MA1 2007-2008
MANAGEMENT ACCOUNTING
MODULE 5
PART 2 Slides 17- 33 – Demonstration problem - Green Glider Golf
Green Glider Corporation makes golf carts that it sells directly to golf courses throughout Canada. Several basic models are
available along with a model that can be customized by the customer based on a list of available options. They want to analyze
their costs by focusing on two models of golf carts; the standard model 200 and the customizable model called the C400.
Activity
a. The purchasing department orders the specific colour of paint specified by the customer from
the company’s supplier
b. A steering wheel is installed in a golf cart
c. An outside attorney draws up a new generic sales contract for the company limiting Green
Glider’s liability in the case of accidents that involve its golf carts
d. The company’s paint shop makes a stencil for a customer’s logo
e. A sales representative visits an old customer to check on how the company’s golf carts are
working out and to try to make a new sale
f. The accounts receivable department prepares the bill for a completed order...............................
g.
Electricity is used to heat and light the administrative offices
Level
Batch-level
Unit-level
Organizationsustaining
Batch-level
Customer-level
Batch-level
Organizationsustaining
h. A golf cart is painted
Unit-level
i. The company’s engineer modifies the design of a model to eliminate a potential safety problem
Product-level
j. The marketing department has a catalogue printed and then mails them to golf course managers
Customer-level
k. Completed golf carts are each tested on the company’s test track
l. A new model golf cart is shipped to the leading golfing trade magazine to be evaluated for the
magazine’s annual rating of golf carts
Unit-level
Product-level
Green Glider Corporation
Cost pool
Activity Measure
Total Total activity
costs
Production of golf
carts
Direct labour hours
C ustomer orders
Number of orders
C ustomer relations
Number of customers
Golf cart design
Number of custom designs
TOTAL
$840,000
70,000
$12/DLH
52,500
150
$350/order
180,000
200
$900/customer
33,000
30
$1,100/design
$1,105,500
Golf Glider STANDARD Model 200
Cost pool
Cost per cart: $814
Activity rate
Production of golf carts
$12
$350
/order
Customer relations
$900
/customer
$1,100
Activity (60 carts)
/direct labour hrs.
Customer orders
Golf cart design
Activity rate
3,720
direct labour hrs.
12
orders
ABC cost
$44,640
$4,200
Not applicable
/custom design
TOTAL
0
custom designs
$48,840
-1-
ma1_mod5_handout1.doc
MA1 2007-2008
MANAGEMENT ACCOUNTING
MODULE 5
PART 2 Slides 17- 33 – Demonstration problem - Green Glider Golf (continued)
Golf Glider CUSTOM Model C400
Cost per cart: $2,650
Cost pool
Activity rate
Activity (30 carts)
ABC cost
Production of golf carts
$12
/direct labour hrs.
3,000
direct labour hrs.
$36,000
Customer orders
$350
/order
30
orders
$10,500
Customer relations
$900
/customer
Not applicable
Golf cart design
$1,100
/custom design
30
custom designs
TOTAL
$33,000
$79,500
Product profitability analysis
Cost pool
Standard Model 200 (60
units)
Sales
C ustom model C400 (30
units)
$300,000
$330,000
$120,000
$203,400
Direct labour
41,160
35,000
Total overhead
cost
48,840
79,600
Product margin
$90,000
$12,000
Per unit
$1500
$400
Costs:
Direct materials
C ustomer profitability analysis
Mill Lake Golf Club
Units
Unit
margin
Total
Standard model 200
3
$1,500
$4,500
C ustom model C400
2
$400
$800
Product margins of carts
ordered
Total product margins
$5,300
Less: Customer relations
overhead
($900)
C usto mer margin
$4,400
-2-
ma1_mod5_handout1.doc
MA1 2007-2008
MANAGEMENT ACCOUNTING
MODULE 5
PART 4 Slides 55- 68 – Demonstration problem – Jones Corporation
The Baltic Division of Jones Corporation has two operating departments and two service departments.
Assembly and
Finishing
Maintenance &
Human Resources
(service departments)
(operating departments)
The total square metres of all departments is 255,000 and there are 95 employees.
Maintenance is allocated using square feet and Human Resources is allocated using the number of
employees.
Jones Corporation
Baltic Division – Service Department Costs
DATA
Service Departments
Maintenance
Human
Resources
Budgeted costs
$30,000
$216,000
before allocation
Square metres
5,000
30,000
Number of
8
15
employees
-3-
Operating Departments
Assembly
Finishing
Total
$170,000
$90,000
506,000
110,000
48
110,000
24
255,000
95
ma1_mod5_handout1.doc
MA1 2007-2008
MANAGEMENT ACCOUNTING
MODULE 5
PART 4 Slides 55- 68 – Demonstration problem – Jones Corporation (continued)
Solution
Jones Corporation
Baltic Division – Service Department Costs
Service Departments
Reciprocal Method
Maintenance
Percentage allocated
% of maintenance allocated to
each dept.
% of human resources allocated
to each dept.
STEP 1 Express support dept.
costs and reciprocal relationships
in linear equation form.
STEP 2 Solve the system of
simultaneous equations to obtain
reciprocated costs
Budgeted costs before allocation
STEP 3: Allocation of
Human
Resources
Operating Departments
Assembly
Finishing
12%
44%
44%
(30,000 sq metres /
250,000)
(110,000
sq.metres /
250,000)
(110,000 sq metres
/ 250,000)
10%
60%
30%
(8 employees /
80)
(48 employees /
80)
(24 employees /
80)
=$30,000 +
.10H
=$216,000 +
.12M
(% of HR used
by Mtce)
(% of Mtce used by
HR)
M = $30,000
+.1(216,000+.
12M)
M=$52,227
H = $216,000 +
.12(52,227)
OR
$216,000 +
.12(30,000
+.10H)
H=$222,267
$30,000
(52,227)
$216,000
6,267
$170,000
22,980
$90,000
22,980
22,227
(222,267)
133,360
66,680
$0
$0
$326,340
$179,660
maintenance
STEP 3: Allocation of Human
Resources
Budgeted manufacturing
overhead of operating
departments
-4-
ma1_mod5_handout1.doc
MA1 2007-2008
MANAGEMENT ACCOUNTING
MODULE 5
PART 5 Slides 70-73 Question 7 March, 2007 exam
Racquet Company produced 2 different types of tennis racquets — a beginner model called the
Ace and an advanced model called the Sureshot. This month, the company has produced 10,000
units of the Ace and 4,000 of the Sureshot, all of which were sold. The Ace sells for $220 each
and the Sureshot for $175 each (unstrung). Both racquets are made of a mixture of titanium and
fiberglass at a cost of $20 per unit, so the raw materials used to make a racquet is the same,
regardless of which racquet is produced. Each racquet takes 0.5 direct labour-hours to make. The
company pays their employees $10 per hour.
Traditionally, Racquet has allocated overhead based on the amount of direct labour dollars. The
overhead allocation is $10 overhead for each $1 of direct labour. Ms. Azziz, the newly hired
accountant, is questioning the traditional method of overhead allocation. She further analyzed the
overhead for the month of December 2006 and discovered the following details:
Overhead Component
Amount
Machine amortization
Indirect materials
Indirect labour
Maintenance
Cleaning
Factory insurance
Heat, light and power
Total monthly overhead
$ 220,000
50,000
80,000
150,000
100,000
25,000
75,000
$ 700,000
Activity Generating
the Overhead
Machine-hours (MH)
Direct material cost (DM)
Direct labour-hours (DLH)
Machine-hours (MH)
Square footage occupied (Sq.ft)
Square footage occupied (Sq.ft)
Machine-hours (MH)
Ms. Azziz also obtained the following information regarding the production of the 2 products:
Overhead Component
Machine amortization
Indirect materials
Indirect labour
Maintenance
Cleaning
Factory insurance
Heat, light, and power
Total Amount
of Activity
22,000 MH
$280,000 DM
7,000 DLH
22,000 MH
10,000 Sq.ft
10,000 Sq.ft
22,000 MH
Resources Used
by Ace
2 MH per unit
$20 DM per unit
1/2 DLH per unit
2 MH per unit
7,500 Sq.ft
7,500 Sq.ft
2 MH per unit
Resources Used
by Sureshot
1/2 MH per unit
$20 DM per unit
1/2 DLH per unit
1/2 MH per unit
2,500 Sq.ft.
2,500 Sq.ft.
1/2 MH per unit
Required
Prepare income statements under both the traditional and activity-based costing systems for each
individual product and for the company as a whole.
-5-
ma1_mod5_handout1.doc
MA1 2007-2008
MANAGEMENT ACCOUNTING
MODULE 5
PART 5 Slides 70-73 Question 7 March, 2007 exam Solution
RACQUET COMPANY
Income Statement — Traditional Costing
month ended December 31, 2006
Ace
Sureshot
1
Revenue
$ 2,200,000
$ 700,000
Cost of goods sold:
Direct materials2
200,000
80,000
Direct labour3
50,000
20,000
Overhead allocation4
500,000
200,000
750,000
300,000
Gross margin
$ 1,450,000
$ 400,000
1
$220 × 10,000 = $2,200,000; $175 × 4,000 = $700,000
2
$20 × 10,000 = $200,000; $20 × 4,000 = $80,000
3
$10 × 0.5 × 10,000 = $50,000; $10 × 0.5 × 4,000 = $20,000
4
$10 × $50,000 = $500,000; $10 × $20,000 = $200,000
Revenue
Cost of goods sold:
Direct materials
Direct labour
Overhead1
1
RACQUET COMPANY
Income Statement — Activity-Based Costing
month ended December 31, 2006
Ace
Sureshot
$ 2,200,000
$ 700,000
Gross margin
Total
Overhead
Amount of
Component Activity
Machine
amortization 22,000 MH
200,000
50,000
591,300
841,300
$ 1,358,700
$ per
Total Unit of
Amount Activity
$ 220,000 $10 MH
Company
$ 2,900,000
280,000
70,000
700,000
1,050,000
$ 1,850,000
Company
$ 2,900,000
80,000
280,000
20,000
70,000
108,700
700,000
208,700
1,050,000
$ 491,300
$ 1,850,000
Resources
Resources
Used by
Total
Used by
Total
Ace
Ace Sureshot Sureshot
2 MH
1/2 MH
per unit $200,000
per unit $ 20,000
Indirect
materials
$280,000 DM
50,000 $0.179 DM
$20 DM
per unit
35,800
$20 DM
per unit
14,200
Indirect
labour
7,000 DLH
80,000 $11.43 DLH
1/2 DLH
per unit
57,150
1/2 DLH
per unit
22,850
136,400
1/2 MH
per unit
13,600
Maintenance
22,000 MH
150,000 $6.82 MH
2 MH
per unit
Cleaning
10,000 Sq.ft
100,000 $10 Sq.ft
7,500 Sq.ft 75,000
2,500 Sq.ft. 25,000
Factory
insurance
10,000 Sq.ft
25,000 $2.5 Sq.ft
7,500 Sq.ft 18,750
2,500 Sq.ft. 6,250
75,000 $3.41 MH
2 MH
per unit
1/2 MH
per unit
Heat, light, and
power
22,000 MH
Total
$ 700,000
68,200
$591,300
-6-
6,800
$108,700
ma1_mod5_handout1.doc
MA1 2007-2008
MANAGEMENT ACCOUNTING
MODULE 5
PART 6 Slides 74 – 78: Question 2 March 2002
Housewise Inc. manufactures and distributes two types of household items. The items, Scrubbies
and Squeegies, are manufactured on a common assembly line by the same direct labourers.
Different direct materials are used in each type and the machinery is retooled for each product.
Until now, manufacturing overhead costs have been allocated on the basis of direct labour-hours using a
plant-wide rate. However, the production manager has been reading about activity-based costing and
wishes to institute it for Housewise’s production operations. To that end, she has assembled the
information below regarding production activities and manufacturing overhead
costs for the month of September:
Activity Centre
Cost Driver
Allocation Rate
Activity Used
in Scrubbies
Activity Used
in Squeegies
Material Handling
Machining
Assembly
Inspection
Number of parts
Machine-hours
Units Started
Number tested
$1.00 per part
$15.00 per hour
$1.60 per unit
$2.00 per unit
2,000 parts
205 hours
1,000 units
100 units
1,300 parts
300 hours
1,300 units
1,200 units
Direct costs:
Labour (600 hours each)
Materials
$ 12,000
$ 5,200
$ 12,000
$ 2,600
Required
a. For each of the following costing methods, determine the total manufacturing cost of
each of the two product lines for September and the cost per unit, assuming that all
units were started and completed in September:
i) activity-based costing
ii) a plant-wide manufacturing overhead rate based on direct labour-hours (compute
plant-wide rate to nearest $0.01)
b. One of the benefits often cited for activity-based costing is the elimination of any
cross-subsidization. With reference to the results of the analysis in part (a), which of
the two products is
i) undercosted
ii) overcosted
Briefly explain your reasoning.
-7-
ma1_mod5_handout1.doc
MA1 2007-2008
MANAGEMENT ACCOUNTING
MODULE 5
PART 6 Slides 74 – 78: Question 2 March 2002 Solution
a.
i)
Activity-based costing overhead rates:
Scrubbies
Direct manufacturing costs:
Direct labour
Direct material
Total direct costs
$ 12,000
5,200
17,200
Indirect manufacturing costs:
Material handling ($1.00 x 2,000)
($1.00 x 1,300)
Machining
1,300
3,075
($1.60 x 1,000)
($1.60 x 1,300)
1,600
($2.00 x 100)
($2.00 x 1,200)
Total indirect costs
200
Inspection
Total manufacturing costs
Divided by: units started
Unit manufacturing costs
-8-
$ 12,000
2,600
14,600
2,000
($15.00 x 205)
($15.00 x 300)
Assembly
Squeegies
4,500
2,080
6,875
2,400
10,280
$ 24,075
$ 24,880
1,000
1,300
$ 24.075
$ 19.138
ma1_mod5_handout1.doc
MA1 2007-2008
MANAGEMENT ACCOUNTING
MODULE 5
PART 6 Slides 74 – 78: Question 2 March 2002 Solution (continued)
(8) ii)
Plant-wide costing overhead rate:
Scrubbies
Direct manufacturing costs:
Direct labour
$ 12,000
Direct material
l 5,200
Total direct costs
17,200
Indirect manufacturing costs:
Material handling (3,300 x $1) = 3,300
Machining
(505 x $15) =
7,575
Assembly
($1.60 x 2,300) = 3,680
Inspection
($2.00 x 1,300)= 2,600
Total indirect costs
17,155
Divided by: DLH
1,200
Plant-wide costing overhead rate
$ 14.30
To Scrubbies: (600 x $14.30)
8,580
To Squeegies: (600 x $14.30)
Total manufacturing costs
Divided by: units started
Unit manufacturing costs
$ 25,780
1,000
$ 25.78
Squeegies
$ 12,000
2,600
14,600
8,580
$ 23,180
1,300
$ 17.83
4 b.
Cross-subsidization can occur with plant-wide costing where overhead, which is not closely
connected with the actual activities giving rise to the overhead amounts (i.e., the true cost
drivers), is applied to products using differing quantities of those cost drivers. Such a broad
application of overhead can distort the true cost of manufacturing those products.
For Housewise, the unit cost to manufacture Squeegies is actually higher than it appears using
the plant-wide overhead rate, and the unit cost to manufacture Scrubbies is less than it appears
using the plant-wide overhead rate. This may affect the pricing of the two products, the revenue
generated by each product (price may affect demand) and, consequently, the company’s overall
profitability. It may also negatively affect management decisions about where to direct new
resources available to the company. In this case, Squeegies are being undercosted and are being
subsidized by Scrubbies, which are being overcosted when a plant-wide overhead rate is used.
This will be covered in module 8. Read your text, page 559. Cross-subsidization occurs in two
ways:
1)
Company fails to trace costs directly to segments in those situations where it is feasible
to do so.
2)
Company uses inappropriate bases to allocate costs.
-9-
ma1_mod5_handout1.doc
MA1 2007-2008
MANAGEMENT ACCOUNTING
MODULE 5
PART 7 Slides 79 – 83: Question 2 March 2005
Peninsula Hospital has 5 departments: 3 are classified as service departments (S) and 2 are classified
as producing departments (P). All service centre costs are allocated to the producing departments.
The percentage distribution of actual services during a recent period is as follows:
To
From
S1
S2
S3
S1
S2
S3
P1
P2
0%
20%
15%
20%
0%
15%
20%
30%
0%
30%
40%
35%
30%
10%
35%
The operating costs of the service departments are as follows:
S1
$10,000
S2
20,000
S3
5,000
The overhead costs of the producing departments are as follows:
P1
P2
$20,000
30,000
Required
a.
Using the direct method of service department cost allocation, prepare a schedule showing
the total overhead in each of the two producing departments.
b.
Using the sequential method of service department cost allocation, prepare a schedule showing
the total overhead in each of the two producing departments. Assume the order of allocation of
the service department costs is S1, S2, S3.
c.
Write out the initial simultaneous equations needed to perform the service department allocation
using the reciprocal method.
-10-
ma1_mod5_handout1.doc
MA1 2007-2008
MANAGEMENT ACCOUNTING
MODULE 5
PART 7 Slides 79 – 83: Question 2 March 2005 Solution
(a) Direct method of service department allocation
Service Departments
S1
S2
S3
$ 10,000 $ 20,000 $ 5,000
Department
Costs
Distribution:
S1 3/6, 3/6
S2 4/5, 1/5
S3 35/70, 35/70
Producing dept.
Total overhead
Production Departments
P1
P2
$ 20,000
$ 30,000
(10,000)
5,000
16,000
2,500
20,000
$ 43,500
(20,000)
(5,000)
0
0
0
5,000
4,000
2,500
30,000
$ 41,500
Total
$ 85,000
$ 85,000
(b) Sequential method of service department allocation
Service Departments
Department Costs
Distribution:
S1 (.2, .2, .3, .3)
S2 (3/8, 4/8, 1/8)
S3 (.5, .5)
Producing dept.
Total overhead
Production Departments
S1
$ 10,000
S2
$ 20,000
S3
$ 5,000
P1
$ 20,000
P2
$ 30,000
Total
$ 85,000
(10,000)
2,000
(22,000)
2,000
8,250
(15,250)
0
0
0
3,000
11,000
7,625
20,000
$ 41,625
3,000
2,750
7,625
30,000
$ 43,375
$ 10,000
20,000
5,000
50,000
$ 85,000
(c) Reciprocal method of service department allocation, simultaneous equations
FIRST, look at part of the original question to simplify the process of forming the equations.
To
Dept Costs
From
S1
S2
S3
S1
$ 10,000
20%
15%
S2
$ 20,000
S3
$ 5,000
20%
20%
30%
15%
Equations are as follows: S1 = 10,000 + .20S2 + .15S3
S2 = 20,000 + .20S1 + .15S3
S3 = 5,000 + .20S1 + .30S2
-11-
ma1_mod5_handout1.doc
MA1 2007-2008
MANAGEMENT ACCOUNTING
MODULE 5
PART 7 Slides 84 – 87: Question 5 December 1995
Osaka Co. uses the direct method in allocating service department costs to production departments.
Costs of Department S1 are allocated on the basis of number of employees. Costs of Department S2
are allocated on the basis of machine hours. In Department P1 denominators are machine hours and
in Department P2 denominators are direct labour hours.
S1
$ 50,000
50
Overhead budget
Number of
employees
Machine hours
Direct labour hours
S2
$ 25,000
20
P1
$ 200,000
60
P2
$ 300,000
120
40,000
20,000
10,000
60,000
Job No. 49
Department P1
Department P2
$ 60
1
3
$ 45
2
1
Materials cost
Direct labour hours
Machine hours
REQUIRED:
Compute the overhead cost of Job No. 49 under each of the following methods:
a.
Departmental rates based on the direct method as described above.
b.
Plant-wide rate using direct labour hours as a denominator.
Solution:
a.
S1
Overhead budget
Department S1
Department S2
Total overhead
Denominator
Overhead rate
Job No. 49:
b.
S2
$ 50,000
( 50,000)
Department P1:
Department P2:
Overhead cost
0
P1
$ 25,000
$ 200,000
16,667
20,000
$ 236,667
40,000
$ 5.92
( 25,000)
0
3 x 5.92 =
2 x 5.64 =
P2
$ 300,000
33,333
5,000
$ 338,333
60,000
$ 5.64
$ 17.76
11.28
$ 29.04
Plant-wide overhead rate: $575,000 / 80,000 = $7.19 per direct labour hour
Job No. 49:
Overhead cost = 3 x $7.19 =
-12-
$ 21.57
ma1_mod5_handout1.doc
MA1 2007-2008
MANAGEMENT ACCOUNTING
MODULE 5
PART 9 Slides 88 – 90: Multiple Choice Questions - Module 5
Q1
Use the following information to answer parts (a) to (c). June, 2007 exam
Assume that the cost drivers for each department are as follows:
Department A
Department B
Department C
Department X
Department Y
a.
Kilowatt hours (kwh)
Square metres (sq.m.)
Number of employees
Machine hours (MH)
Direct labour hours (DLH)
Which service department should be allocated first using the step method of allocation?
1)
2)
3)
4)
Department A
Department B
Department C
Department X or Y
Answer 3)
The sequence of allocation using the step method is that the service centre
that provides the highest amount of its services to the other service centres
is allocated first. In this question:
Department A provides 1,200 kwh / (1,200 + 500 + 33,300 + 35,000) =
1,200 / 70,000 = 1.71% of its services to Department B and 500 / 70,000
= 0.71% to Department C, for a total of 2.42% provided to other service
centres.
Department B provides 1,000 sq.m. / (1,000 + 1,000 + 40,000 + 5,000) =
1,000 / 47,000 = 2.1% of its services to Department A and 2.1% of its
services to Department C, for a total of 4.2% provided to other service
departments.
Department C provides 12 employees / (12 + 21 + 147 + 20) = 12 / 200 =
6% of its services to Department A and 21 / 200 = 10.5% of its services to
Department B, for a total of 16.5% provided to other service centres.
Therefore, the answer is 3).
-13-
ma1_mod5_handout1.doc
MA1 2007-2008
MANAGEMENT ACCOUNTING
MODULE 5
PART 9 Slides 88 – 90: Multiple Choice Questions – (continued)
Note:
For the following 2 questions, assume that the service departments’ costs were allocated in
alphabetical order.
b.
What is the approximate overhead rate for Department C?
1)
2)
3)
4)
$1,860
$2,308
$2,429
$2,516
Answer 4)
c.
What is the approximate total overhead for Department X?
1)
2)
3)
4)
$1,230,800
$1,327,541
$2,557,540
$3,268,157
Answer 3)
Solution
Department
Original $
Allocation 1
A
$ 800,000
(800,000)
Allocation 2
0
Allocation 3
0
Total
Rate
B
$650,000
(1,200 / 70,000)
× 800,000
= 13,714
(650,000 + 13,714)
= $663,714
C
$400,000
(500 / 70,000)
× 800,000
= 5,714
[1000 / (1,000 +
40,000 + 5,000)
× 663,714 =
1,000 / 46,000
× 663,714
= 14,428
0
$420,142
$420,142 / 167
= $2,515.82
-14-
X
$1,230,000
(33,300 / 70,000)
× 800,000
= 380,571
(40,000 / 46,000)
× 663,714
= 577,143
Y
$370,000
(35,000 / 70,000)
× 800,000
= 400,000
(5,000 / 46,000)
× 663,714
= 72,143
(147 / 167) ×
420,142
= 369,826
$2,557,540
ma1_mod5_handout1.doc
MA1 2007-2008
MANAGEMENT ACCOUNTING
MODULE 5
PART 9 Slides 88 – 90: Multiple Choice Questions – (continued)
Q2.
Parts (a), (b), and (c) refer to the following information: March 2003 exam
A CGA firm has two departments, audit and tax, and support staff, such as word processing personnel,
that serve both departments. The following information is for the support staff and the two departments:
Support Staff Hours
Charged to Department
12,000
6,000
Audit
Tax
Support staff
a.
Payroll Cost of
Department
$500,000
$200,000
$300,000
How much of the support staff cost should be allocated (on the basis of support staff hours) to the
audit department?
1)
2)
3)
4)
$200,000
$214,286
$333,333
$466,667
Support Staff
Support Staff (hours)
Cost before allocation
Allocate: (12/18, 6/18)
$ 300,000
( 300,000)
Audit
Tax
12/18
6/18
$200,000
answer 1)
b.
How much of the support staff cost should be allocated (on the basis of payroll cost of
departments) to the tax department?
1)
2)
3)
4)
$ 85,714
$142,857
$228,571
$333,333
Support Staff
Support Staff (payroll)
Cost before allocation
Allocate: (5/7, 2/7)
$ 300,000
( 300,000)
Audit
Tax
5/7
2/7
$85,714
answer 1)
c.
The support staff fixed costs are $180,000 and are allocated on the basis of department payroll,
and the remaining variable costs are allocated on the basis of hours charged to the department.
What is the cost allocation to the tax department?
1)
2)
3)
4)
$ 58,096
$ 91,429
$185,714
$208,571
($200,000/$700,000) x 180,000 + (6,000/18,000) x 120,000
= 51,428.57 + 40,000
= 91,428.57
answer 2)
Q3.
Activity-based costing (ABC) is a costing technique that uses a 2-stage allocation process. Which of
the following statements best describes these 2 stages?
1)
2)
3)
4)
All costs are assigned to activities, and then to the products based on the products’ use of
the activities.
All costs are assigned to departments, and then to the products based upon the products’ use
of the activities.
Service department costs are allocated to the production departments, and then to the products
based upon the products’ use of the activities.
Indirect costs are assigned to activities, and then to the products based upon the products’ use
of the activities.
June 2000 exam: answer 4)
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ma1_mod5_handout1.doc