Question 1

If product costs plus allocated support costs are used to set prices:
I. Prices increase as the volume of production decreases
II. Price increases cause further decreases in quantity demanded, causing production to decrease
III. The company may eventually go out of business

Accepted Answer

When product costs plus allocated support costs are used to set prices, as production volume decreases, the fixed support costs are spread over fewer units, increasing the cost per unit and thus the price. This can lead to a cycle where high prices reduce demand further, leading to lower production volumes and even higher prices, potentially driving the company out of business.

Question 2

The allocation method that ignores all services rendered between support departments is the:

Accepted Answer

The direct method involves allocating the costs of support departments directly to production departments without considering any services rendered between the support departments. This method is the simplest and easiest to use but may not necessarily provide an accurate allocation of costs.

Question 3

PIR Corporation has 2 support departments and 2 operating departments. Number of employees is used as an allocation base for personnel support costs, and square metres are used for janitorial support costs. A breakdown of their costs, along with other operating information, is shown below for a recent accounting period:  If PIR uses dual-rate allocation and the direct method, the variable cost allocation rate for janitorial services will be:

Accepted Answer

The answer of PIR Corporation has 2 support departments and...

Question 4

A firm allocates the cost of electricity to its operating departments based upon the number of electrical outlets in each department. The actual cost for electricity is $20,000 per period plus $0.02 per kilowatt-hour (KWH). The $20,000 is related to the amount of capacity needed, and capacity is reasonably estimated by the number of outlets. The firm has a total of 1,000 outlets and typically uses 700,000 KWH per period. Department W has 25 outlets and typically uses 15,000 KWH per period.
If the firm switches from a single allocation rate based upon capacity to dual rates based upon capacity and actual use, Department W's cost will:

Accepted Answer

The answer of A firm allocates the cost of electricity...

Question 5

Operating departments:

Accepted Answer

Operating departments are responsible for the production of goods or services for external customers. These departments are directly involved in creating revenue for the organization.

Question 6

PIR Corporation has 2 support departments and 2 operating departments. Number of employees is used as an allocation base for personnel support costs, and square metres are used for janitorial support costs. A breakdown of their costs, along with other operating information, is shown below for a recent accounting period:  If PIR uses single-rate allocation and the direct method, the allocation rate for personnel will be:

Accepted Answer

The answer of PIR Corporation has 2 support departments and...

Question 7

Managers can improve the quality of information when allocating support department costs by:
I. Using single-rate allocation
II. Using dual-rate allocation
III. Choosing cost drivers for allocation bases

Accepted Answer

Using dual-rate allocation (II) can improve the quality of information by differentiating between fixed and variable costs of support departments, which allows for a more accurate allocation to the other departments. Choosing cost drivers (III) as allocation bases can also improve the quality of information by identifying the factors that actually drive support department costs. Single-rate allocation (I) does not differentiate between fixed and variable costs and may not fully capture the cost drivers, making it less accurate. Therefore, II and III are better choices for improving the quality of information when allocating support department costs.

Question 8

The stand-alone method:

Accepted Answer

The stand-alone method allocates common costs based on information about individual users, considering how each user would incur costs if they were to operate independently.

Question 9

WST Corporation uses actual amounts to calculate support department cost allocation rates. A disadvantage of this practice is:

Accepted Answer

Using actual amounts to allocate support department costs means that if one department uses much less of a support department's services than others, the support charge to remaining departments will increase to compensate. This may not accurately reflect the value of support services used by each department, and could lead to inequitable or inflated charges. Option A is not a disadvantage as managers should be held responsible for actual usage. Option B is also not a disadvantage as it allows managers to plan and budget accordingly. Option D is not a direct disadvantage of using actual amounts to allocate support department costs.

Question 10

Which of the following contract types is most susceptible to inappropriate cost allocations?

Accepted Answer

Cost-based contracts rely heavily on accurate cost allocations and cost accounting. Without proper controls and oversight, there is a risk of inappropriate cost allocations which can lead to inaccurate reporting and payment disputes between parties.

Question 11

Advantages of using budgeted values to calculate support department cost allocation rates include:
I. Managers know support department costs in advance
II. Managers are motivated to use support department services efficiently
III. Allocated support costs for the period are not affected by actual usage so managers have little incentive to minimize the use of support services

Accepted Answer

I and II are advantages because knowing costs in advance helps in planning, and the motivation for efficient use of services comes from trying to stay within budgeted costs. III is not an advantage as it discourages minimizing the use of support services.

Question 12

Because the process of measuring and allocating support costs is uncertain and requires judgment:

Accepted Answer

The process of measuring and allocating support costs is subjective and involves various assumptions and estimates. As a result, the quality of the allocated support cost information can be low, leading to misleading decisions if relied upon solely. Therefore, managers should be cautious when using allocated support costs information, and should complement it with other cost information where possible.

Question 13

Allocation bases used in allocating support department costs:

Accepted Answer

Allocation bases used in allocating support department costs should be related to the services provided by the support department, as this provides a more accurate reflection of the support department's usage by other departments. Using any kind of measure or only direct costs may not accurately reflect the level of support being provided. Allocating costs based on cost drivers is also important for accuracy, but that is not an option in the given choices.

Question 14

If support department allocations are used to motivate managers to be more efficient:
I. The managers must believe the allocation system is fair
II. The managers should choose the allocation bases
III. It is not important that managers understand how the allocations are made

Accepted Answer

For support department allocations to effectively motivate managers towards efficiency, it's crucial that managers perceive the allocation system as fair. This perception of fairness encourages acceptance and motivation to improve efficiency based on the allocations. Allowing managers to choose the allocation bases could potentially improve their engagement with the process, but it's not a universally required condition for motivation. Understanding how allocations are made is also important for transparency and fairness, contradicting statement III.

Question 15

Which of the following is a drawback of dual-rate allocation?
I. It introduces uncertainty about cost classification
II. It costs more to develop and maintain than single-rate allocation
III. It may cause managers to believe that all support costs are variable

Accepted Answer

Option I is a drawback of dual-rate allocation as it can introduce uncertainty about cost classification which can lead to errors in decision making. Option II is also a drawback because dual-rate allocation costs more to develop and maintain than single-rate allocation. However, option III is not a drawback of dual-rate allocation as it is not a direct consequence of using dual-rate allocation. It is possible for managers to understand that only some support costs are variable while others remain fixed, even with dual-rate allocation.

Question 16

Following are reasons to allocate support department costs:
I. To motivate managers to provide and use support services efficiently
II. For external reporting such as cost reports for government contracts
III. For economic planning and decision-making

Accepted Answer

Allocating support department costs serves multiple purposes, including motivating managers to use support services efficiently, providing cost reports for external reporting, and aiding in economic planning and decision-making. Therefore, all three options - I, II, and III - are correct.

Question 17

PIR Corporation has 2 support departments and 2 operating departments. Number of employees is used as an allocation base for personnel support costs, and square metres are used for janitorial support costs. A breakdown of their costs, along with other operating information, is shown below for a recent accounting period:   If PIR uses single-rate allocation and the direct method, the total cost (including support department costs) for Product Assembly will be:

Accepted Answer

To use the single-rate allocation method with the direct method, we need to allocate the support department costs to the operating departments first.

First, let's allocate the personnel support costs, using the number of employees as the allocation base:

Personnel Support Department 1 Allocation: 
Operating Department 1: (4/10) x $20,000 = $8,000 
Operating Department 2: (6/10) x $20,000 = $12,000

Personnel Support Department 2 Allocation: 
Operating Department 1: (3/12) x $24,000 = $6,000 
Operating Department 2: (9/12) x $24,000 = $18,000

Next, let's allocate the janitorial support costs, using square metres as the allocation base:

Janitorial Support Department Allocation: 
Operating Department 1: (300/600) x $6,000 = $3,000 
Operating Department 2: (300/600) x $6,000 = $3,000

Now, we can add up the total costs for each department, including the support department allocations:

Operating Department 1 Total Cost: 
Direct Operating Costs: $40,000 
Personnel Support Allocation: $8,000 + $6,000 = $14,000 
Janitorial Support Allocation: $3,000 
Total Cost: $57,000

Operating Department 2 Total Cost: 
Direct Operating Costs: $60,000 
Personnel Support Allocation: $12,000 + $18,000 = $30,000 
Janitorial Support Allocation: $3,000 
Total Cost: $93,000

Finally, we can allocate the support department costs to the operating departments, using a single rate for all support department costs:

Single Rate: Total Support Department Costs / Total Allocation Base 
Total Personnel Support Costs = $20,000 + $24,000 = $44,000 
Total Janitorial Support Costs = $6,000 
Total Allocation Base = Number of Employees + Square Metres 
Operating Department 1 Allocation Base: 10 + 600 = 610 
Operating Department 2 Allocation Base: 12 + 600 = 612 
Single Rate = $50,000 / 1,222 = $40.90 per allocation base unit

Support Department 1 Allocation: 
Operating Department 1: 10 employees x $40.90 = $409 
Operating Department 2: 12 employees x $40.90 = $491

Support Department 2 Allocation: 
Operating Department 1: 300 sqm x $40.90 = $12,270 
Operating Department 2: 300 sqm x $40.90 = $12,270

Now we can add up the total costs for each operating department, including the support department allocations:

Operating Department 1 Total Cost: 
Direct Operating Costs: $40,000 
Personnel Support Allocation: $8,000 + $6,000 + $409 = $14,409 
Janitorial Support Allocation: $3,000 + $12,270 = $15,270 
Total Cost: $69,679

Operating Department 2 Total Cost: 
Direct Operating Costs: $60,000 
Personnel Support Allocation: $12,000 + $18,000 + $491 = $30,491 
Janitorial Support Allocation: $3,000 + $12,270 = $15,270 
Total Cost: $105,761

Therefore, the total cost (including support department costs) for Product Assembly (Operating Department 1) is $69,679.

The correct answer is C) $30,400.

Question 18

Support departments:

Accepted Answer

Support departments provide services to other departments within an organization, such as IT, human resources, and legal departments. This helps to ensure the smooth functioning of the organization as a whole. They do not generate revenue for the organization or provide services exclusively to other support departments. In large organizations, support departments are often essential for effective operations.

Question 19

When one user is viewed as being more responsible for common costs than other users, managers can allocate support department costs more fairly with the:

Accepted Answer

The Incremental Cost Allocation Method is used when one user is viewed as being more responsible for common costs than other users. This method allocates costs to the primary user first, and then allocates any remaining costs among other users incrementally, based on their respective levels of responsibility or usage. This approach allows for a more equitable distribution of costs when there's a clear primary user.

Question 20

Replacing cost-based reimbursement contracts with fixed fee reimbursement contracts is one way to:

Accepted Answer

Fixed fee reimbursement contracts reduce the incentive for biased information because the reimbursement is not based on the reported costs, thus minimizing the motivation to inflate costs.

Quiz 8: Measuring and Assigning Support Department Costs

If product costs plus allocated support costs are used to set prices: I. Prices increase as the volume of production decreases II. Price increases cause further decreases in quantity demanded, causing production to decrease III. The company may eventually go out of business