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13-Cost Acctng - reviewer for cost
Mariano Marcos State University
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172
Chapter 13
FACTORY OVERHEAD: DEPARTMENTALIZATION
MULTIPLE CHOICE
Question Nos. 10, 11-14, and 26 are AICPA adapted. Question Nos. 15-28 and 23-25 are CIA adapted.
C 1. A department that would be classified as a producing department is: A. Production Control B. Utilities C. Finishing D. Medical E. Shipping
B 2. A department that would be classified as a service department is: A. Refining B. Receiving C. Mixing D. Assembly E. Finishing
A 3. In determining the right method for allocating equipment depreciation to departments, the best recommendation is to: A. use the cost of equipment in the department as a basis for allocation B. allocate on the basis of square footage used in a given department C. charge the amounts to General Plant D. use algebraic techniques E. allocate on the basis of companywide rates
A 4. The most reasonable basis for allocating worker's compensation insurance is: A. departmental payroll B. building depreciation C. kilowatt-hours D. number of employees E. materials used
E 5. A company is attempting to allocate the costs of electricity in various departments. The variable portion of electricity expense is to be allocated using kilowatt-hours. The information needed in order to allocate the fixed portion of the current period's electricity expense is: A. rated horsepower of equipment B. number of machines in each department C. estimated materials consumption D. number of employees E. square footage in each department
Factory Overhead: Departmentalization 173
E 6. The method for allocating service department costs that requires the least clerical work is: A. use of square footage in each department B. step method C. allocation to other service departments only D. simultaneous method E. direct method
E 7. Rapid Falls Corp. has three producing departments, A, B, and C, with 50, 30, and 20 employees, respectively, in each department. Factory payroll costs other than direct labor are accumulated in a Payroll Department account and are assigned to producing departments on the basis of number of employees. The total payroll in each department was: A, $300,000; B, $275,000; C, $325,000; and Payroll, $50,000. Other costs accumulated in the Payroll Department amounted to $200,000. The amount of Payroll Department costs chargeable to Department C is: A. $125, B. $100, C. $40, D. $10, E. $50,
SUPPORTING CALCULATION:
E 8. The following statement that best describes cost allocation is: A. a company, as a general rule, should allocate indirect costs randomly or based on an "ability-to-bear" criterion B. a company can affect total income the most strongly by using the algebraic method of allocating indirect costs C. a company can maximize or minimize total company income by selecting different bases on which to allocate indirect costs D. a company should select an allocation base to raise or lower reported income on given products E. a company's total income will remain unchanged no matter how indirect costs are allocated
=$2,500/employee_ 20 = $50,
50 + 30 + 20
$50,000+$200,
Factory Overhead: Departmentalization 175
A 10. Carmichael Manufacturing Company has two production departments (Fabrication and Assembly) and three service departments (General Factory Administration, Factory Maintenance, and Factory Cafeteria). A summary of the year's costs and other data for each department prior to allocation of service department costs appears below.
General Factory ) Fabrication Assembly Administration ) Labor costs ............................................... $1,950,000 $2,050,000 $90,000 ) Material costs ........................................... $3,130,000 950,000 --- ) Overhead .................................................. $1,650,000 $1,850,000 $70,000 ) Direct labor hours ................................... 562,500 437,500 31,000 ) Number of employees .............................. 280 200 12 ) Square footage occupied ......................... 88,000 72,000 1,750 )
( Factory Factory ( Maintenance Cafeteria ( $82,100 $87, ( $65,000 $91, ( $56,100 $62, ( 27,000 42, ( 8 20 ( 2,000 4,
The costs of the General Factory Administration Department, Factory Maintenance Department, and Factory Cafeteria are allocated on the basis of direct labor hours, square footage occupied, and number of employees, respectively. The amount of General Factory Administration Department costs that would be allocated to the Assembly Department under the direct method is (round all final calculations to the nearest dollar): A. $70, B. $90, C. $ D. $63, E. none of the above
SUPPORTING CALCULATION:
=$.16_437,500= $70,
562,500+437,
$90,000+$70,
176 Chapter 13
B 11. Carmichael Manufacturing Company has two production departments (Fabrication and Assembly) and three service departments (General Factory Administration, Factory Maintenance, and Factory Cafeteria). A summary of the year's costs and other data for each department prior to allocation of service department costs appears below.
General Factory ) Fabrication Assembly Administration ) Labor costs ............................................... $1,950,000 $2,050,000 $90,000 ) Material costs ........................................... $3,130,000 $950,000 --- ) Overhead .................................................. $1,650,000 $1,850,000 $70,000 ) Direct labor hours ................................... 562,500 437,500 31,000 ) Number of employees .............................. 280 200 12 ) Square footage occupied ......................... 88,000 72,000 1,750 )
( Factory Factory ( Maintenance Cafeteria ( $82,100 $87, ( $65,000 $91, ( $56,100 $62, ( 27,000 42, ( 8 20 ( 2,000 4,
The costs of the General Factory Administration Department, Factory Maintenance Department, and Factory Cafeteria are allocated on the basis of direct labor hours, square footage occupied, and number of employees, respectively. Assuming that Carmichael elects to distribute service department costs to other service departments using the step method of cost allocation and that the order of distribution is based on the dollar amount of costs originating in the service departments, how much of the total Factory Cafeteria cost would be allocated to the Factory Maintenance Department? (Round all final calculations to the nearest dollar.) A. $96, B. $3, C. $6, D. $ E. none of the above
SUPPORTING CALCULATION:
=$480/employee_ 8 = $3,
280 + 200 + 12 + 8
$87,000+$91,000+$62,
178 Chapter 13
A 13. Acie Company has two service departments and three production departments, each producing a separate product. For a number of years, Acie has allocated the costs of the service departments to the production departments on the basis of the annual sales dollars. In a recent audit report, the internal auditor stated that the distribution of service department costs on the basis of annual sales dollars would lead to serious inequities. It was recommended that maintenance and engineering service hours be used as a better service cost allocation basis. For illustration purposes, the following information was appended to the audit report:
Service Departments ) Maintenance Engineering ) Maintenance hours used ....................................... 400 ) Engineering hours used ........................................ 400 ) Department direct costs ........................................ $12,000 $54,000 )
( Production Departments ( Department A Department B Department C ( 800 200 200 ( 800 400 400 ( $80,000 $90,000 $50,
Using the simultaneous method, what would be the total Engineering Department cost after allocation of interservice department costs, but before allocation to the Maintenance and Production Departments? A. $60, B. $57, C. $12, D. $54, E. none of the above
SUPPORTING CALCULATION:
Maintenance = $12,000 + .2E Engineering = $54,000 + .25M E = $54,000 + .25($12,000 + .2E) E = $54,000 + $3,000 + .05E .95E = $57, E = $60,
Factory Overhead: Departmentalization 179
D 14. Acie Company has two service departments and three production departments, each producing a separate product. For a number of years, Acie has allocated the costs of the service departments to the production departments on the basis of the annual sales dollars. In a recent audit report, the internal auditor stated that the distribution of service department costs on the basis of annual sales dollars would lead to serious inequities. It was recommended that maintenance and engineering service hours be used as a better service cost allocation basis. For illustration purposes, the following information was appended to the audit report:
Service Departments ) Maintenance Engineering ) Maintenance hours used ....................................... 400 ) Engineering hours used ........................................ 400 ) Department direct costs ........................................ $12,000 $54,000 )
( Production Departments ( Department A Department B Department C ( 800 200 200 ( 800 400 400 ( $80,000 $90,000 $50,
Using the simultaneous method, what would be the total Maintenance Department cost after allocation of interservice department costs, but before allocation to the Engineering and Production Departments? A. $72, B. $12, C. $60, D. $24, E. none of the above
SUPPORTING CALCULATION:
Maintenance = $12,000 + .2E Engineering = $54,000 + .25M M = $12,000 + .2E M = $12,000 + .2($54,000 + .25M) M = $12,000 + $10,800 + .05M .95M = $22, M = $24,
Factory Overhead: Departmentalization 181
B 16. Acie Company has two service departments and three production departments, each producing a separate product. For a number of years, Acie has allocated the costs of the service departments to the production departments on the basis of the annual sales dollars. In a recent audit report, the internal auditor stated that the distribution of service department costs on the basis of annual sales dollars would lead to serious inequities. It was recommended that maintenance and engineering service hours be used as a better service cost allocation basis. For illustration purposes, the following information was appended to the audit report:
Service Departments ) Maintenance Engineering ) Maintenance hours used ....................................... 400 ) Engineering hours used ........................................ 400 ) Department direct costs ........................................ $12,000 $54,000 )
( Production Departments ( Department A Department B Department C ( 800 200 200 ( 800 400 400 ( $80,000 $90,000 $50,
Using the step method of cost allocation, what amount of engineering cost would be allocated directly to Department A, assuming that the service departments are distributed in the order of total dollars of direct departmental costs? A. $11, B. $21, C. $10, D. $22, E. none of the above
SUPPORTING CALCULATION:
800/2,000 x $54,000 = $21,
E 17. A factor to be considered in deciding the kinds of departments required for establishing accurate departmental overhead rates with which to control costs is: A. location of operations, processes, and machinery B. responsibilities for production and costs C. number of departments or cost centers D. similarity of operations, procedures, and machinery in each department E. all of the above
E Services available for the benefit of producing departments and other service departments can be 18. organized by: A. establishing a separate service department for each function B. combining several functions into one department C. placing service costs in a department called "general factory cost pool" D. none of the above E. all of the above
182 Chapter 13
B 19. Entities that have practiced departmentalization for many years, by grouping their activities into categories such as occupancy, sales promotion, purchasing, and delivery are: A. hospitals B. retail stores C. banks D. insurance companies E. colleges
A 20. An automotive company has three divisions. One division manufactures new replacement parts for automobiles; another rebuilds engines; and the third does repair and overhaul work on a line of trucks. All three divisions use the services of a central payroll department. The best method of allocating the cost of the payroll department to the various operating divisions is: A. total labor hours incurred in the divisions B. value of production in the divisions C. direct materials costs incurred in the divisions D. machine hours used in the divisions E. none of the above
B 21. The Janitorial Department provides cleaning services to all departments of a large store. Management wishes to allocate the janitorial costs to the various departments that benefit from the service. The most reasonable allocation base for janitorial costs would be: A. sales of each department B. square footage of each department C. number of employees in each department D. total direct costs of each department before any allocations E. none of the above
C 22. A hospital has a $100,000 expected utility bill this year. The Janitorial, Accounting, and Orderlies Departments are service functions to the Operating, Hospital Rooms, and Laboratories Departments. Floor space assigned to each department is:
Department ........................................................................................................ Square Footage Janitorial ............................................................................................................ 1, Accounting ......................................................................................................... 2, Orderlies ............................................................................................................. 7, Operating ........................................................................................................... 4, Hospital Rooms .................................................................................................. 30, Laboratories ....................................................................................................... 6, .................................................................................................................. 50,
How much of the $100,000 will eventually become the Hospital Rooms Department total costs, assuming use of the direct method of allocation based on square footage? A. $60, B. $72, C. $75, D. $80, E. none of the above
184 Chapter 13
C 26. An example of a department that would be a prime candidate for multiple overhead rates would be one whose overhead was primarily: A. labor driven B. machine related C. caused by setups and production design changes D. materials related E. none of the above
Factory Overhead: Departmentalization 185
PROBLEMS
PROBLEM
1.
Overhead Allocation and Rates. To determine an overhead application rate for its Machining and Assembly Departments, the management of Knight Co. requested the following overhead cost data for June:
Machining Assembly Item Department Department Total Number of employees ................................................................... 60 40 100 Square footage .............................................................................. 15,000 10,000 25, Monthly average wage per employee (direct and indirect) ............................................................. $ 2,000 $ 2,500 -- Overhead directly chargeable to department (excluding indirect labor) .............................. $ 90,000 $ 75,000 $165, Materials used ............................................................................... 60,000 90,000 150, Factory rent ...................................................................................?? 33, Other building costs .....................................................................?? 60, Payroll Department cost ..............................................................?? 18, Freight-in and other Receiving Department costs .................................................................?? 75,
In each department, 80% of the employees are direct laborers. Overhead is charged to production on the basis of direct labor dollars. The allocation basis for other data is as follows: all building costs, square footage; Payroll Department cost, number of employees; freight-in and other Receiving Department costs, materials used.
Required:
(1) Compute the total overhead chargeable to the Machining and Assembly Departments. (2) Compute the overhead application rate as a percentage of direct labor cost for each department. (Round to the nearest whole percent.)
Factory Overhead: Departmentalization 187
PROBLEM
2.
Overhead Application; Correction of Net Profit (or Loss). Pomeroy Printers Inc. uses job order costing. Printers' wages are charged to direct labor, while typesetters' wages are charged to overhead and comprise 30% of applied overhead. Overhead is applied at the rate of 150% of direct labor cost. During July, only two jobs were started and completed. Relevant data from these jobs were:
Item Job 1776 Job 1865 Materials cost .......................................................................................................... $ 5,000 $ 3, Direct labor ............................................................................................................. 10,000 8, Overhead applied ................................................................................................... 15,000 12, Total cost of job ................................................................................................ $ 30,000 $ 23, Selling price ............................................................................................................. 30,000 35, Gross profit from job ...................................................................................... $ 0 $ 12,
Management determines that the typesetters' wages should be a direct labor cost and that Job 1776 required 1/3 of the total typesetting cost incurred, while Job 1865 required 2/3.
Required:
(1) Determine the total typesetters' wages for July. (2) Determine the corrected direct labor costs for Jobs 1776 and 1865. (3) Determine the correct gross profit (or loss) for each job. (Round the new overhead rate to the nearest whole percent and the total overhead to the nearest dollar.)
SOLUTION
(1) $8,100 [30% x ($15,000 + $12,000)]
(2) Job 1776 Job 1865 $ 10,000 $ 8, + 2,700 (1/3 x $8,100) + 5,400 (2/3 x $8,100) $ 12,700 $ 13,
(3) Item Job 1776 Job 1865 Materials cost .......................................................................................................... $ 5,000 $ 3, Direct labor ............................................................................................................. 12,700 13, Overhead applied 1 .................................................................................................. 9,144 9, Total cost of job ................................................................................................ $ 26,844 $ 26, Selling price ............................................................................................................. 30,000 35, Gross profit from job ...................................................................................... $ 3,156 $ 8,
=72%or72%overhead applied
$12,700+$13,
$18,
=
Directlaborcost
Totaloverhead
1
188 Chapter 13
PROBLEM
3.
Overhead Distribution Via Direct Method. Geo-trig Inc. has three producing departments (Sine, Cosine, and Tangent) and two service departments (Rhombus and Triangle). Data that summarize overhead activity for January are:
Producing Departments Service Departments Sine Cosine Tangent Rhombus Triangle Total overhead before service department allocations ...................... $50,000 $80,000 $30,000 $40,000 $20, Square footage occupied ............................................... 3,000 4,000 3,000 1,000 1, Number of employees ................................ 50 30 20 10 10
Rhombus costs are distributed on the basis of square footage occupied, while Triangle costs are distributed on the basis of number of employees. The direct method is used for allocating service department costs to producing departments.
Required: Prepare a schedule indicating the detailed components of overhead costs for the producing and service departments, including the directly assigned and allocated overhead.
190 Chapter 13
PROBLEM
4.
Distribution of Direct and Indirect Overhead Costs to Producing Departments. Chaing Chemical Co. operates with three producing departments —Blending, Testing, and Terminal. The overhead items and amounts for the period, along with the bases for their allocation, are listed below.
Item Amount Allocation Basis Building depreciation........................................................................... $ 24,000 Square footage Janitorial cost ........................................................................................ 33,000 Square footage Materials receiving cost ....................................................................... 48,000 Materials usage Payroll Department cost ...................................................................... 126,000 Number of employees Power...................................................................................................... 75,000 Horsepower of equipment
Other relevant data are: Blending Testing Terminal Department Department Department Total Number of employees ........................................... 25 40 19 84 Direct labor hours ................................................ 62,000 104,000 54,000 220, Horsepower of equipment ................................... 60,000 15,000 5,000 80, Kilowatt-hours ...................................................... 4,000 1,000 6,000 11, Square footage ...................................................... 2,000 2,000 2,000 6, Directly chargeable overhead cost .................... $ 125,000 $ 75,000 $87,500 $287, Direct materials ................................................... $ 75,000 $ 25,000 -- $100,
Required: Prepare the overhead distribution for each producing department, including the detail for each item of allocated overhead and the overhead rate based on direct labor hours for each department (rounded to the nearest cent).
Factory Overhead: Departmentalization 191
SOLUTION
Blending Testing Terminal Department Department Department Directly chargeable cost ................................................................. $125,000 $ 75,000 $ 87,
Building depreciation: 2, $24,000 x --------- ...................................................................... 8,000 8,000 8, 6,
Janitorial cost: 2, $33,000 x --------- ...................................................................... 11,000 11,000 11, 6,
Materials receiving cost: $75, $48,000 x ------------ .................................................................. 36, $100,
$25, $48,000 x ------------ .................................................................. -- 12,000 -- $100,
Payroll Department cost: 25 $126,000 x ---- ........................................................................... 37, 84
40 $126,000 x ---- ........................................................................... -- 60,000 -- 84
19 $126,000 x ---- ........................................................................... -- -- 28, 84
Power: 60, $75,000 x --------- ...................................................................... 56, 80,
15, $75,000 x --------- ...................................................................... -- 14,063 -- 80,
5, $75,000 x ------ --- ...................................................................... -- -- 4, 80,
Total overhead ................................................................................. $273,750 $180,063 $139,
Overhead rate per direct labor hour ............................................ 4 1 2.
13-Cost Acctng - reviewer for cost
University: Mariano Marcos State University
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