evaluated on their use of center assets to generate income.

Question 22

An activity-based costing system usually involves a fewer number of allocations compared with a traditional cost allocation system.

Question 23

A cost center is a unit of a business that incurs costs but does not directly generate revenues. All of the following are considered cost centers except:

A) Accounting department.
B) Purchasing department.
C) Research department.
D) Advertising department.
E) All of these could be considered cost centers.

Question 24

Departmental income statements are prepared for operating as well as service departments.

Question 25

Activity-based costing assigns costs first to activity pools, and then costs from activity cost pools are assigned to the cost objects benefiting from the activities.

Question 26

Activity-based costing can be especially effective in situations where many different products are manufactured in the same department or departments.

Question 27

An example of a service department is the human resources department.

Question 28

A joint cost of producing two products can be allocated between those products on the basis of the relative physical quantities of each product produced.

Question 29

A single basis for allocating service department costs to production departments should be used for all service departments.

Question 30

In producing oat bran, the joint cost of milling the oats into bran, oatmeal, and animal feed is considered a direct cost to the oat bran, because the oat bran cannot be produced without incurring the joint cost.

Question 31

A useful measure used to evaluate the performance of an investment center is investment center residual income.

Question 32

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

Question 33

Traditional two-stage cost allocation means that indirect costs are first allocated to both operating and service departments, then operating department costs are allocated to service departments.

Question 34

A measure used to evaluate the manager of an investment center is return on total costs for the investment center.

Question 35

The process of preparing departmental income statements starts with allocating service departments.

Question 36

Departmental contribution to overhead is the amount of revenues for that department less its direct expenses.

Question 37

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

Question 38

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

Question 39

Activity cost pools are an important part of the allocation of overhead costs using activity-based costing.

Question 40

Departmental contribution to overhead is the same as gross profit generated by that department.

Question 41

Within an organizational structure, the person most likely to be evaluated in terms of controllable costs would be:

A) A payroll clerk.
B) A cost center manager.
C) A production line worker.
D) A maintenance worker.
E) All of these.

Question 42

The most useful allocation basis for the departmental costs of an advertising campaign for a storewide sale is likely to be:

A) Floor space of each department.
B) Relative number of items each department had on sale.
C) Number of customers to enter each department.
D) An equal amount of cost for each department.
E) Proportion of sales of each department.

Question 43

A company has two departments, A and B that incur delivery expenses. An analysis of the total delivery expense of $9,000 indicates that Dept. A had a direct expense of $1,000 for deliveries and Dept. B had no direct expense. The indirect expenses are $8,000. The analysis also indicates that 60% of regular delivery requests originate in Dept. A and 40% originate in Dept. B. Departmental delivery expenses for Dept. A and Dept. B,

A) $4,500; $4,500.
B) $5,800; $3,200.
C) $5,500; $3,500.
D) $5,500; $4,500.
E) $5,400; $3,600.

Question 44

An accounting system that provides information that management can use to evaluate the performance of a department's manager is called a:

A) Cost accounting system.
B) Managerial accounting system.
C) Responsibility accounting system.
D) Financial accounting system.
E) Activity-based accounting system.

Question 45

A department that incurs costs without directly generating revenues is a:

A) Service center.
B) Production center.
C) Profit center.
D) Cost center.
E) Performance center.

Question 46

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

A) Uncontrollable costs.
B) Controllable costs.
C) Joint costs.
D) Direct costs.
E) Indirect costs.

Question 47

Expenses that are easily traced and assigned to a specific department because they are incurred for the sole benefit of that department are called:

A) Direct expenses.
B) Indirect expenses.
C) Controllable expenses.
D) Uncontrollable expenses.
E) Fixed expenses.

Question 48

A difficult problem in calculating the total costs and expenses of a department is:

A) Determining the gross profit ratio.
B) Assigning direct costs to the department.
C) Assigning indirect expenses to the department.
D) Determining the amount of sales of the department.
E) Determining the direct expenses of the department.

Question 49

The allocation bases for assigning indirect costs include:

A) Only physical bases.
B) Only cost bases.
C) Only value bases.
D) Only unit bases.
E) Any appropriate and reasonable bases.

Question 50

The difference between a profit center and an investment center is

A) an investment center incurs costs, but does not directly generate revenues.
B) an investment center incurs no costs but does generate revenues.
C) an investment center is responsible for effectively using center assets.
D) an investment center provides services to profit centers.
E) There is no difference; investment center and profit center are synonymous.

Question 51

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

A) Variable expenses.
B) Indirect expenses.
C) Direct expenses.
D) Responsibility expenses.
E) Unavoidable expenses.

Question 52

Regardless of the system used in departmental cost analysis:

A) Direct costs are allocated, indirect costs are not.
B) Indirect costs are allocated, direct costs are not.
C) Both direct and indirect costs are allocated.
D) Neither direct nor indirect costs are allocated.
E) Total departmental costs will always be the same.

Question 53

An expense that does not require allocation between departments is a(n):

A) Common expense.
B) Indirect expense.
C) Direct expense.
D) Administrative expense.
E) All of these.

Question 54

A report that accumulates the actual costs that a manager is responsible for and their budgeted amounts is a:

A) Segmental accounting report.
B) Managerial cost report.
C) Controllable expense report.
D) Departmental accounting report.
E) Responsibility accounting performance report.

Question 55

An accounting system that provides information that management can use to evaluate the profitability and/or cost effectiveness of a department's activities is a:

A) Departmental accounting system.
B) Cost accounting system.
C) Service accounting system.
D) Revenue accounting system.
E) Standard accounting system.

Question 56

Expenses that are not easily associated with a specific department, and which are incurred for the benefit of more than one department, are:

A) Fixed expenses.
B) Indirect expenses.
C) Direct expenses.
D) Uncontrollable expenses.
E) Variable expenses.

Question 57

A profit center:

A) Incurs costs, but does not directly generate revenues.
B) Incurs costs and directly generates revenues.
C) Has a manager who is evaluated solely on efficiency in controlling costs.
D) Incurs only indirect costs and directly generates revenues.
E) Incurs only indirect costs and generates revenues.

Question 58

Plans that identify costs and expenses under each manager's control prior to the reporting period are called:

A) Cost accounting systems.
B) Managerial accounting systems.
C) Responsibility accounting systems.
D) Responsibility accounting budgets.
E) Activity-based accounting systems.

Question 59

Costs that the manager does not have the power to determine or at least strongly influence are:

A) Variable costs.
B) Uncontrollable costs.
C) Indirect costs.
D) Direct costs.
E) Joint costs.

Question 60

A unit of a business that not only incurs costs, but also generates revenues, is called a:

A) Performance center.
B) Profit center.
C) Cost center.
D) Responsibility center.
E) Expense center.

Question 61

A sawmill bought a shipment of logs for $40,000. When cut, the logs produced a million board feet of lumber in the following grades. Compute the cost to be allocated to Type 1 and Type 2 lumber, respectively, if the value basis is used. Type 1 - 400,000 bd. ft. priced to sell at $0.12 per bd. ft.
Type 2 - 400,000 bd. ft. priced to sell at $0.06 per bd. ft.
Type 3 - 200,000 bd. ft. priced to sell at $0.04 per bd. ft.

A) $16,000; $16,000.
B) $13,333; $4,444.
C) $40,000; $24,000.
D) $24,000; $12,000.
E) $24,000; $8,000.

Question 62

Breon Beef Company uses the relative market value method of allocating joint costs in its production of beef products. Relevant information for the current period follows: The total joint cost for the current period was $43,000. How much of this cost should Breon Beef allocate to sirloin?

A) $0.
B) $5,909.
C) $8,600.
D) $10,750.
E) $43,000.

Question 63

A sawmill paid $70,000 for logs that produced 200,000 board feet of lumber in 3 different grades and amounts as follows: Compute the portion of the $70,000 joint cost to be allocated to No. 2 Common.

A) $0.
B) $17,500.
C) $23,333.
D) $35,000.
E) $70,000.

Question 64

Dresden, Inc. has four departments. Information about these departments follows is listed below. If allocated maintenance cost is based on floor space occupied by each, compute the amount of maintenance cost allocated to the Cutting Department.

A) $2,769.
B) $3,000.
C) $3,724.
D) $6,000.
E) $18,000.

Question 65

A responsibility accounting system:

A) Is designed to measure the performance of managers in terms of controllable costs.
B) Assigns responsibility for costs to the appropriate managerial level that controls those costs.
C) Should not hold a manager responsible for costs over which the manager has no influence.
D) Can be applied at any level of an organization.
E) All of these.

Question 66

Investment center managers are usually evaluated using performance measures

A) that combine income and assets.
B) that combine income and capital.
C) based on assets only.
D) based on income only.
E) that combine assets and capital.

Question 67

Allocations of joint product costs can be based on the relative sales values of the products:

A) And never on the relative physical quantities of the products.
B) Plus an adjustment for future excess margins.
C) And not on any other basis.
D) At the "split-off point".
E) Only if the products contain both direct and indirect costs.

Question 68

In a responsibility accounting system:

A) Controllable costs are assigned to managers who are responsible for them.
B) Each accounting report contains all items allocated to a responsibility center.
C) Organized and clear lines of authority and responsibility are only incidental.
D) All managers at a given level have equal authority and responsibility.
E) All of these.

Question 69

Allocating joint costs to products can be based on their relative:

A) Sales values.
B) Direct costs.
C) Gross margins.
D) Total costs.
E) Variable costs.

Question 70

In a firm that manufactures clothing, the department that is responsible for actually assembling the garments could best be described as a:

A) Service department.
B) Operating or production department.
C) Cost center.
D) Department in which all of the costs incurred are direct expenses.
E) Department in which all of the costs incurred are indirect expenses.

Question 71

Calculating return on total assets for an investment center is defined by the following formula for an investment center:

A) Contribution margin/Ending assets.
B) Gross profit/Ending assets.
C) Net income/Ending assets.
D) Net income/Average invested assets.
E) Contribution margin/Average invested assets.

Question 72

A dairy allocates the cost of unprocessed milk to the production of milk, cream, butter and cheese. For the current period, unprocessed milk was purchased for $240,000, and the following quantities of product and sales revenues were produced. How much of the $240,000 cost should be allocated to milk?

A) $0.
B) $86,400.
C) $90,000.
D) $133,333.
E) $240,000.

Question 73

A cost incurred in producing or purchasing two or more products at the same time is a(n):

A) Product cost.
B) Incremental cost.
C) Differential cost.
D) Joint cost.
E) Fixed cost.

Question 74

A retail store has three departments, 1, 2, and 3, and does general advertising that benefits all departments. Advertising expense totaled $50,000 for the year, and departmental sales were as follows. Allocate advertising expense to Department 2 based on departmental sales.

A) $11,000.
B) $14,000.
C) $16,667.
D) $22,500.
E) $50,000.

Question 75

Data pertaining to a company's joint production for the current period follows: Compute the cost to be allocated to Product A for this period's $660 of joint costs if the value basis is used.

A) $330.00.
B) $440.00.
C) $220.00.
D) $194.12.
E) $484.00.

Question 76

Baker Corporation has two operating departments, Machining and Assembly, and an office. The three categories of office expenses are allocated to the two departments using different allocation bases. The following information is available for the current period: The amount of the total office expenses that should be allocated to Assembly for the current period is:

A) $35,750.
B) $45,000.
C) $54,250.
D) $90,000.
E) $600,000.

Question 77

General Chemical produced 10,000 gallons of Breon and 20,000 gallons of Baron. Joint costs incurred in producing the two products totaled $7,500. At the split-off point, Breon has a market value of $6.00 per gallon and Baron $2.00 per gallon. Compute the portion of the joint costs to be allocated to Breon if the value basis is used.

A) $2,500.
B) $3,000.
C) $4,500.
D) $5,625.
E) $1,500.

Question 78

A responsibility accounting performance report reports:

A) Only actual costs.
B) Only budgeted costs.
C) Both actual costs and budgeted costs.
D) Only direct costs.
E) Only indirect costs.

Question 79

Responsibility accounting performance reports:

A) Become more detailed at higher levels of management.
B) Become less detailed at higher levels of management.
C) Are equally detailed at all levels of management.
D) Are useful in any format.
E) Are irrelevant.

Question 80

The most useful evaluation of a manager's cost performance is based on:

A) Controllable costs.
B) Contribution percentages.
C) Departmental contributions to overhead.
D) Uncontrollable expenses.
E) Direct costs.