104 10. Exercises (Part 1)
10-1: The Bola Tie Company has two service departments (Departments A and B) and three production departments (Departments X, Y and Z). Service Department A provides services to all three production departments as well as to Service Department B. However, Service Department B only provides services to the other service department (Department A). In other words, Service Department B provides no services directly to the production departments. Which of the following methods for allocating service department costs makes the most sense in this situation?
(A) The direct method.
(B) The step-down method, beginning with Service Department A.
(C) The step-down method, beginning with Service Department B.
(D) We would want to know the costs incurred by each service department before determining which allocation method makes the most sense.
10-2: The “Big One” accounting firm has three divisions: audit, tax and consulting; two support departments: administration and human resources. The following table shows the
utilization of support department services by the user departments:
|
Administration |
Human
Resources |
Audit |
Tax |
Consulting |
|
| Administration | 10% | 30% | 25% | 35% | |
| Human Resources | 10% | 30% | 35% | 25% |
Which of the following allocation methods will result in the smallest allocation of support department costs to the Consulting Division?
(A) The direct method.
(B) The step-down method, beginning with Administration.
(C) The step-down method, beginning with Human Resources.
(D) Cannot be determined from the information given.
10-3: One advantage of the step-down method of allocating service department costs to production departments, over the direct method, is the following:
(A) Some interaction among service departments (i.e., service departments providing services to other service departments) is accounted for.
(B) The step-down method is easier to apply (i.e., it is less complicated).
(C) All service department costs are eventually allocated to production departments.
(D) All interaction among service departments (i.e., service departments providing services to other service departments) is accounted for.
10-4: The MIS department of Coldwater Industries provides services to two other service departments (Accounting and Personnel) and two factories. The cost of operating the
MIS department is $100,000 annually. The volume of services provided to Accounting, Personnel, and the factories is measured by the number of computer terminals in each
area.
| Factory X | Factory Y | Accounting | Personnel | |
| Number of terminals | 30 | 10 | 40 | 20 |
Required: Using the direct method of service department allocation, calculate the allocation of MIS costs to Factory X.
10-5: Amber Industries has two service departments: Human Resources (H.R.) and Accounting. These two service departments provide services to each other, and to three
factories, as shown in the following table:
Service Dept Cost Percentages of Service Service Department Provides Others
| H.R. | Accounting | Factory A | Factory B | Factory C | ||
| H.R. | $350,000 | 15% | 35% | 40% | 10% | |
| Accounting | $880,000 | 25% | 25% | 15% | 35% |
Required: Calculate the amount of service department costs that will be allocated to each
of the factories, using the Direct Method of service department cost allocation.
10-6: Global-Mega-Corp allocates the costs of three service departments to its three production departments. The following table shows the percentage of services that each service department provides to each production department and to the other two service departments:
| Human Resources | Data Processing | Legal Department | Production Dept 1 | Production Dept 2 | Production Dept 3 | |
| Human Resources | 15% | 15% | 35% | 15% | 20% | |
| Data
Processing |
15% | 10% | 25% | 30% | 20% | |
| Legal Department | 15% | 25% | 25% | 20% | 15% |
The following table shows the costs incurred by each service department, prior to the allocation of any service department costs to the other service departments:
| Human Resources | $101,000 |
| Data Processing | $324,000 |
| Legal Department | $253,000 |
Required: Using the Direct Method of service department cost allocation, calculate the total service department costs that are allocated to each production department.
10-7: Xancar Corporation has three factories, and allocates the costs of two service departments to these factories using the Direct Method of service department cost allocation. The table below shows the costs incurred by these two service departments for the most recent year, the allocation base used to allocate the costs of each department, and the amount of the allocation base incurred by the factories and service departments.
| Costs incurred | Allocation base | Accounting &
Computing |
Human Resources | Factory in Zancobar | Factory in
Yebasta |
Factory in Quinzotet | |
| Accounting &
Computing |
$850,000 | Operating
costs |
$850,000 | $930,000 | $1,200,000 | $1,100,000 | $1,700,000 |
| Human
Resources |
$930,000 | Number of
employees |
45 | 33 | 110 | 75 | 145 |
Required: Calculate service department costs allocated to each factory.
10-8: A company has three service departments that provide services to each other and to four production departments. Details for 2005 are shown below:
| Human Resources |
Accounting |
Data Processing | |
| Costs incurred to run the department: | $700,000 | $1,200,000 | $1,400,000 |
| Allocation base used to allocate costs of the service department to the four production departments: | FTE’s (full-
time employee equivalents) |
Invoices processed | # of computers |
| Amount of services provided by the service department to itself and to each of the recipient departments, as measured by the quantity of the allocation base incurred in each department: | |||
| Human Resources | 9 | 467 | 13 |
| Accounting | 23 | 117 | 25 |
| Data Processing | 32 | 83 | 40 |
| Production Department A | 101 | 223 | 32 |
| Production Department B | 157 | 319 | 44 |
| Production Department C | 33 | 444 | 37 |
| Production Department D | 69 | 190 | 17 |
| Total quantity of the allocation base | 424 | 1,843 | 208 |
Required: Using the Direct Method of service department cost allocation, what are the total service department costs from the three service departments that will be allocated to
production department B?
10-9: The Franklin Corporation allocates the costs of three service departments to its three production departments. The following table shows the percentage of services that each service department provides to each production department and to the other two service departments:
| Service Dept A | Service Dept B | Service Dept C | Production Dept 1 | Production Dept 2 | Production Dept 3 | |
| Service Dept A | 20% | 20% | 30% | 10% | 20% | |
| Service Dept B | 15% | 10% | 25% | 30% | 20% | |
| Service Dept C | 15% | 25% | 30% | 20% | 10% |
The following table shows the costs incurred by each service department, prior to the allocation of any service department costs to the other service departments:
| Service Dept A | $ 80,000 |
| Service Dept B | $124,000 |
| Service Dept C | $153,000 |
Required:
A) Using the Direct Method of service department cost allocation, calculate the total service department costs that are allocated to each production department.
B) Use the Step-Down Method of service department cost allocation, and calculate the total service department costs allocated to Production Department 1. Assume that Service Department A is allocated first, then Service Department C, and finally Service Department B.
10-10: State Farmers Insurance Company has three revenue-generating divisions: Property Insurance, Life Insurance, and Automobile Insurance. The Legal Department is a service department that provides services to these three revenue-generating divisions, and not to any other department. To allocate legal department costs to the user departments, the lawyers in the Legal Department track the hours they spend providing services to each department. (These hours are called “lawyer-billed” hours.) Relevant information about lawyer-billed hours is as follows:
| Peak Demand | Average Demand | Actual May Usage | |
| Property Insurance Division
Life Insurance Division Automobile Insurance Division |
600 hours
200 hours 200 hours |
300 hours
180 hours 180 hours |
420 hours
170 hours 180 hours |
The Legal Department budgets fixed costs at $100,000 monthly, and variable costs at $16 per lawyer-billed hour. During May, actual costs incurred were as follows: $70,000 in fixed costs, and $7,000 in variable costs.
Required:
A) What is the actual cost per lawyer-billed hour, using actual costs (fixed and variable) and the actual level of activity for the month?
B) Allocate May legal costs to the Auto Division, using the rate calculated in Part (A), based on actual usage.
C) What amount of legal costs for May will be allocated to the Life Division if a dual allocation rate is used, in which budgeted fixed costs are allocated based on peak usage requirements, and budgeted variable costs are allocated based on actual usage?
