Managerial accounting, 5th by jiambalvo test bank ch06

CHAPTER 6
Cost Allocation and Activity-Based Costing
Summary of Questions by Objectives and Bloom’s Taxonomy
Item SO
BT Item
True-False Statements
1.
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Multiple Choice Questions

29.
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54.
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32.
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75.
51.
3

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76.
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77.
53.
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78.
Matching
152. 1-6
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Exercises
153. 2-4 AP 157.
154.
1
C
158.
155. 1,2,4 AP 159.
156.
2
AP 160.

SO

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13.
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18.

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19.
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24.

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K
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C
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AP
AP

79.
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AP
AP
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AP
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AP
AP
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AP
AP
AP

104.
105.
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113.
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AP
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161.
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3,4
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3,4

AP
AP

AP
AP

165.
166.
167.
168.

3
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4,5
5

Item

SO

BT

25.
*26.
*27.
28.

6
A1
A1
5

K

K
K
C

AP
AP
AP
AN
AP
AP
AP
AP
AP
AP
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AN
AN
AP
AP
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AP

129.
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AN
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C

AP
AP
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C

169.
170.

2,5
6

AP
AN


6-2

Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition

Challenge Exercises
171. 2,5 AN 172.
Short-Answer Essays
174.
1
K
176.
175.
1
C
177.

5

AP

173.

3

AN

2
3

K
C

178.

179.

4
3

C
C

180.
*181
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5
A1

C
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*182.

A1

K


Chapter 6 Cost Allocation and Activity-Based Costing

6-3

TRUE-FALSE

1.

Indirect costs occur because resources are shared by more than one cost objective.

2.

Cost allocation is the process of assigning direct and indirect costs to products.

3.

Cost allocation methods that provide the most accurate full cost information for financial
reporting, also provide the most accurate information for cost-plus contracts.

4.

One of the reasons that companies allocate costs is to allow for the frivolous use of common
resources.

5.

One of the reasons that companies allocate costs is to encourage managers to use externally
provided services, rather than those that are internally provided.

6.

From a decision-making standpoint, the allocated cost should measure the opportunity cost of
using a company resource.

7.

Once the opportunity cost associated with a shared resource is determined, it is unlikely to
change.

8.

In order to provide full cost information for external reporting purposes, indirect production costs
must be allocated to goods produced.

9.

Cost-plus contracts guarantee that the supplier will pay for production costs and the customer will
pay a fixed amount or percentage of the cost.

10.

The more costs that are allocated to a cost-plus contract, the smaller the profit will be for the
supplier of the contract.

11.

A cost objective is the product, service, or department that will receive the allocated cost.

12.

Large cost pools that contain many different kinds of costs are most useful to managers in making
decisions.

13.

The allocation base selected should ideally have a relative benefits relationship with the costs to

be allocated.

14.

In the direct method of allocating costs, service department costs are allocated only to production
departments, not to other service departments.

15.

When service department costs are allocated using actual costs and actual usage, the amount
allocated to one department will depend on the usage of other departments.

16.

Allocating actual service department costs allows the service departments to pass on the costs of
inefficiencies to the production departments.

17.

Managers should not be held responsible for noncontrollable costs.

18.

Allocating unitized fixed and variable costs leads to better decision making than allocating total
costs.


6-4

Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition

19.

Allocating fixed costs on a per unit basis will often cause the managers receiving the allocations
to perceive the costs as variable.

20.

ABC is more likely than traditional costing systems to undercost complex, low-volume products.

21.

ABC allocates cost pools to cost objectives using cost drivers as the allocation base.

22.

Under the ABC approach, costs are assigned to cost drivers based on a chosen cost objective.

23.

An example of a unit-level activity is the design of a particular product.

24.

Activity-based management aims at improving the efficiency and effectiveness of business
processes.

25.

Activity-based costing uses benchmarking to compare the cost of an activity in one organization

to the cost for a similar activity in another organization.

*26.

Before resources used by the major activities of a business can be identified, managers using
activity-based management must identify ways to improve the effectiveness of the activities.

*27.

The process of determining major activities occurs before the resources used by each activity are
identified in performing an activity-based management study.

28.

A batch-level activity is an activity that supports all other activities.

Answers
1 T
2 F
3 T
4 F
5 F

6
7
8
9
10

T

F
T
F
F

11
12
13
14
15

T
F
F
T
T

16
17
18
19
20

T
T
F
T
F

21

22
23
24
25

T
F
F
T
F

*26 F
*27 T
28 F


Chapter 6 Cost Allocation and Activity-Based Costing

6-5

MULTIPLE CHOICE
29.

Indirect costs occur when
A.
resources are shared by more than one product or service.
B.
costs are directly traced to products or services.
C.
controllable costs are incurred by cost objectives.

D.
All of these answer choices are correct.

30.

The process of assigning indirect costs is called
A.
benchmarking.
B.
tracing.
C.
cost allocation.
D.
cost unitizing.

31.

Which of the following is not a reason that companies allocate costs?
A.
To calculate the full cost of products for financial reporting purposes
B.
To discourage managers from using external suppliers
C.
To reduce the frivolous use of company resources
D.
To provide information needed by managers to make appropriate decisions

32.

Costs may not be allocated to

A.
cost drivers.
B.
services.
C.
departments.
D.
cost objectives.

33.

From a decision-making standpoint, the allocated cost should measure the
A.
sunk cost of the resource involved.
B.
variable costs of the materials purchased.
C.
opportunity cost of using a company resource.
D.
product cost of the goods produced.

34.

If managers are not charged for centrally administered services, what may managers likely do?
A.
Seek outside suppliers
B.
Limit their frivolous use of these services
C.
Consider the services as free

D.
Evaluate and consider lower-cost alternatives for the services

35.

Full cost information
A.
is required by GAAP for internal reporting purposes.
B.
requires the allocation of indirect costs.
C.
provides managers with cost information on uncontrollable costs.
D.
treats all costs as fixed costs.

36.

A contract that specifies that the supplier will be paid for the cost of production as well as some
fixed amount or percentage of cost is called a(n)
A.
relative-benefits contract.
B.
cost-plus contract.
C.
allocation cost pool.
D.
indirect cost budget.


6-6

Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition

37.

In which of the following industries are cost-plus contracts common?
A.
Hybrid car manufacturers
B.
Soft drink bottlers
C.
Governmental defense suppliers
D.
Newspaper publishers

38.

A major problem with cost-plus contracts is that they
A.
include costs that do not follow GAAP.
B.
cause the supplier to take significant financial risks.
C.
require the supplier to use variable costing.
D.
create an incentive to allocate as much cost as possible to the goods produced under the
contract.

39.

Which of the following is not a step in the cost allocation process?
A.
Calculate the cost involved in each step of the production process.
B.
Select an allocation base to relate the cost pools to the cost objectives.
C.
Form cost pools.
D.
Identify the cost objectives.

40.

A cost objective is the
A.
reason for allocating the cost.
B.
basis on which costs are allocated.
C.
product, service, or department that is to receive the allocation.
D.
relative benefit received from using a resource.

41.

What is the product, service, or department that is to receive the cost allocation called?
A.
Cost-plus recipient
B.
Cost objective
C.

Cost driver
D.
Cost pool

42.

Which of the following is least likely to be a cost objective?
A.
Salaries such as those in the accounting and personnel departments
B.
Individual products such as spades and mowers
C.
Product lines such as loans and estate plans
D.
Departments such as assembly and finishing

43.

Which of the following is a grouping of individual costs whose total is allocated using one
allocation base?
A.
Cost objective
B.
Cost pool
C.
Direct cost
D.
Cost driver

44.

A cost pool is
A.
not necessary in cost-plus contracts.
B.
useful when separating mixed costs into their fixed and variable components.
C.
allocated using a single allocation base.
D.
a method of allocating costs among service departments.


Chapter 6 Cost Allocation and Activity-Based Costing

6-7

45.

Which of the following is a measure of activity used to distribute indirect costs?
A.
Cost objective
B.
Cost pool
C.
Cost driver
D.
Cost unitization

46.

Which of the following is the overriding concern in forming a cost pool?
A.
To ensure that there are no variable costs in the cost pool
B.
To ensure that the total amount in the cost pool is less than the direct costs for the product
C.
To ensure that only costs which have been budgeted are included in the cost pool
D.
To ensure the costs in the pool are homogeneous or similar

47.

Which of the following statements about cost pools is true?
A.
The costs in each of the cost pools should be homogeneous or similar.
B.
The number of cost pools must be the same as the number of products produced by a
company.
C.
Only four different kinds of costs may be included in a single cost pool.
D.
Each cost pool should include the costs of one expense account.

48.

An allocation base
A.
is the minimum amount to be allocated to a cost objective.
B.
is also called a cost pool.

C.
represents the items to which a cost will be allocated.
D.
relates the cost pool to the cost objectives.

49.

An allocation base
A.
is also called a cost objective.
B.
is a characteristic that is the same for all cost drivers.
C.
ideally uses a cause-and-effect relationship to the cost pool.
D.
All of these answer choices are correct.

50.

Which of the following is not a criterion typically used to allocate indirect fixed costs?
A.
Ability to bear costs
B.
Equity
C.
Feasible outcomes
D.
Relative benefits

51.

Which of the following is not a service department in a typical manufacturing firm?
A.
Security
B.
Fabrication
C.
Maintenance
D.
Personnel

52.

Which of the following is a method of allocation used to assign service department costs to
production departments, but not to other service departments?
A.
Equity method
B.
Direct method
C.
Lump-sum method
D.
Traditional method


6-8

Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition

53.

Service department costs are allocated to producing departments
A.
so that the costs can be allocated to the products in the producing departments.
B.
so that less cost is allocated to service departments.
C.
so that the service will not be purchased externally.
D.
All of these answer choices are correct.

54.

Which of the following allocations would not occur when the direct method is used in a
manufacturing company?
A.
Personnel department costs are allocated to the maintenance department.
B.
Maintenance department costs are allocated to the mixing department.
C.
Security department costs are allocated to the packaging department.
D.
Payroll department costs are allocated to the assembly department.

55.

The advantage of allocating budgeted rather than actual service department costs is that
A.
managers are not motivated to evaluate the charges.
B.

only one cost pool is necessary.
C.
service departments cannot pass on the costs of inefficiencies and waste.
D.
this practice is acceptable under GAAP.

56.

What costs are affected by the manager’s decisions for which the manager should be held
accountable?
A.
Indirect costs
B.
Controllable costs
C.
Sunk costs
D.
Pooled costs

57.

Managers are correct when they perceive that almost all cost allocations are
A.
insignificant.
B.
arbitrary.
C.
designed to make them look bad.
D.
unnecessary.

58.

When fixed costs are unitized, they
A.
are stated on a per unit basis.
B.
may appear to remain the same in total at all levels of activity.
C.
may cause managers to use volume-related allocation.
D.
All of these answer choices are correct.

59.

An allocation of a predetermined amount that is not affected by changes in the activity level of
the organizational unit receiving the allocation is called a(n)
A.
allocation base.
B.
unitized cost.
C.
lump-sum allocation.
D.
cost driver.

60.

Lump-sum allocations
A.

generally changes year after year.
B.
do not change when the activity levels of any of the user departments change.
C.
are impacted by the usage of the allocated resource by other departments.
D.
make fixed costs appear variable.


Chapter 6 Cost Allocation and Activity-Based Costing

6-9

61.

Which of the following statements is true concerning lump-sum allocations of service department
costs?
A
They make fixed costs appear to be variable to the manager receiving the allocation.
B.
They are not affected by the activity level in the department receiving the allocation.
C.
They make fixed costs appear to be variable to the manager receiving the allocation and
are not affected by the activity level in the department receiving the allocation.
D.
They do not make fixed costs appear to be variable to the manager receiving the
allocation and are affected by the activity level in the department receiving the allocation

62.

Which of the following is not a problem caused by assigning actual service department costs to
operating departments based on actual usage of service department activities by the operating
departments?
A.
The cost assigned to one manager will be affected by the service usage of another
manager.
B.
Inefficiencies in the service department will be passed along to the operating
departments.
C.
Operating managers having high peak capacity requirements will not have to bear the full
cost of meeting this peak capacity.
D.
All of these answer choices are problems caused by assigning actual service costs to
operating departments.

63.

The Copy Department of Hernandez Hardware is budgeted to incur $30,000 per month in fixed
costs plus a cost of $0.02 per copy. The company allocates copy costs to user departments as
follows:
• Fixed costs are allocated as a lump sum based on budgeted fixed costs and estimated
peak demand for each department.
• Variable costs are allocated based on the budgeted rate per copy times the
department's actual usage.
Which of the following is an advantage of this allocation scheme over allocating all actual service
costs based on actual usage?
A.
Departments that use copy services are charged for cost overruns in the copy department.
B.

The amount charged to a particular user department is affected by the number of copies
used by another department.
C.
Managers in departments that use services pay for the fixed costs that fluctuate based on
their changing needs.
D.
Managers are charged for the activities they use.

64.

From the perspective of a manager of a producing department, which of the following is a desired
feature of a cost allocation received from a service department?
A.
The amount of the allocation should be based solely on the usage of the service by the
producing department and not a function of the usage of the service by other departments.
B.
The budgeted cost should be allocated rather than actual service department costs.
C.
The allocation should force the production manager to pay for fluctuating demands that
the production manager is creating.
D.
All of these answer choices are correct.


6-10

Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition

65.

Companies that use only one or two cost pools rather than several cost pools
A.
incurs more cost of record keeping.
B.
will experience more profit than if more pools are used.
C.
may price products incorrectly due to inaccurate cost allocation.
D.
are likely to be using ABC.

66.

When activity-based costing is implemented, the initial outcome is that
A.
the unit cost of all products will be higher.
B.
the unit cost of all products will be lower.
C.
the unit cost of low-volume products will be higher and the unit cost of high-volume
products will be lower.
D.
the unit cost of low-volume products will be lower and the unit cost of high-volume
products will be higher.

67.

Which of the following is likely to occur when fewer overhead cost pools are used?
A.
Product costs will be less accurate.
B.

Recordkeeping will be more expensive.
C.
Decisions such as product pricing will be improved.
D.
All products will be undercosted.

68.

The traditional approach to cost allocation
A.
tends to over-cost high volume core products.
B.
usually requires more cost pools than ABC.
C.
attempts to identify the activities that cause costs.
D.
produces more accurate costs than other allocation methods.

69.

Which of the following steps is not involved in the ABC approach?
A.
Identify activities that cause costs to be incurred.
B.
Allocate costs to products based on activity usage.
C.
Group costs of activities into cost pools.
D.
Improve processes based on benchmarking.

70.

How many distinct activities are used by most companies that design ABC systems?
A.
Fewer than 3
B.
3 to 10
C.
11 to 24
D.
25 to 100

71.

Happy Foods uses ABC costing. Which of the following is most likely to be a cost driver for the
cost of cashiering at a convenience store?
A.
Cost of items purchased
B.
Direct labor cost
C.
Number of customers processed
D.
Number of employees handling the job

72.

Which of the following is generally true when a company compares activity-based costing (ABC)
and traditional volume-based costing?
A.

ABC uses fewer cost drivers in an effort to reduce total costs.
B.
ABC allocates costs based primarily on production volume.
C.
ABC is less expensive.
D.
ABC is less likely to undercost complex, low-volume products.


Chapter 6 Cost Allocation and Activity-Based Costing

6-11

73.

Which of the following is not an advantage of activity-based costing over traditional volumebased costing systems?
A.
ABC may lead to cost control improvement as managers are charged for using activities.
B.
ABC is less likely than a traditional system to undercost complex, low-volume products.
C.
ABC is less costly to implement than traditional systems.
D.
ABC allows managers to get an understanding of the cost of their respective department’s
activities.

74.

What is the major difference between ABC and ABM?
A.

ABC is used in managerial accounting, while ABM is used in financial accounting.
B.
ABC focuses on measurement, while ABM focuses on control.
C.
The goal of ABC is to accurately control costs, while the goal of ABM is to allocate costs
most effectively to cost objectives.
D.
There is no difference; ABC and ABM are two names for the same thing.

75.

Activity-based management
A.
is the management of activities that cause costs.
B.
requires cost pools to be formed consisting of costs that are homogenous in nature.
C.
allocates costs in a cause and effect manner to cost objectives.
D.
is a method of allocating direct costs to cost objectives.

*76.

Which one of the following lists the major steps in activity-based management in the correct
order?
A.
Determine major activities, form cost pools, evaluate the performance of the activities,
and identify ways to improve the activities
B.
Determine major activities, identify resources used by each activity, evaluate the

performance of the activities, and identify ways to improve the activities
C.
Determine major activities, identify ways to improve the activities, evaluate the
performance of the activities, and identify resources used by each activity
D.
Determine major activities, evaluate the performance of activities, form cost pools, and
identify ways to improve the activities

77.

Teal Sports offers 2 different types of water sport activities—sailfish rental and banana boat rides.
The company has two different activities—lifeguarding and maintenance—that provide input into
its cost objectives. Data on estimated overhead for the year follows:
Activity

Driver

Estimated
Overhead Cost

Sailfish Rental
Estimate

Boat Rides
Estimate

Lifeguarding
Maintenance

# of Labor hours

Hours of riding time

$63,940
$88,000

3,280 hours
1,500 hours

2,280 hours
2,500 hours

What overhead rates will be used in each department to assign costs to the banana boat rides?
Lifeguarding
Maintenance
A.
$28.04
$22.00
B.
$11.50
$22.00
C.
$28.04
$35.20
D.
$11.50
$35.20


6-12

Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition

78.

Terrel Gifts produces logo platters and cups bearing the name of the city in which the items will
be sold to tourists. Indirect logo printing costs are allocated to platters and cups based on the
amount of time spent on the logo machine. The company has budgeted logo costs of $4,224 per
month and expects to spend 4,800 hours on the printing logos each month. Each platter uses 24
minutes and each cup spends 6 minutes on the logo machine. How much of the logo printing
costs will be allocated to each platter?
A.
$0.35
B.
$0.88
C.
$21.12
D.
$8.12

79.

Teal Sports offers 2 different types of water sport activities—sailfish rental and banana boat rides.
The company has two different activities—lifeguarding and maintenance—that provide input into
its cost objectives. Data on estimated overhead for the year follows:
Activity
Lifeguarding
Maintenance

Driver
# of Labor hours

Hours of riding time

Estimated
Overhead Cost
$63,940
$88,000

Sailfish Rental
Estimate
3,280 hours
1,500 hours

Boat Rides
Estimate
2,280 hours
2,500 hours

The company provides 2,400 banana boat rides and 1,200 sailfish rentals each year. How much
overhead will be assigned to each banana boat ride?
A.
$42.20
B
$73.24
C
$22.56
D.
$33.84
80.

The law firm of Barnes & Cohen purchased a new $17,600 copier. Copying costs will be shared

by the purchasing, accounting, and information technology departments since those are the only
departments that will have access to the machine. The company has decided to allocate the
copying cost based on the number of copies made by each department. The sales person who sold
the copier to the attorneys expects it will generate 1,000,000 copies. The manager of each
department has estimated the number of copies that his or her department will make over the life
of the copier:
Department
Purchasing
Accounting
Information Technology

Copies
150,000
450,000
200,000

How much overhead will be allocated each time a copy is made by the accounting department?
A.
2.2 cents
B.
3.9 cents
C.
1.76 cents
D.
None of these answer choices are correct.


Chapter 6 Cost Allocation and Activity-Based Costing

6-13

81.

Marley Music produces toy instruments—trumpet and flute— for children. Molding costs are
allocated to products based on a percentage of material costs. Molding costs of $15,000 per
month are budgeted and the store anticipates spending $30,000 in materials. By the end of the
month, it was determined that actual molding costs were $14,500. If the company spends $6.50
per trumpet for materials, and $3.50 per flute for materials, how much of the molding costs will
be allocated to each trumpet?
A.
$0.50
B.
$0.48
C.
$3.14
D.
$3.25

82.

The law firm of Barnes & Cohen purchased a new $17,600 copier. Copying costs will be shared
by the purchasing, accounting, and information technology departments since those are the only
departments that will have access to the machine. The company has decided to allocate the
copying cost based on the number of copies made by each department. The sales person who sold
the copier to the attorneys expects it will generate 1,000,000 copies. The manager of each
department has estimated the number of copies that his or her department will make over the life
of the copier:
Department
Copies
Purchasing

150,000
Accounting
450,000
Information Technology
200,000
If the purchasing department makes 23,000 copies this quarter, how much copying cost will
Barnes & Cohen allocate to purchasing?
A.
$405
B.
$2,699
C.
$506
D.
None of these answer choices are correct.

83.

Ransom Widgets allocates the estimated cost of its accounting department, $200,000, to its
production and sales departments since the accounting department supports these departments
with regard to payroll and accounts payable functions. The accounting department costs will be
allocated based on the number of employees using the direct method. Information regarding
employees follows:
Department
Accounting
Production
Sales

Employees
4

36
12

How much of the accounting department costs will be allocated to the production and sales
departments, respectively?
Production
Sales
A.
$150,000
$50,000
B.
$180,000
$60,000
C.
$1,800,000
$600,000
D.
$22,222
$66,667


6-14

Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition

84.

Intermodal Moving uses the direct method and allocates its maintenance costs on the basis of
repair hours and its payroll department costs on the basis of employees. Estimated costs and
information on the services and production departments follows:

Payroll
Maintenance
Packing
Driving

$36,000
$48,000
30 employees, 280 repair hours
10 employees, 1,960 repair hours

How much of the payroll and maintenance costs will be allocated to the packing department?
Payroll
Maintenance
A.
$900
$171.43
B.
$27,000
$6,000
C.
$27,000
$21.43
D.
$1,200
$6,000
85.

Freely Service provides residential and commercial monthly swimming pool cleaning services.
Information on this service is as follows:
Service revenue

Direct materials
Direct labor

$140,000
18,000
44,000

Estimated travel costs for the month total $2,340 and are allocated to each client based on miles
driven to each pool cleaning. The company estimates it will clean 50 residential pools and 80
commercial pools per month with 1,200 total miles used for commercial pools and 2,400 total
miles used for residential pools. Because commercial pools are much larger, they take 3 hours to
clean, while residential pools take a half hour each. During the month, the actual mileage totaled
2,600 miles. How much is the rate at which travel costs will be allocated to residential pools?
A.
$0.65
B.
$0.975
C.
$18.00
D.
$8.83
86.

The building maintenance department for Advantage Toys budgets annual costs of $4,200,000
based on the expected operating level for the coming year. The costs are allocated to two
production departments. The following data relate to the potential allocation bases:
Production Dept. A
Production Dept. B
Square footage
15,000

45,000
Direct labor hours
25,000
50,000
If Advantage assigns costs to departments based on square footage, how much maintenance cost
will be allocated to Production Department A?
A.
$1,400,000
B.
$1,050,000
C.
$1,575,000
D.
$2,100,000


Chapter 6 Cost Allocation and Activity-Based Costing

87.

6-15

The building maintenance department for Advantage Toys budgets annual costs of $4,200,000
based on the expected operating level for the coming year. The costs are allocated to two
production departments. The following data relate to the potential allocation bases:
Production Dept. A
Production Dept. B
Square footage
15,000
45,000

Direct labor hours
25,000
50,000
If Advantage assigns costs to departments based on direct labor hours, how much maintenance
cost will be allocated to Production Department B?
A.
$1,400,000
B.
$1,050,000
C.
$2,800,000
D.
$2,100,000

88.

Sweet Cocoa produces chocolate syrup used by candy companies. Recently, the company has had
excess capacity due to a foreign supplier entering its market. Sweet Cocoa is currently bidding on
a potential order from Kilwin’s Candy for 5,000 cases of syrup. The estimated cost of each case is
$27.50, as follows: direct material, $10; direct labor, $5; and manufacturing overhead, $12.50.
The overhead rate of $2.50 per direct labor dollar is based on estimated annual overhead of
$1,500,000 and estimated direct labor cost of $600,000, composed 40% of variable costs and 60%
of fixed costs. The largest fixed cost relates to depreciation of plant and equipment. How much is
the variable cost of producing a case of chocolate syrup?
A.
$16.00
B.
$27.50
C.
$11.00

D.
$20.00

89.

Sweet Cocoa produces chocolate syrup used by candy companies. Recently, the company has had
excess capacity due to a foreign supplier entering its market. Sweet Cocoa is currently bidding on
a potential order from Kilwin’s Candy for 5,000 cases of syrup. The estimated cost of each case is
$27.50, as follows: direct material, $10; direct labor, $5; and manufacturing overhead, $12.50.
The overhead rate of $2.50 per direct labor dollar is based on estimated annual overhead of
$1,500,000 and estimated direct labor cost of $600,000, composed 40% of variable costs and 60%
of fixed costs. The largest fixed cost relates to depreciation of plant and equipment. Should Sweet
Cocoa bid on the Kilwin’s Candy business at $21 per case?
A.
No, because the incremental loss will be $6.50 per case
B.
Yes, because the incremental profit will be $1.00 per case
C.
No, because there are too many qualitative considerations
D.
Yes, because the incremental profit will be $10 per case

90.

Maintenance costs at Sturgeon Company are allocated to the production departments based on
area occupied. Maintenance costs of $300,000 are budgeted to maintain a 60,000 square foot
production area. If the finishing department occupies 25,000 square feet, how much of the
maintenance department costs will be allocated to the finishing department?
A.
$125,000

B.
$175,000
C.
$100,000
D.
$5,000


6-16

Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition

91.

Dewey, Cheatham, and How, Attorneys-at-Law, specialize in three areas: criminal, civil, and
family law. When specifications for a new IT system were established, the partners agreed to
allocate fixed costs based on gigabytes needed by each department. The criminal law division
needed 40% of the capacity, civil law needed 35%, and family law needed 25%. Variable costs for
the IT department are allocated on the amount of bandwidth used by each division used. The IT
department’s budgeted monthly fixed costs are $640,000, and the budgeted monthly variable
costs are $160,000. The firm estimates that 8,000,000 gigabytes of computer time will be used in
June. The criminal law division actually used 3,040,000 gigabytes of bandwidth during June.
How much fixed IT costs will be allocated to the criminal law division during June?
A.
$256,000
B.
$240,000
C.
$512,000
D.

None of these answer choices are correct.

92.

Dewey, Cheatham, and How, Attorneys-at-Law, specialize in three areas: criminal, civil, and
family law. When specifications for a new IT system were established, the partners agreed to
allocate fixed costs based on gigabytes needed by each department. The criminal law division
needed 40% of the capacity, civil law needed 35%, and family law needed 25%. Variable costs for
the IT department are allocated on the amount of bandwidth used by each division used. The IT
department’s budgeted monthly fixed costs are $640,000, and the budgeted monthly variable
costs are $160,000. The firm estimates that 8,000,000 gigabytes of computer time will be used in
June. During June, the family law division used 1,900,000 gigabytes of bandwidth. How much
are total variable IT costs to be allocated to the family law division during June? Compute cost
allocation rates to 3 significant digits.
A.
$160,000
B.
$60,000
C.
$40,000
D.
$38,000

93.

Dewey, Cheatham, and How, Attorneys-at-Law, specialize in three areas: criminal, civil, and
family law. When specifications for a new IT system were established, the partners agreed to
allocate fixed costs based on gigabytes needed by each department. The criminal law division
needed 40% of the capacity, civil law needed 35%, and family law needed 25%. Variable costs for
the IT department are allocated on the amount of bandwidth used by each division used. The IT

department’s budgeted monthly fixed costs are $640,000, and the budgeted monthly variable
costs are $160,000. The firm estimates that 8,000,000 gigabytes of computer time will be used in
June. The criminal law division actually used 3,040,000 gigabytes of bandwidth during June. The
family law division used 2,100,000 and the civil law division used 3,100,000 gigabytes of
bandwidth during June. What amount of the IT fixed costs will be allocated to the civil law
division during June? (Compute cost allocation rates to 3 significant digits.)
A.
$224,000
B.
$248,000
C.
$241,984
D.
None of these answer choices are correct.


Chapter 6 Cost Allocation and Activity-Based Costing

94.

6-17

Dragon Fire Hot Sauce makes two types of hot sauces—meek and mild. Budgeted information
for the two flavors appears below:
Sales
Direct materials
Direct labor cost
Labor hourly cost

Meek

$600,000
$100,000
$108,000
$12.00

Mild
$400,000
$120,000
$180,000
$12.00

The company estimates it will incur $345,600 in overhead costs for the period. Dragon Fire
allocates overhead cost to products based on the labor hours worked on each product. What is the
overhead application rate to be used when allocating to Meek?
A.
$14.40
B.
$1.20
C.
$3.20
D.
None of these answer choices are correct.
95.

Manufacturing overhead is allocated to products based on the number of machine hours required.
In a year when 40,000 machine hours and 60,000 direct labor hours were anticipated, indirect
costs were budgeted at $252,000. If production of wagons requires 9,000 machine hours and
10,800 direct labor hours, how much manufacturing overhead will be allocated to wagons?
A.
$45,360

B.
$56,700
C.
$2,268
D.
$28

96.

Dragon Fire Hot Sauce makes two types of hot sauces—meek and mild. Budgeted information
for the two flavors appears below:
Sales
Direct materials
Direct labor cost
Labor hourly cost

Meek
$600,000
$100,000
$108,000
$12.00

Mild
$400,000
$120,000
$180,000
$12.00

The company estimates it will incur $345,600 in overhead costs for the period. Dragon Fire
allocates overhead cost to products based on the labor hours worked on each product. How much

is the total overhead applied to Meek?
A. $130,500
B. $129,600
C. $1,566
D.
$348,000
97.

The production departments at Windsor Parke occupy a total area of 50,000 square feet. Heating
costs total $600,000 and are allocated based on the area that each department occupies. The
finishing department occupies 30,000 square feet and the packaging department occupies 20,000
square feet. What amount of heating cost will be allocated to the finishing and packaging
departments, respectively?
A.
$360,000 and $240,000
B.
$300,000 and $300,000
C.
$36,000 and $24,000
D.
$32,727 and $21,818


6-18

Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition

98.

Dragon Fire Hot Sauce makes two types of hot sauces—meek and mild. Budgeted information

for the two flavors appears below:
Sales
Direct materials
Direct labor cost
Labor hourly cost

Meek
$600,000
$100,000
$108,000
$12.00

Mild
$400,000
$120,000
$180,000
$12.00

The company estimates it will incur $345,600 in overhead costs for the period. Dragon Fire
allocates overhead cost to products based on the labor cost incurred. How much overhead is
assigned to Mild?
A.
$216,000
B.
$28,800
C.
$56,250
D.
None of these answer choices are correct.
99.

Maintenance cost is allocated to Wakshaw’s three producing departments based on the machine
hours used in each department. The maintenance cost for June was $200,000. The three
departments had the following usage for June:
Department
Assembly
Fabrication
Testing

Machine hours used
600
600
800

Direct labor hours used
2,000
5,000
3,000

How much maintenance cost should be allocated to the fabrication department for June?
A.
$60,000
B.
$100,000
C.
$66,667
D.
$6,000
100.

Excellence Pastries produces baked goods. Utility costs are allocated to the products based on the
baking time required for the product. Utility costs of $291,500 are budgeted in a period when
550,000 total minutes of baking time and 100,000 minutes of cooling time are anticipated. If a
batch of rolls bakes for 45 minutes, and then cools for 15 minutes, what amount of utility cost
will be allocated to each batch of rolls?
A.
$38.87
B.
$23.85
C.
$20.18
D.
$31.80

101.

ZanaTech has an on-site cafeteria in which it provides free meals for employees. The company
allocates the cost of the cafeteria to production departments using the direct method based on the
number of employees in each department. The four production departments in the company have
the following number of employees: molding, 15; polishing, 20; engraving, 10; and packaging,
15. There are 20 employees in the cafeteria. The cafeteria’s costs are budgeted at $144,000 for the
year. When the cafeteria’s costs are allocated, what is the amount per employee that will be
allocated to the packaging department each year?
A.
$2,400
B.
$9,600
C.
$1,800
D.

None of these answer choices are correct.


Chapter 6 Cost Allocation and Activity-Based Costing

6-19

102.

ZanaTech has an on-site cafeteria in which it provides free meals for employees. The company
allocates the cost of the cafeteria to production departments using the direct method based on the
number of employees in each department. The four production departments in the company have
the following number of employees: molding, 15; polishing, 20; engraving, 10; and packaging,
15. There are 20 employees in the cafeteria. The cafeteria’s costs are budgeted at $144,000 for the
year. What amount of the cafeteria’s cost will be allocated to the molding department?
A.
$27,000
B.
$9,600
C.
$2,400
D.
$36,000

103.

ZanaTech has an on-site cafeteria in which it provides free meals for employees. The company
allocates the cost of the cafeteria to production departments using the direct method based on the
number of employees in each department. The four production departments in the company have
the following number of employees: molding, 15; polishing, 20; engraving, 10; and packaging,

15. There are 20 employees in the cafeteria. The cafeteria’s costs are budgeted at $144,000 for the
year. What amount of cafeteria cost will be allocated to the engraving department? Use 4
significant digits for calculations.
A.
$2,400
B.
$24,000
C.
$18,000
D.
$14,400

104.

ZanaTech has an on-site cafeteria in which it provides free meals for employees. The company
allocates the cost of the cafeteria to production departments using the direct method based on the
number of employees in each department. The four production departments in the company have
the following number of employees: molding, 15; polishing, 20; engraving, 10; and packaging,
15. There are 20 employees in the cafeteria. The cafeteria’s costs are budgeted at $144,000 for the
year. The actual cafeteria costs totaled $147,000 for the year. What is the total amount of the
cafeteria’s costs that will be allocated to the production departments?
A.
$108,000
B.
$144,000
C.
$147,000
D.
None of these answer choices are correct.

105.

Ransall Auto Parts has two service departments—maintenance and personnel, and three
production departments—fabrication, assembly, and packaging. Service costs are allocated to
producing departments using the direct method. Information on overhead in each department and
possible allocation bases appear below:
Cost
Machine hours
Employees

Maintenance
$90,000
4

Personnel
$130,000
16

Fabrication

Assembly

Packaging

12,000
24

30,000
30

18,000
26

Using the most logical activity base, how much maintenance cost will be allocated to packaging?
A.
$3,600
B.
$27,000
C.
$33,750
D.
$30,000


6-20

Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition

106.

Ransall Auto Parts has two service departments—maintenance and personnel, and three
production departments—fabrication, assembly, and packaging. Service costs are allocated to
producing departments using the direct method. Information on overhead in each department and
possible allocation bases appear below:
Cost
Machine hours
Employees

Maintenance
$90,000

4

Personnel
$130,000
16

Fabrication

Assembly

Packaging

12,000
24

30,000
30

18,000
26

Using the most logical activity base, how much personnel cost will be allocated to the packaging
department?
A.
$7,150
B.
$39,000
C.
$33,800
D.

$42,250
107.

Ransall Auto Parts has two service departments—maintenance and personnel, and three
production departments—fabrication, assembly, and packaging. Service costs are allocated to
producing departments using the direct method. Information on overhead in each department and
possible allocation bases appear below:
Cost
Machine hours
Employees

Maintenance
$90,000
4

Personnel
$130,000
16

Fabrication

Assembly

Packaging

12,000
24

30,000
30

18,000
26

Using the most logical activity base, how much maintenance cost will be allocated to the
personnel department?
A.
$26,000
B.
$39,000
C.
$18,000
D.
$0
108.

Ernst & Gray, CPAs has three divisions: audit, tax, and business consulting. When the
specifications for the new computer system were established, the audit division needed 50% of
the capacity, the tax division required 30%, and business consulting required 20%. The fixed
computer department costs are allocated based on computer needs. The variable costs of the
computer department are allocated based on the minutes of computer time that each department
uses. The computer division budget for fixed costs is $450,000, and the budget for variable costs
is $145,600. The company anticipates using 520,000 minutes of computer time. What amount of
variable costs will be allocated when a division uses a minute of computer time?
A.
$4.50
B.
$2.80
C.
$1.15

D.
$0.28


Chapter 6 Cost Allocation and Activity-Based Costing

6-21

109.

Ernst & Gray, CPAs has three divisions: audit, tax, and business consulting. When the
specifications for the new computer system were established, the audit division needed 50% of
the capacity, the tax division required 30%, and business consulting required 20%. The fixed
computer department costs are allocated based on computer needs. The variable costs of the
computer department are allocated based on the minutes of computer time that each department
uses. The computer division budget for fixed costs is $450,000, and the budget for variable costs
is $145,600. The company anticipates using 520,000 minutes of computer time. If the audit
division uses 250,000 minutes of computer time, what amount of variable costs will be allocated
to the audit division (round your intermediate calculation to two decimal places)?
A.
$70,000
B.
$302,848
C.
$286,346
D.
$48,533

110.

Ernst & Gray, CPAs has three divisions: audit, tax, and business consulting. When the
specifications for the new computer system were established, the audit division needed 50% of
the capacity, the tax division required 30%, and business consulting required 20%. The fixed
computer department costs are allocated based on computer needs. The variable costs of the
computer department are allocated based on the minutes of computer time that each department
uses. The computer division budget for fixed costs is $450,000, and the budget for variable costs
is $145,600. The company anticipates using 520,000 minutes of computer time. If the tax division
uses 104,000 minutes of computer time this year, what is the total amount of computer
department costs that will be allocated to the tax division (round your intermediate calculation to
two decimal places)?
A.
$173,680
B.
$135,000
C.
$164,120
D.
$119,120

111.

Ernst & Gray, CPAs has three divisions: audit, tax, and business consulting. When the
specifications for the new computer system were established, the audit division needed 50% of
the capacity, the tax division required 30%, and business consulting required 20%. The fixed
computer department costs are allocated based on computer needs. The variable costs of the
computer department are allocated based on the minutes of computer time that each department
uses. The computer division budget for fixed costs is $450,000, and the budget for variable costs
is $145,600. The company anticipates using 520,000 minutes of computer time. What amount of
the computer department’s fixed costs will be allocated to the business consulting division?
A.

$150,000
B.
$29,120
C.
$90,000
D.
$119,120


6-22

Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition

112.

Ernst & Gray, CPAs has three divisions: audit, tax, and business consulting. When the
specifications for the new computer system were established, the audit division needed 50% of
the capacity, the tax division required 30%, and business consulting required 20%. The fixed
computer department costs are allocated based on computer needs. The variable costs of the
computer department are allocated based on the minutes of computer time that each department
uses. The computer division budget for fixed costs is $450,000, and the budget for variable costs
is $145,600. The company anticipates using 520,000 minutes of computer time. If the business
consulting division uses 78,000 minutes of computer time, what is the total amount of computer
department costs that will be allocated to the business consulting division (round your
intermediate calculation to two decimal places)?
A.
$21,840
B.
$89,340
C.

$111,840
D.
$119,120

113.

Bayard Backup is a manufacturer of data storage devices. Bayard operates two service
departments—maintenance and technology, and two production departments—assembly and
testing. Maintenance costs are allocated on the basis of square footage occupied, and technology
costs are allocated on the basis of the number of workstations. The following data relate to
allocations of service department costs:
Service department costs
Square footage
Workstations

Maintenance
$400,000
2,000
4

Technology
$230,000
3,000
16

Assembly

Testing

20,000

10

30,000
30

How much maintenance costs will be allocated to the assembly department using the direct
method?
A.
$160,000
B.
$133,333
C.
$266,667
D.
$4,000
114.

Bayard Backup is a manufacturer of data storage devices. Bayard operates two service
departments—maintenance and technology, and two production departments—assembly and
testing. Maintenance costs are allocated on the basis of square footage occupied, and technology
costs are allocated on the basis of the number of workstations. The following data relate to
allocations of service department costs:
Service department costs
Square footage
Workstations

Maintenance
$400,000
2,000
4

Technology
$230,000
3,000
16

Assembly

Testing

20,000
10

30,000
30

How much technology department costs will be allocated to the testing department using the
direct method?
A.
$92,000
B.
$65,714
C.
$172,500
D.
$115,000


Chapter 6 Cost Allocation and Activity-Based Costing

115.

6-23

VelCraft allocates costs from its payroll department and the maintenance department to its
production departments using the direct method of allocation. 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 that the production department occupies within
the factory. Information about the departments is presented below:
Department
Payroll
Maintenance
Molding
Finishing
Packaging

Costs
$150,000
$220,000

Number of
Employees
2
8
75
50
25

Number of Square
Feet Occupied

2,000
64,000
100,000
60,000
40,000

What amount of the payroll department costs will be allocated to the molding department?
A.
$70,313
B.
$185,000
C.
$75,000
D.
$132,353
116.

VelCraft allocates costs from its payroll department and the maintenance department to its
production departments using the direct method of allocation. 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 that the production department occupies within
the factory. Information about the departments is presented below:
Department
Payroll
Maintenance
Molding
Finishing
Packaging

Costs

$150,000
$220,000

Number of
Employees
2
8
75
50
25

Number of Square
Feet Occupied
2,000
64,000
100,000
60,000
40,000

When the payroll department costs are allocated, what is the amount per employee that will be
charged to each of the departments?
A.
$937.50
B.
$15,000
C.
$6.67
D.
$1,000

6-24

Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition

117.

VelCraft allocates costs from its payroll department and the maintenance department to its
production departments using the direct method of allocation. 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 that the production department occupies within
the factory. Information about the departments is presented below:
Department
Payroll
Maintenance
Molding
Finishing
Packaging

Costs
$150,000
$220,000

Number of
Employees
2
8
75
50
25

Number of Square
Feet Occupied
2,000
64,000
100,000
60,000
40,000

What amount of the payroll department costs will be allocated to the packaging department?
A.
$23,438
B.
$73,333
C.
$25,000
D.
$36,667
118.

VelCraft allocates costs from its payroll department and the maintenance department to its
production departments using the direct method of allocation. 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 that the production department occupies within
the factory. Information about the departments is presented below:
Number of
Number of Square
Department
Costs
Employees

Feet Occupied
Payroll
$150,000
2
2,000
Maintenance
$220,000
8
64,000
Molding
75
100,000
Finishing
50
60,000
Packaging
25
40,000
When the maintenance department costs are allocated, what amount will be charged to the
packaging department? (Round your intermediate calculation to two decimal places)
A.
$44,000
B.
$33,083
C.
$70,400
D.
$52,932

Chapter 6 Cost Allocation and Activity-Based Costing

119.

6-25

VelCraft allocates costs from its payroll department and the maintenance department to its
production departments using the direct method of allocation. 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 that the production department occupies within
the factory. Information about the departments is presented below:
Department
Payroll
Maintenance
Molding
Finishing
Packaging

Costs
$150,000
$220,000

Number of
Employees
2
8
75
50
25

Number of Square
Feet Occupied
2,000
64,000
100,000
60,000
40,000

When the maintenance department costs are allocated, what amount will be charged to the
molding department? (Round your intermediate calculation to two decimal places)
A.
$44,000
B.
$82,707
C.
$110,000
D.
$52,932
120.

The manager of the molding department at the Category Products Company is evaluated based on
the profit performance of his department. Personnel costs at Category Products are estimated to
be $40,000. These costs are allocated based on the number of employees in each production
department. The welding department has 40 employees, and the molding department has 60
employees. The personnel department actually incurred $52,000 in personnel costs. The profit of
the molding department is down this year because the molding department’s share of allocated
personnel costs is much higher than last year. The allocation of personnel costs to the molding
department is higher in the current year. This is most likely due to
A.
the increase in the company’s total production costs.

B.
allocating actual personnel costs to the production departments.
C.
more number of efficient employees in the welding department.
D.
more number of employees in the molding department.

121.

Vystar Credit Union has six service departments (human resources, duplicating, janitorial,
accounting, graphic design, and food services) whose fixed costs are allocated to the company’s
two subsidiaries (Vystar Personal Banking and Vystar Business Banking) on the basis of their
relative revenue. What type of costs will the president of Vystar Business Banking subsidiary
perceive the allocated service department costs to be?
A.
Fixed costs
B.
Opportunity costs
C.
Direct costs
D.
Variable costs