Cost Allocation
Medium Practice Test
Cost Accounting
Medium Practice Test
Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.
1. A responsibility accounting system should provide reports that
a. include only revenues of the company
b. include all revenues and costs under a manager’s control
c. do not reflect the organization chart of management
d. includes costs only
Answer
B. The responsibility accounting systems provides reports that give revenues and costs related to different units of the company managed by different managers. The system should be set up to report according to the organization chart of the company.
2. The manager of a revenue center has the authority to
a. establish sales prices of products
b. invest funds in assets
c. manage costs incurred in the revenue center
d. manage profits generated in the revenue center
Answer
C. The manager of a revenue center can not establish sales prices. This also means they are not responsible for profits generated from products sold in the revenue center. The manager has authority to control costs within the revenue center only.
3. The manager of an investment center has the authority to
a. control only profits
b. control only investments
c. control profits and investments
d. control only costs
Answer
C. The manager of an investment center has the authority to set prices, control costs and make investments. When you have control over revenues and costs you also have control over profits.
4. The direct method of allocating service department costs recognizes that
a. other service departments benefit from services provided
b. only revenue generating units benefit from all services provided
c. some service departments serve other service departments and revenue generating units
d. a company can determine the exact amount of cost incurred by all service departments
Answer
B. The direct method allocates costs to revenue units only. Cost units do not assign costs to other cost units based on the belief that the ultimate benefit is revenues and cost units do not generate revenues. The allocation is an estimate.
5. The step method of allocating service department costs recognizes that
a. other service departments do not benefit from services provided
b. only revenue generating units benefit from all services provided
c. some service departments serve other departments and revenue generating units
d. a company can determine the exact amount of cost incurred by other service departments
Answer
C. The step method allocates all cost unit costs to cost units and revenue generating units. It recognizes that cost units can benefit from other cost units.
6. Accounting practices in a decentralized organization are commonly called
a. responsibility accounting
b. departmentalized accounting
c. management accounting
d. allocation accounting
Answer
A. A decentralized organization delegates decision making authority to managers within the organization. The responsibility accounting system reports revenues and costs associated with delegated lines of authority.
7. When providing reports that will be used to evaluate management performance in a responsibility accounting system, the report should NOT
a. distinguish controllable expenses
b. have a correlation with the company’s organization chart
c. show the difference between budget and actual costs
d. include allocated administrative costs
Answer
D. Responsibility reports should give information on revenues and costs that are controllable by the manager. Allocated costs are not controllable.
8. Allocating service department costs to revenue producing units can be used as an alternative to
a. allocating direct costs
b. transfer pricing
c. both a. & b.
d. none of the above
Answer
B. Transfer pricing is used to sell goods and services between units of the company. Allocating costs is an alternative to charging for the service. Direct costs are never allocated.
9. The term that means the company has an accounting system that reports information based on management’s ability to control costs is referred to as
a. a performance system
b. a responsibility accounting system
c. an allocation accounting system
d. an operational accounting system
Answer
B. This is the definition of a responsibility accounting system. The other choices are not common terms.
10. One of the primary benefits of decentralization is
a. managers are not held accountable for decisions
b. decisions are made by those most knowledgeable about the situation
c. top management is allowed to make most decisions
d. the accounting system required is simpler than for a centralized system
Answer
B. In a decentralized organization management responsible for units within the company are authorized to make decisions. Managers working in an area are normally more knowledgeable about the current situation. Managers are held accountable for the results of their decisions. The accounting system is more complex because data must be collected by unit within the company.
11. A company has three service departments: human resources (allocate costs based on employees), computer service (allocate costs based on reports), and facilities (allocate costs based on square feet). Human resources is considered the highest ranked service that begins the allocation. It has 2 revenue producing units: East and West. Information gathered to do the allocation follows:
| Unit | Direct Costs | Employees | Reports | Square Feet |
| Human Resources | $190,000 | 7 | 142 | 2,500 |
| Computer Service | $320,000 | 10 | 58 | 6,750 |
| Facilities | $265,000 | 4 | 15 | 1,450 |
| East | $495,000 | 63 | 739 | 22,780 |
| West | $636,000 | 72 | 942 | 19,845 |
Required:
A. Allocate costs using the direct method.
B. Allocate costs using the step method.
Answer
A. Direct method – all costs go to revenue producing units only:
Human Resources –
| East 63 = .467 x 190,000 = 88,730 West 72 = .533 x 190,000 = 101,270 Total 135 |
Computer Services –
| East 739 = .440 x 320,000 = 140,800 West 942 = .560 x 320,000 = 179,200 Total 1,681 |
Facilities –
| East 22,780 = .534 x 265,000 = 141,510 West 19,845 = .466 x 265,000 = 123,490 Total 42,625 |
B. Step Method – begin allocation with human resources and allocate to cost units and revenue producing units
Human Resources –
| Computer 10 = .067 x 190,000 = 12,730 Facility 4 = .027 x 190,000 = 5,130 East 63 = .423 x 190,000 = 80,370 West 72 = .483 x 190,000 = 91,770 Total 149 |
Computer Services – $320,000 + $12,730 = $332,730 to allocate
| Facility 15 = .009 x 332,730 = 2,995 East 739 = .436 x 332,730 = 145,070 West 942 = .555 x 332,730 = 184,665 Total 1,696 |
Facilities – $265,000 + $5,130 + 2,995 = $273,125 to allocate
| East 22,780 = .534 x 273,125 = 145,849 West 19,845 = .466 x 273,125 = 127,276 Total 42,625 |
12. The company allocates cost based on the following chart:
| Department | Direct Costs | Admin | Selling | Accounting | Sales 1 | Sales 2 |
| Admin | $100,000 | 30% | 20% | 25% | 25% | |
| Selling | $200,000 | 15% | 5% | 40% | 40% | |
| Accounting | $ 90,000 | 40% | 20% | 10% | 30% | |
| Sales 1 | $250,000 | |||||
| Sales 2 | $400,000 |
Revenues from sales area 1 is $600,000 and from sales area 2 is $750,000
The cost units are listed in the order of ranking for allocation.
Required:
A. Allocate costs using the direct method
B. Allocate costs using the step method
C. Determine which sales area is the most profitable.
Answer
A. Direct method – all costs go to revenue producing units only:
Admin –
| Sales 1 25 = .50 x 100,000 = 50,000 Sales 2 25 = .50 x 100,000 = 50,000 Total 50 |
Selling –
| Sales 1 40 = .50 x 200,000 = 100,000 Sales 2 40 = .50 x 200,000 = 100,000 Total 80 |
Accounting –
| Sales 1 10 = .25 x 90,000 = 22,500 Sales 2 30 = .75 x 90,000 = 67,500 Total 40 |
B. Step Method: Begin with admin and allocate to cost units and revenue producing units
Admin:
| Selling 30 % x 100,000 = 30,000 Accounting 20 % x 100,000 = 20,000 Sales 1 25 % x 100,000 = 25,000 Sales 2 25 % x 100,000 = 25,000 Total 100 |
Selling: $200,000 + $30,000 = $230,000 to allocate
| Accounting 5 = .059 x 230,000 = 13,570 Sales 1 40 = .4705 x 230,000 = 108,215 Sales 2 40 = .4705 x 230,000 = 108,215 Total 85 |
Do not allocate to selling costs to admin because it is a higher-ranking cost unit.
Accounting: $90,000 + $20,000 + $13,570 = $123,570
| Sales 1 10 = .25 x 123,570 = 30,893 Sales 2 30 = .75 x 123,570 = 92,677 Total 40 |
Do not allocate to selling and admin because they are higher-ranking cost units.
C. Profitability of each sales area
| Direct | Step | |||||
| Sales 1 | Sales 2 | Sales 1 | Sales 2 | |||
| Sales | 600,000 | 750,000 | 600,000 | 750,000 | ||
| – Direct | 250,000 | 400,000 | 250,000 | 400,000 | ||
| – Admin | 50,000 | 50,000 | 25,000 | 25,000 | ||
| – Selling | 100,000 | 100,000 | 108,215 | 108,215 | ||
| – Accounting | 22,500 | 67,500 | 30,893 | 92,677 | ||
| = Profits | 177,500 | 132,500 | 185,842 | 124,108 |
Sales area 1 is more profitable under both allocation methods.
13. The hospital allocates service department costs to revenue producing units. The hospital has 3 service departments: x-ray, blood tests, and maintenance. Revenue units are surgery and in-patient. The following information is available:
| Direct Costs |
Number of Employees |
Hours of Equip. Oper. |
Number of Patients |
|
| Maintenance | $276,000 | 15 | 2,080 | |
| X-ray | $194,000 | 28 | 10,945 | 12,105 |
| Blood-tests | $234,000 | 24 | 4,576 | 17,892 |
| Surgery | $932,000 | 89 | 16,724 | 3,452 |
| In-patient | $1,573,000 | 378 | 49,230 | 22,056 |
Maintenance costs are allocated based on hours of equipment operation.
X-ray costs and Blood test costs are allocated based on number of patients
The listing above is in order of ranking for the step allocation.
A. allocate costs using the direct method
B. allocate costs using the step method
Answer
A. Direct method – all costs go to revenue producing units only:
Maintenance –
| Surgery 16,724 = .254 x 276,000 = 70,104 In Patient 49,230 = .746 x 276,000 = 205,896 Total 65,954 |
X-ray –
| Surgery 3,452 = .135 x 194,000 = 26,190 In Patient 22,056 = .865 x 194,000 = 167,810 Total 25,508 |
Blood tests –
| Surgery 3,452 = .135 x 234,000 = 31,590 In Patient 22,056 = .865 x 234,000 = 202,410 Total 25,508 |
B. Step Method: Begin with maintenance costs to cost units and revenue producing units
Maintenance –
| X-Ray 10,945 = .134 x 276,000 = 36,984 Blood Tests 4,576 = .056 x 276,000 = 15,456 Surgery 16,724 = .205 x 276,000 = 56,580 In Patient 49,230 = .605 x 276,000 = 166,980 Total 81,475 |
X-ray – $194,000 + $36,984 = $230,984 to allocate
| Blood Tests 17,892 = .412 x 230,984 = 95,165 Surgery 3,452 = .080 x 230,984 = 18,479 In Patient 22,056 = .508 x 230,984 = 117,340 Total 43,400 |
| Blood Tests – $234,000 + $15,456 + $95,165 = $344,621 Surgery 3,452 = .135 x 344,621 = 46,524 In Patient 22,056 = .865 x 344,621 = 298,097 Total 25,508 |