Sierra Company allocates the estimated $200,000 of its accounting department costs to its production
and sales departments since the accounting department supports the other two departments
particularly with regard to payroll and accounts payable functions. The costs will be allocated based on
the number of employees using the direct method. Information regarding costs and employees
follows:
Department
Employees
Accounting
4
Production
36
Sales
12
How much of the accounting department costs will be allocated to the production and sales
departments?
Sales
Department
Production
Department
$22,222
$66,667
$150,000
$50,000
$1,800,000
$600,000
$180,000
$60,000
Velvet Company allocates costs from the payroll department (S1) and the maintenance department
(S2) to the molding (P1), finishing (P2), and packaging (P3) departments. Payroll department costs
are allocated based on the number of employees in the department and maintenance department
costs are allocated based on the number of square feet which the production department occupies
within the factory.
Information about the departments is presented below:
Department
Costs
Number of
Number of Square
Employees
Feet Occupied
Payroll (S1)
$150,000
2
2,000
Maintenance (S2)
$220,000
8
64,000
Molding (P1)
75
100,000
Finishing (P2)
50
60,000
Packaging (P3)
25
40,000
Velvet uses the direct method to allocate costs. Round all answers to the nearest dollar.
What amount of the payroll department costs will be allocated to the molding department?
$132,353
$75,000
$70,313
$185,000
Rand Company sells fine collectible statues and has implemented activity-based costing. Costs in the
shipping department have been divided into three cost pools. The first cost pool contains costs that
are related to packaging and shipping and Rand has determined that the number of boxes shipped is
an appropriate cost driver for these costs. The second cost pool is made up of costs related to the final
inspection of each item before it is shipped and the cost driver for this pool is the number of individual
items that are inspected and shipped. The final cost pool is used for general operations and
supervision of the department and the cost driver is the number of shipments. Information about the
department is summarized below:
Cost Pool
Total Costs
Packaging and shipping
$170,000 Number of boxes shipped
Final inspection
$200,000
General operations and
supervision
Annual
Activity
Cost Driver
25,000 boxes
Number of individual items
shipped
$85,000 Number of orders
100,000
items
10,000 orders
During the period, the Far East sales office generated 680 orders for a total of 6,120 items. These
orders were shipped in 1,495 boxes. What amount of shipping department costs should be allocated to
these sales?
$22,406
$16,590
$10,588
$28,186
Library Resources Company uses activity-based costing. The company produces soft and hard-cover
books. The estimated costs and expected activity for each of the activity pools follow:
Activity
Estimated
Expected Activity
Cost Pool
Cost
Hard-Cover
Soft-Cover
Total
Activity 1
$15,675
800
300
1,100
Activity 2
$11,900
500
200
700
Activity 3
$36,000
800
400
1,200
To which of the following is the rate for activity 3 that will used to apply costs to Soft-cover books
closest?
$90.00
$12,000
$30.00
Not enough information is provided
Biltmore Financial is a banking services company that offers many different types of checking
accounts. The bank has recently adopted an activity-based costing system to assign costs to their
various types of checking accounts. The following data relate to the money market checking accounts,
one of the popular checking accounts, and the ABC cost pools:
Annual number of accounts = 60,000 accounts
Checking account cost pools:
Cost Pool
Cost
Returned check costs
Cost Drivers
$3,000,000
Checking account reconciliation
costs
60,000
Number of returned checks
Number of account reconciliation
requests
New account setup
650,000
Number of new accounts
Copies of cancelled checks
400,000
Number of cancelled check copy
requests
Online banking web site
maintenance
195,000
Per product group (type of account)
Total checking account costs
$4,305,000
Annual activity information related to cost drivers:
Cost Pool
All Products
Money Market Checking
Returned check
200,000 returned
checks
Check reconciliation costs
3,000 checking account
New accounts
60,000 new accounts
15,000
Cancelled check copy requests
100,000 cancelled
check
60,000
Web site costs
10 types of accounts
18,000
420
1
Calculate the overhead cost per account for the Money Market Checking.
Rockwell Company owns a single restaurant which has a cantina primarily used to seat patrons while
they wait on their tables. The company is considering eliminating the cantina and adding more dining
tables. Segmented contribution income statements are as follows and fixed costs applicable to both
segments are allocated on the basis of sales.
Restaurant
Sales
Variable costs
Cantina
Total
$800,000
$200,000
$1,000,000
475,000
160,000
635,000
Direct fixed costs
Allocated fixed costs
Net Income
50,000
15,000
65,000
212,500
37,500
250,000
$ 62,500
($12,500)
$50,000
What financial effect will occur to profit if Rockwell eliminates the cantina but no more dining
customers are served?
Net income will decrease to $37,500.
Net income will decline by $25,000.
Net income will increase by $12,500.
Net income will be $50,000.
Explorer Company manufactures two products, hard-tops and covers for its convertible vehicles. Data
for each follows:
Hard-top
Direct labor hours required per
unit
Contribution margin per unit
Covers
4
8
$240
$390
Only 4,200 direct labor hours are available per month. How many units of each product should
Explorer make in order to maximize profits?
Covers
Hardtop
0
250
1,050
0
4,200
400
1,050
250
Superior Gaming, a computer enhancement company, has three product lines: audio enhancers, video
enhancers, and connection-speed accelerators. Common costs are allocated based on relative sales. A
product line income statement for the year ended December 31, 2011 follows:
Audio
Video
Accelerators
Total
$1,045,000
$2,255,000
$2,200,000
$5,500,000
Less COGS
575,000
1,240,000
1,870,000
3,685,000
Gross margin
470,000
1,015,000
330,000
1,815,000
53,000
69,000
20,000
142,000
Sales
Less other var costs
Contribution margin
417,000
946,000
310,000
1,673,000
Less direct salaries
155,000
175,000
65,000
395,000
11,970
25,830
25,200
63,000
Utilities
4,370
9,430
9,200
23,000
Depreciation
5,890
12,710
12,400
31,000
79,230
170,970
166,800
417,000
$160,540
$552,060
$31,400
$744,000
Less common fixed costs:
Rent
Other admin costs
Net income
Since the profit for accelerators is relatively low, the company is considering dropping this product
line. What is the incremental effect of dropping accelerators?
$499,000
$31,400
($310,000)
($245,000)
Molina Medical Supply Company is trying to decide whether or not to continue distributing hospital
supplies. The following information is available for Molina’s business segments. Assume that all direct
fixed costs could be avoided if a segment is dropped and that the total common fixed costs would
remain unchanged if a segment is dropped.
Hospital
Supplies
Sales
Retail Stores
Mail Order
$120,000
$440,000
$360,000
Variable costs
64,000
200,000
140,000
Contribution Margin
56,000
240,000
220,000
Direct Fixed Costs
50,000
80,000
90,000
Allocated common fixed costs
20,000
70,000
60,000
($ 14,000)
$ 90,000
$ 70,000
Net Income
If hospital supplies are dropped, what would happen to profit?
Increase by $14,000.
Decrease by $114,000.
Decrease by $6,000.
Increase by $76,000.
Molina Medical Supply Company is trying to decide whether or not to continue distributing hospital
supplies. The following information is available for Molina’s business segments. Assume that all direct
fixed costs could be avoided if a segment is dropped and that the total common fixed costs would
remain unchanged if a segment is dropped.
Hospital
Supplies
Sales
Retail Stores
Mail Order
$120,000
$440,000
$360,000
Variable costs
64,000
200,000
140,000
Contribution Margin
56,000
240,000
220,000
Direct Fixed Costs
50,000
80,000
90,000
Allocated common fixed costs
20,000
70,000
60,000
($ 14,000)
$ 90,000
$ 70,000
Net Income
Assume that if hospital supplies were dropped, retail store sales would increase by 25%. What would
the impact on overall profitability be if the “Hospital Supplies” segment is eliminated?
Income will increase by $104,000.
Income would increase by $54,000.
Income will increase by $14,000.
Income will increase by $60,000.
Iguana Company sells a single product. Iguana estimates demand and costs at various activity levels
as follows:
Units Sold
Price
Total Variable Costs
Fixed Costs
120,000
$48
$3,000,000
$1,000,000
140,000
$45
$3,500,000
$1,000,000
160,000
$40
$4,000,000
$1,000,000
180,000
$35
$4,500,000
$1,000,000
200,000
$30
$5,000,000
$1,000,000
How would you best describe Iguana’s variable cost per unit over the range shown?
It is decreasing as volume increases.
It is first increasing as volume increases, then decreasing.
It is constant.
It is increasing as volume increases.
Jackson Company is trying to determine the optimal price to charge for its PUNCH model. Jackson has
fixed costs of $50,000 and the PUNCH has variable costs of $12.00 per unit. Jackson has determined
that the following relationships exist between price and demand:
Price
Demand
$20
6,875
$19
8,800
$18
10,000
$17
11,000
What price should Jackson charge in order to maximize its profit?
$19
$18
$17
$20
Costa Company has a capacity of 40,000 units per year and is currently selling 35,000 for $400 each.
Barton Company has approached Costa about buying 2,000 units for only $300 each. The units would
be packaged in bulk, saving Costa $20 per unit when compared to the normal packaging cost.
Normally, Costa has a variable cost of $280 per unit. The annual fixed cost of $2,000,000 would be
unaffected by the special order. What would be the impact on profits if Costa were to accept this
special order?
Profits would increase $80,000.
Profits would increase $60,000.
Profits would decrease $200,000.
Profits would increase $40,000.
The Pure Company uses cost-plus pricing with a 50% mark-up. The company is currently selling
100,000 units at $12 per unit. Each unit has a variable cost of $6. In addition, the company incurs
$200,000 in fixed costs annually. If demand falls to 80,000 units and the company wants to continue
to earn a 50% return, what price should the company charge?
$12.75
$14.55
$10.95
$13.50
A company has $8.00 per unit in variable costs and $4.00 per unit in fixed costs at a volume of 50,000
units. If the company marks up total cost by 60%, what price should be charged if 60,000 units are
expected to be sold?
$11.33
$18.13
$19.20
$7.20
The chief engineer at Tech Deals has proposed production of a high-tech portable electronic storage
device to be sold at a 30 percent markup above its full cost. Management estimates that the fixed
costs per year will be $160,000. The quantity demanded is 40,000 units. How much is the price with a
30 percent markup?
$20.00
$19.60
$20.80
More information is needed to answer.
A new product is being designed by an engineering team at Golem Security. Several managers and
employees from the cost accounting department and the marketing department are also on the team
to evaluate the product and determine the cost using a target costing methodology. An analysis of
similar products on the market suggests a price of $135 per unit. The company requires a profit of 30
percent of selling price. How much is the target cost per unit?
$94.50
$175.50
$81.00
$40.50
Carlton Products Company has analyzed the indirect costs associated with servicing its various
customers in order to assess customer profitability. Results appear below:
Cost Pool
Annual Cost Cost Driver
Annual Driver Quantity
Processing electronic orders
$1,000,000 Number of orders
500,000
Processing non-electronic orders
$2,000,000 Number of orders
400,000
Picking orders
$3,000,000 Number of different products ordered
800,000
Packaging orders
$1,500,000 Number of items ordered
Returns
$2,000,000 Number of returns
50,000,000
50,000
If all costs were assigned to customers based on the number of items ordered, what would be the cost
per item ordered?
$6.09
$10.62
$0.19
$0.09
A company using activity based pricing marks up the direct cost of goods by 30% plus charges
customers for indirect costs based on the activities utilized by the customer. Indirect costs are charged
as follows: $8.00 per order placed; $4.00 per separate item ordered; $30.00 per return. A customer
places 10 orders with a total direct cost of $3,000, orders 300 separate items, and makes 5 returns.
What will the customer be charged?
$5,759
$3,000
$3,900
$5,330
A law firm uses activity-based pricing. The company’s activity pools are as follows:
Cost Pool
Annual Estimated Cost Cost Driver
Consultation
200,000 Number of consultations
Administrative Costs
150,000 Admin labor hours
Client Service
99,000 Number of clients
Annual Driver Quantity
100 consultations
10,000 labor hours
110 clients
The firm had two consultations with this client and required 130 administrative labor hours. What
additional costs will be charged to this customer?
$2,850
$2,915
$6,850
$5,950