Chapter 16

Service Department Costing: An Activity Approach

True/False
1.
T
Medium

Inboththedirectandstepmethodsofallocatingservice
departmentcosts,anyamountoftheallocationbasethatis
attributabletotheservicedepartmentwhosecostisbeing
allocatedisignored.

2.
F
Medium

Thedirectmethodhasthedisadvantagethatitmayleavesome
servicedepartmentcostsunallocated.

3.
T
Easy

Underthedirectmethodofallocatingservicedepartmentcosts,
reciprocalservicesprovidedamongservicedepartmentsare
ignored.

4.
F
Medium

Ifpersonneldepartmentexpensesareallocatedonthebasisof
thenumberofemployeesinvariousdepartments,thenthenumber
ofemployeesinthepersonneldepartmentitselfmustbe
includedintheallocationbasewhenthestepmethodisused.

5.
T
Medium

Thestepmethodrequiresthatanorderofallocationis
establishedbeforeservicedepartmentcostscanbeallocatedto
operatingdepartments.

6.
T
Easy

Thestepmethodofallocatingservicedepartmentcoststakes
intoaccountsome,butnotall,ofthereciprocalservicesthat
servicedepartmentsprovidetoeachother.

7.
F
Medium

Thestepmethodusuallybeginswiththeservicedepartmentthat
providestheleastamountofservicetotheotherservice
departments.

8.
F
Medium

Thetotalamountofaservicedepartment'svariablecost
allocatedtoanoperatingdepartmentshouldusuallybethesame
atthebeginningandattheendofaperiod.

9.
T
Medium

Thetotalamountofaservicedepartment'sfixedcostallocated
toanoperatingdepartmentshouldusuallybethesameatthe
beginningandattheendofaperiod.

10.
F
Medium

Thefixedcostsofservicedepartmentsshouldbeallocatedto
operatingdepartmentsattheendofaperiodinproportionto
theamountofcapacitytheservicedepartmentsactuallyuse
duringtheperiod.

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69

11.
F
Medium

Forperformanceevaluationpurposes,actualservicedepartment
costsinsteadofbudgetedservicedepartmentcostsshouldbe
allocatedtooperatingdepartments.

12.
F
Easy

Anallocationbasisforservicedepartmentcostsshouldreflect
howmuchcosttheoperatingdepartmentscanbear.Forthis
reason,thesalesoftheoperatingdepartmentsisoftenagood
allocationbasis.

13.
F
Medium

Servicesprovidedbetweenservicedepartmentsareknownasnon
valueaddedactivities.

14.
F
Easy

Thereciprocalmethodofallocatingservicedepartmentcostsis
muchsimplerthanthedirectmethodandasaconsequenceis
muchmorewidelyused.

15.
F
Medium

Allofaservicedepartment'sactualcostsshouldbeallocated
tooperatingdepartmentstoensurethattheyarefully
recovered.

Multiple Choice
16.
D
Medium

Reciprocalservicedepartmentcostsare:
a.allocatedtoproducingdepartmentsunderthedirectmethod
butnotallocatedtoproducingdepartmentsatallunderthe
stepmethod.
b.allocatedtoproducingdepartmentsunderthestepmethodbut
notallocatedtoproducingdepartmentsatallunderthe
directmethod.
c.notallocatedtoproducingdepartmentsundereitherthe
directorthestepmethods.
d.allocatedtoproducingdepartmentsunderboththedirectand
stepmethods.

17.
D
Medium

Thestepmethodofallocatingservicedepartmentcosts:
a.isalessaccuratemethodofallocationthanthedirect
method.
b.cannotbeusedwhenacompanyhasmorethantwoservice
departments.
c.isasimplerallocationthanthedirectmethod.
d.ignoressomeinterdepartmentalservices.

70 ManagerialAccounting,9/e

18.
B
Easy

GrantCompanyhasseveralservicedepartmentsthatprovide
servicesforeachotheraswellasforproducingdepartments
withthecompany.
Themethodthatwouldbeleastaccurateinallocatingthe
company'sservicedepartmentcostswouldbe:
a.bycostbehavior.
b.bythedirectmethod.
c.bythestepmethod.
d.bythereciprocalmethod.

19.
B
Medium

Variableservicedepartmentcostsshouldbeallocatedto
operatingdepartmentsattheendoftheperiodaccordingtothe
formula:
a.BudgetedrateXBudgetedactivity.
b.BudgetedrateXActualactivity.
c.ActualrateXActualactivity.
d.BudgetedtotalcostXPercentageofpeakperiodcapacity
required.

20.
D
Medium

Itwouldbebesttoallocatefixedservicedepartmentcoststo
operatingdepartmentsattheendoftheperiodaccordingto
whichoneofthefollowingtheformulas?
a.BudgetedrateXBudgetedactivity.
b.BudgetedrateXActualactivity.
c.ActualrateXActualactivity.
d.BudgetedtotalcostXPercentageofpeakperiodcapacity
required.

21.
C
Medium

PiedmontCompanyhasoneservicedepartmentandthreeoperating
departments.Duringaparticularyear,asubstantialvariance
developedbetweentheactualcostsandthebudgetedcostsof
theservicedepartment.Forperformanceevaluationpurposes,
thevarianceshouldbe:
a.allocatedtotheoperatingdepartmentsonabasisofusage.
b.allocatedtooperatingdepartments,butonsomebasisother
thanusage.
c.keptintheservicedepartment,andnotchargedtothe
operatingdepartmentsatall.
d.noneofthese.

22.
C
Medium

Ifaportionoftheactualcostincurredbyaservice
departmentisnotallocatedtootherdepartments,attheendof
theperiod,theunallocatedcostshouldbe:
a.allocatedequallybetweentheotherdepartments.
b.allocatedbetweentheotherdepartmentsinproportionsto
budgetedactivity.
c.treatedasavarianceoftheservicedepartment.
d.treatedasavarianceoftheotherdepartments.

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71

23.
B
Medium

Thelongrunaverageorpeakperiodneedsofoperating
departmentswouldbethemostsuitablebaseforallocating:
a.thevariableelementofpowercosts.
b.thefixedelementofpowercosts.
c.totalpowercosts.
d.noneofthese.

24.
C
Easy
CMA
adapted

Becausethisallocationmethodrecognizesthatservice
departmentsoftenprovideeachotherwithinterdepartmental
services,itisconsideredtobethemostaccuratemethodfor
allocatingservicedepartmentcoststooperatingdepartments.
Thismethodis:
a.thedirectmethod.
b.thestepmethod.
c.thereciprocalmethod.
d.thefullmethod.

25.
A
Medium

25.ParkerCompanyhastwoservicedepartments,cafeteriaand
engineering,andtwooperatingdepartments.Thenumberof
employeesineachdepartmentisgivenbelow:
Cafeteria...................10
Engineering..................40
OperatingDepartment1.......500
OperatingDepartment2.......200
ThecostsoftheCafeteriaareallocatedtootherdepartments
onthebasisofthenumberofemployeesinthedepartments.If
thesecostsarebudgetedat$69,375,theamountofcost
allocatedtoEngineeringunderthedirectmethodwouldbe:
a.$0.
b.$3,700.
c.$3,750.
d.$17,344.

72 ManagerialAccounting,9/e

26.
C
Medium
CPA
adapted

BoaCorp.usesthedirectmethodtoallocateservicedepartment
overheadcoststooperatingdepartments.Informationforthe
monthofJunefollows:

ServiceDepartmentso
MaintenanceUtilities
Departmentalcostsincurred..$20,000$10,000
Serviceprovidedtodepartments:
Maintenance............10%
Utilities..............20%
OperatingA...........40%30%
OperatingB...........40%60%
Theamountofmaintenancedepartmentcostsallocatedto
OperatingDepartmentAforJunewouldbe:
a.$8,000.
b.$8,800.
c.$10,000.
d.$20,000.

27.
C
Medium

FairviewHospitalhasaFoodServicesdepartmentwhichprovides
foodforpatientsinallotherdepartmentsofthehospital.For
May,variablefoodcostswerebudgetedat$3permeal,basedon
15,000mealsservedduringthemonth.Attheendofthemonth,
itwasdeterminedthat16,000mealshadbeenservedatatotal
costof$54,000.Howmuchfoodcostshouldbechargedtoother
departmentsattheendofthemonthforperformanceevaluation
purposes?
a.$45,000
b.$51,200
c.$48,000
d.$50,625

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73

28.
A
Medium

SwiftCompanyhasaMaintenanceDepartmentwhichdoes
maintenanceworkonallequipmentinoperatingdepartmentsA
andB.TheMaintenanceDepartmentbudgetedvariable
maintenancecostsof$0.20permachinehourforJune.Actual
variablemaintenancecostsforthemonthtotaled$15,000.
Budgetedandactualmachinehoursintheoperatingdepartments
forthemonthwere:
Dept.ADept.BTotal
Budgetedmachinehours.......22,00018,00040,000
Actualmachinehoursworked..30,00020,00050,000
Howmuchvariablemaintenancecostforthemonthshouldbe
chargedtoDept.Aattheendofthemonthforperformance
evaluationpurposes?
a.$6,000
b.$15,000
c.$8,250
d.$9,000

29.
C
Medium

WilsonCompanymaintainsacafeteriaforitsemployees.For
June,variablefoodcostswerebudgetedat$45peremployee
basedonabudgetedlevelof200employeesinother
departments.Duringthemonth,anaverageof190employees
workedinotherdepartmentsandactualfoodcoststotaled
$9,250.Howmuchfoodcostshouldbechargedtoother
departmentsattheendofthemonthforperformanceevaluation
purposes?
a.$9,000
b.$9,250
c.$8,550
d.$9,737

30.
A
Medium

ThemedicalservicesdepartmentofCareyCompanybudgeted$20
ofvariablemedicalexpensesperemployeeforMay,basedon
1,000employeesinoperatingdepartments.DuringMayanaverage
of1,050employeeswereemployedinoperatingdepartments.
Actualvariablemedicalexpensestotaled$23,100forthemonth.
Howmuchvariablemedicalexpensesshouldbechargedto
operatingdepartmentsattheendofMayforperformance
evaluationpurposes?
a.$21,000
b.$23,100
c.$20,000
d.$22,000

74 ManagerialAccounting,9/e

31.
B
Medium

ThefixedcostsofBaxterCompany'spersonneldepartmentare
allocatedtooperatingdepartmentsonthebasisofdirectlabor
hours.Thefollowingdatahavebeenprovided:
OperatingDepartment
XY
DirectlaborhoursLongrunaverage...15,00010,000
DirectlaborhoursActual.............10,0006,000
Thefixedcostsofthepersonneldepartmentarebudgetedat
$56,000peryearandareincurredinordertosupportlongrun
averagerequirements.Howmuchofthisfixedcostshouldbe
allocatedtoOperatingDepartmentXattheendoftheyearfor
performanceevaluationpurposes?
a.$35,000
b.$33,600
c.$52,500
d.$22,400

Reference:161
WestmoreCompanyhastwoservicedepartmentsandtwooperatingdepartments.
Budgetedcostsandotherdatarelatingtothesedepartmentsarepresented
below:
BuildingOperatingDepartment
&GroundsPersonnelAB
Departmentalcosts.....$54,000$200,000$650,000$800,000
Squarefeetoccupied...1,0003,00012,00015,000
Numberofemployees....1054555
Directlaborhours.....76,00092,000
ThecostsofBuilding&Groundsareallocatedfirstonthebasisofsquare
feetofspaceoccupied.Personnelcostsareallocatedonthebasisofnumber
ofemployees.Thedepartmentalcostsfortheoperatingdepartmentsare
overheadcosts.Predeterminedoverheadratesintheoperatingdepartments
arecomputedonthebasisofdirectlaborhours.
32.
C
Medium
ReferTo:
161

Assumethatthecompanyusesthedirectmethodofallocating
servicedepartmentcoststooperatingdepartments.Howmuch
Building&GroundscostwouldbeallocatedtoDepartmentA?
a.$29,700
b.$21,600
c.$24,000
d.$20,903

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33.
D
Medium
ReferTo:
161

Assumethatthecompanyusesthedirectmethodofallocating
servicedepartmentcosts.Thepredeterminedoverheadratethat
wouldbeusedinDepartmentBwouldbeclosestto:
a.$11.50/DLH.
b.$12.00/DLH.
c.$10.00/DLH.
d.$10.22/DLH.

34.
C
Medium
ReferTo:
161

Assumethatthecompanyusesthestepmethodofallocating
servicedepartmentcoststooperatingdepartmentsandBuilding
andGroundscostsareallocatedfirst.HowmuchPersonnel
DepartmentcostwouldbeallocatedtoDepartmentB?
a.$0
b.$107,368
c.$112,970
d.$107,590

35.
B
Medium
ReferTo:
161

Assumeagainthatthecompanyusesthestepmethod.Thetotal
amountofcostallocatedfromthetwoservicedepartmentsto
theoperatingdepartmentsfortheyearwouldbe:
a.$1,450,000.
b.$254,000.
c.$1,704,000.
d.$850,000.

Reference:162
RussetCompanyhastwoservicedepartmentsandtwoproducingdepartments.
Budgetedcostsandbudgetedactivityinthevariousdepartmentsforthemost
recentyeararepresentedbelow:
CustodialCuttingAssembly

ServicesCafeteriaDepartmentDepartment
Overheadcosts.........$252,000$140,000$600,000$900,000
Squarefeetof
spaceoccupied.....1,0002,0008,00010,000
Numberofemployees....2030150200
Machinehours..........40,00060,000
ServiceDepartmentcostsareallocatedtoproducingdepartmentswiththe
costsofCustodialServicesallocatedfirstonthebasisofsquarefeetof
spaceoccupied.ThecostsoftheCafeteriaareallocatedonthebasisof
numberofemployees.PredeterminedoverheadratesintheCuttingand
AssemblyDepartmentsarebasedonmachinehours.Roundallcalculationsto
thenearestdollar.
36.
D
Medium
ReferTo:
162

Underthedirectmethodofallocation,theamountofCustodial
ServicescostallocatedtotheCuttingDepartmentwouldbe:
a.$0.
b.$96,000.
c.$100,800.
d.$112,000.

76 ManagerialAccounting,9/e

37.
A
Hard
ReferTo:
162

Underthedirectmethodofallocation,thepredetermined
overheadratefortheyearintheAssemblyDepartmentwouldbe.
a.$18.67.
b.$18.17.
c.$3.67.
d.$3.17.

38.
C
Medium
ReferTo:
162

Underthestepmethodofallocation,theamountofCustodial
ServicescostallocatedtotheAssemblyDepartmentwouldbe:
a.$0.
b.$120,000.
c.$126,000.
d.$140,000.

39.
B
Medium
ReferTo:
162

Underthestepmethodofallocation,theamountofcost
allocatedfromtheCafeteriatotheCuttingDepartmentwould
be:
a.$0.
b.$70,800.
c.$61,500.
d.$60,000.

40.
A
Medium
ReferTo:
162

Underthestepmethodofallocation,theamountofcost
allocatedfromtheCafeteriatoCustodialServiceswouldbe:
a.$0.
b.$8,260.
c.$7,000.
d.$7,568.

Reference:163
TheJamesCompanyhasfourdepartmentswithdataasfollows:

ServiceDepts.OperatingDepts.

o
CafeteriaMaintenanceMillingFinishing
Budgetedcosts..........$12,000$10,000$42,000$38,000
Numberofemployees.....12108466
Laborhours.............1,5001,2505,2504,750
41.
C
Medium
ReferTo:
163

MaintenanceDepartmentcostsareallocatedonthebasisof
laborhours.TheamountofcostallocatedtoMillingfrom
Maintenanceunderthedirectmethodwouldbe:
a.$5,600.
b.$6,720.
c.$5,250.
d.$5,700.

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42.
D
Medium
ReferTo:
163

Cafeteriacostsareallocatedonthebasisofnumberof
employees.Ifthestepmethodisusedwithcostsofthe
Cafeteriaallocatedfirst,theamountofcostallocatedfrom
theCafeteriatoMaintenancewouldbe:
a.$0.
b.$625.
c.$698.
d.$750.

Reference:164
AndersonCompanyhastwoservicedepartmentsandtwoproducingdepartments.
ThecostsofthePersonnelDepartmentareallocatedtootherdepartmentson
thebasisofthenumberofemployeesinthedepartments.Departmentsand
numberofemployeesareasfollows:
Employees
PersonnelDepartment...........30
EngineeringDepartment.........90
ProducingDepartmentNo.1.....590
ProducingDepartmentNo.2.....290
Totalemployees................1,000
43.
C
Medium
ReferTo:
164

CostsinthePersonnelDepartmenttotal$900,000peryear.
Underthestepmethod,thecostsofthePersonnelDepartment
areallocatedbeforethecostsoftheEngineeringDepartment
areallocated.Theamountofthiscostallocatedtothe
EngineeringDepartmentunderthestepmethod(roundedtothe
nearestdollar)wouldbe:
a.$0.
b.$81,000.
c.$83,505.
d.$92,046.

44.
D
Medium
ReferTo:
164

TheamountofPersonnelDepartmentcostthatwouldbeallocated
toProducingDepartment2underthedirectmethodwouldbe:
a.$0.
b.$261,000.
c.$269,072.
d.$296,591.

78 ManagerialAccounting,9/e

Reference:165
TheTovilleCityHospitalhastwoservicedepartmentsEnergyand
Housekeeping.Thesetwodepartmentsprovideservicestothethreeoperating
departmentsPediatrics,Surgery,andHealthCare.Thefixedcostsofthe
EnergyDepartmentareallocatedonthebasisofkilowatthours(KWH),and
thefixedcostsoftheHousekeepingDepartmentareallocatedonthebasisof
squarefootageofspaceoccupied.DataforAugustareasfollows:
HousePediaHealth
EnergykeepingtricsSurgeryCare
Budgetedfixed
costs..............$160,000$200,000
Actualfixed
costs..............$162,000$207,000
Squarefootage........5,0005,00020,00010,00070,000
Longrun
averageKWH........2,00036,00090,00090,000144,000
ActualKWHused.......2,00030,00075,00060,000135,000
Thehospitalallocatesservicedepartmentcostsbythestepmethod,starting
withtheEnergyDepartment.TheEnergyDepartment'sbudgetedfixedcostsare
determinedbythelongrunaverageKWHrequirements.
45.
B
Medium
ReferTo:
165

TheamountoffixedcostallocatedfromHousekeepingto
PediatricsforAugustwouldbe:
a.$200,000.
b.$43,200.
d.$40,500.
c.$44,640.

46.
D
Medium
ReferTo:
165

TheamountoffixedcostallocatedfromEnergytoSurgeryfor
Augustwouldbe:
a.$40,500.
b.$38,900.
c.$42,000.
d.$40,000.

47.
B
Medium
ReferTo:
165

TheamountoffixedcostallocatedfromHousekeepingtoSurgery
forAugustwouldbe:
a.$22,320.
b.$21,600.
c.$35,980.
d.$25,180.

48.
C
Medium
ReferTo:
165

ThetotalamountoffixedcostallocatedtoHealthCarefrom
allservicedepartmentsforAugustwouldbe:
a.$221,040.
b.$61,600.
c.$215,200.
d.$175,800.

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Reference:166
TheMohawkHudsonCompanyisanelectricutilitywhichhastwoservice
departments,AccountingandMaintenance.Ithastwooperatingdepartments,
GenerationandTransmission.Thecompanydoesnotdistinguishbetweenfixed
andvariableservicedepartmentcosts.MaintenanceDepartmentcostsare
allocatedonthebasisofmaintenancehoursofservice.Accounting
Departmentcostsareallocatedtooperatingdepartmentsonthebasisof
accountinghoursofserviceprovided.Budgetedcostsandotherdataforthe
comingyearareasfollows:
AccountingMaintenanceGenerationTransmission
Budgetedcosts........$100,000$200,000$600,000$400,000
Maintenancehours
ofservice..........6007,2004,800
Accountinghours
ofservice..........5002,0004,5003,500
Thestepmethodisusedtoallocateservicedepartmentcosts,withthe
accountingdepartmentbeingallocatedfirst.
49.
B
Medium
ReferTo:
166

Theamountofaccountingdepartmentcostsallocatedtothe
maintenancedepartmentwouldbe:
a.$0.
b.$20,000.
c.$19,048.
d.$18,000.

50.
D
Medium
ReferTo:
166

Theamountofaccountingdepartmentcostsallocatedtothe
generationdepartmentwouldbe:
a.$42,857.
b.$57,143.
c.$38,000.
d.$45,000.

51.
A
Medium
ReferTo:
166

Theamountofmaintenancedepartmentcostallocatedtothe
accountingdepartmentwouldbe:
a.$0.
b.$69,315.
c.$75,000.
d.$88,000.

52.
A
Medium
ReferTo:
166

Theamountofmaintenancedepartmentcostallocatedtothe
generationdepartmentwouldbe:
a.$132,000.
b.$123,750.
c.$150,685.
d.$140,000.

80 ManagerialAccounting,9/e

Reference:167
LakesideNursingHomehastwooperatingdepartments,CustodialCareand
Rehabilitation.ItalsohasaHousekeepingDepartmentthatservesthetwo
operatingdepartments.ThecostsoftheHousekeepingDepartmentareall
variableandareallocatedtotheoperatingdepartmentsonthebasisof
laborhours.DataforSeptemberfollow:
CustodialCareRehabilitation
Budgetedlaborhours....3,0001,000
Actuallaborhours......3,2001,600
ThebudgetedcostsoftheHousekeepingDepartmentforSeptemberwere$24,000
andtheactualcostswere$29,760.
53.
D
Medium
ReferTo:
167

HowmuchHousekeepingDepartmentcostshouldbeallocatedto
CustodialCareatthestartofSeptemberforflexiblebudget
planningpurposes?
a.$16,000
b.$6,000
c.$8,000
d.$18,000

54.
C
Medium
ReferTo:
167

HowmuchHousekeepingDepartmentcostshouldbechargedto
RehabilitationattheendofSeptemberforperformance
evaluationpurposes?
a.$19,840
b.$9,920
c.$9,600
d.$7,440

55.
A
Hard
ReferTo:
167

HowmuchoftheactualHousekeepingDepartmentcostsfor
Septembershouldnotbechargedtotheoperatingdepartments
forperformanceevaluationpurposes?
a.$960
b.$5,760
c.$0
d.$1,240

Reference:168
CommunityGeneralHospitalhasaFoodServicesDepartmentthatprovides
mealsforallpatientsinthehospital.Budgetedandactualmealsservedfor
themonthjustendedare:

MealsServed

o
BudgetedActual
PediatricsDepartment........30,00024,000
SurgicalDepartment..........50,00076,000
Totalmeals..................80,000100,000
Thebudgetedvariablecostofmealsforthemonthjustendedwas$100,000;
theactualvariablecostofmealsforthemonthwas$130,000.
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56.
B
Medium
ReferTo:
168

HowmuchFoodServicesvariablecostshouldbeallocatedtothe
PediatricsDepartmentatthebeginningofthecurrentyearfor
planningpurposes?
a.$0.
b.$37,500.
c.$39,000.
d.$48,750.

57.
C
Medium
ReferTo:
168

Howmuchofthe$130,000actualFoodServicesvariablecost
shouldbeallocatedtotheSurgicalDepartmentattheendof
themonthjustcompleted?
a.$62,500.
b.$65,000.
c.$95,000.
d.$98,800.

58.
B
Medium
ReferTo:
168

Howmuchofthe$130,000actualFoodServicescostforthe
monthjustcompletedshouldbekeptintheFoodServices
Departmentandnotallocatedtotheotherdepartments?
a.$30,000.
b.$5,000.
c.$4,000.
d.$0.

Reference:169
NathanCompanyhasanEquipmentServicesDepartmentthatperformsallneeded
maintenanceworkontheequipmentinthecompany'sFabricationandAssembly
Departments.CostoftheequipmentServicesDepartmentareallocatedtothe
FabricationandAssemblyDepartmentsonthebasisofdirectlaborhours.
Datafortheyearjustcompletedfollow:
FabricationAssemblyTotal

o
Budgeteddirectlaborhours.....20,00060,00080,000
Actualdirectlaborhours.......30,00070,000100,000
Peakperioddirectlaborhours..40,00080,000120,000
Fortheyearjustended,thecompanybudgeteditsvariablemaintenancecosts
at$200,000fortheyear.Actualvariablemaintenancecostsfortheyear
totaled$275,000.
59.
B
Medium
ReferTo:
169

Howmuchofthe$200,000ofbudgetedvariablemaintenancecost
shouldhavebeenallocatedtotheFabricationDepartmentatthe
beginningoftheyearjustcompleted?
a.$66,667.
b.$50,000.
c.$60,000.
d.$100,000.

82 ManagerialAccounting,9/e

60.
A
Medium
ReferTo:
169

Howmuchofthe$275,000ofactualvariablemaintenancecost
shouldbeallocatedtotheAssemblyDepartmentattheendof
theyearjustendedforpurposesofmeasuringperformance?
a.$175,000.
b.$116,900.
c.$192,500.
d.$150,000.

61.
C
Medium
ReferTo:
169

Howmuch(ifany)ofthe$275,000invariablemaintenancecost
shouldnotbeallocatedtotheFabricationandAssembly
Departments?
a.$0.
b.$75,000.
c.$25,000.
d.$108,000.

Reference:1610
FixedcostsbudgetedforCaterton'sMaintenanceDepartmentforlastyear
totaled$280,000;actualfixedcostsfortheyeartotaled$308,000.The
levelofbudgetedfixedcostsisdeterminedbypeakperiodrequirements.The
MillingDepartmentrequires15/35ofthepeakperiodcapacityandthe
AssemblyDepartmentrequires20/35.
62.
B
Easy
ReferTo:
1610

Howmuchfixedmaintenancecostshouldbeallocatedtothe
Millingdepartmentatthebeginningoftheyearforflexible
budgetplanningpurposes?
a.$145,600
b.$120,000
c.$132,000
d.$140,000

63.
A
Medium
ReferTo:
1610

Howmuchfixedmaintenancecostshouldbechargedtothe
Assemblydepartmentattheendoftheyearforpurposesof
measuringperformance?
a.$160,000
b.$176,000
c.$173,500
d.$147,800

64.
C
Hard
ReferTo:
1610

Howmuchoftheactualfixedmaintenancecostfortheyear
shouldbekeptintheMaintenancedepartmentandnotchargedto
theotherdepartmentsforperformanceevaluationpurposes?
a.$0
b.$308,000
c.$28,000
d.$280,000

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83

Reference:1611
MuellerIndustrieshasaMaintenanceDepartmentthatservicesthecompany's
MillingandAssemblyDepartments.FixedcostsoftheMaintenancedepartment
areallocatedtothesedepartmentsonthebasisofpeakperiodmachinehour.
Dataonmachinehoursfortheyearjustendedfollow:
MillingAssemblyTotal

o
Budgetedmachinehours...........60,000140,000200,000
Actualmachinehours.............50,000200,000250,000
Peakperiodmachinehours........100,000200,000300,000
FixedcostsbudgetedfortheMaintenanceDepartmentfortheyearjustended
totaled$500,000;actualfixedcostsfortheyeartotaled$530,000.
65.
B
Medium
ReferTo:
1611

Howmuchofthe$500,000inbudgetedfixedcostsshouldbe
allocatedtotheMillingDepartmentatthebeginningofthe
yearforplanningpurposes?(Roundtothenearestdollar.)
a.$100,000.
b.$166,667.
c.$250,000.
d.$83,333.

66.
C
Medium
ReferTo:
1611

Howmuchofthe$530,000inactualfixedcostsshouldbe
allocatedtotheAssemblyDepartmentattheendoftheyearfor
purposesofmeasuringperformance?(Roundtothenearest
dollar.)
a.$424,000.
b.$371,000.
c.$333,333.
d.$353,333.

67.
D
Medium
ReferTo:
1611

Howmuchofthe$530,000inactualfixedcostfortheyear
shouldbekeptintheMaintenanceDepartmentandnotallocated
totheotherdepartments?(Roundtothenearestdollar.)
a.$0.
b.$88,333.
c.$95,000.
d.$30,000.

Reference:1612
TheShermanCompanymanufacturesandsellsrowboatsandcanoes.Thecompany
hastwooperatingdepartments,CarpentryandFinishing.Thecompanyalsohas
aMaintenanceDepartmentwhichservesbothoperatingdepartments.Thecosts
intheMaintenanceDepartmentarebudgetedat$120,000permonthplus$0.25
perlaborhour.Thebudgetedfixedcostsaredeterminedbythepeakperiod
requirements.TheCarpentryDepartmentrequires62.5%ofthepeakperiod
capacityandtheFinishingDepartmentrequires37.5%.ForMay,Carpentryhas
estimatedthatitwilloperate100,000laborhoursandFinishinghas
estimatedthatitwilloperate80,000laborhours.

84 ManagerialAccounting,9/e

68.
B
Medium
ReferTo:
1612

HowmuchMaintenanceDepartmentcostshouldbeallocatedto
CarpentryatthebeginningofMayforflexiblebudgetplanning
purposes?
a.$112,500
b.$100,000
c.$74,537
d.$92,400

69.
D
Medium
ReferTo:
1612

HowmuchMaintenanceDepartmentcostshouldbeallocatedto
FinishingatthebeginningofMayforflexiblebudgetplanning
purposes?
a.$67,500
b.$65,400
c.$70,000
d.$65,000

Essay
70.
Medium

CentralMedicalClinichastwoservicedepartments,Building
ServicesandEnergy,andthreeoperatingdepartments,Pediatrics,
Geriatrics,andSurgery.CentralallocatesthecostofBuilding
ServicesonthebasisofsquarefootageandEnergyonthebasisof
patientdays.Nodistinctionismadebetweenvariableandfixed
costs.Budgetedoperatingdatafortheyearjustcompletedfollow:
ServiceDepartmentsOperatingDepartments

o
Building
ServicesEnergyPediatricsGeriatricsSurgery
Budgeted
costsbefore
allocation$20,000$10,000$90,000$60,000$100,000
Squarefootage1,0004,0006,00018,00012,000
Patientdays5,5007,7008,800
Required:
a.Prepareascheduletoallocateservicedepartmentcoststo
operatingdepartmentsbythedirectmethod(roundalldollar
amountstothenearestwholedollar).
b.Prepareascheduletoallocateservicedepartmentcoststo
operatingdepartmentsbythestepmethod,allocating
BuildingServicesfirst(roundallamountstothenearest
wholedollar).

ManagerialAccounting,9/e

85

Answer:
a.
DirectMethod:
ServiceDepartmentsOperating

Departments
o
Building
ServicesEnergyPediatricsGeriatrics
Surgery
Budgetedcosts
beforeallocation$20,000$10,000$90,000$60,000
$100,000
Allocationof
BuildingServices:(20,000)
Pediatrics:
6,000/36,000x$20,0003,333
Geriatrics:
18,000/36,000x$20,00010,000
Surgery:
12,000/36,000x$20,000
6,667
AllocationofEnergy:(10,000)
Pediatrics:
5,500/22,000x$10,0002,500
Geriatrics:
7,700/22,000x$10,0003,500
Surgery:
8,800/22,000x$10,000___________________________
4,000
Costsafterallocation$0$0$95,833$73,500
$110,667
b.
StepMethod
ServiceDepartmentsOperating

Departments
o
Building
ServicesEnergyPediatricsGeriatrics
Surgery
Budgetedcosts
beforeallocation$20,000$10,000$90,000$60,000
$100,000
Allocationof
BuildingServices:(20,000)
Energy:
4,000/40,000x$20,0002,000
Pediatrics:
6,000/40,000x$20,0003,000
Geriatrics:
18,000/40,000x$20,0009,000
86 ManagerialAccounting,9/e

Surgery:
12,000/40,000x$20,000
6,000
AllocationofEnergy:(12,000)
Pediatrics:
5,500/22,000x$12,0003,000
Geriatrics:
7,700/22,000x$12,0004,200
Surgery:
8,800/22,000x$12,000____________________________
4,800
Costsafterallocation$0$0$96,000$73,200
$110,800

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71.
Hard

DeltaManufacturingCompanyhastwoservicedepartments,Custodial
ServicesandMaintenance,andthreeproductiondepartments,Cutting,
Milling,andAssembly.DeltaallocatesthecostofCustodial
ServicesonthebasisofsquarefootageandMaintenanceonthebasis
oflaborhours.Nodistinctionismadebetweenvariableandfixed
costs.Budgetedoperatingdatafortheyearjustcompletedfollow:
ServiceDepartmentsProductionDepartments

o
Custodial
ServicesMaintenanceCuttingMillingAssembly
Budgetedcosts
before
allocation$18,000$8,000$80,000$50,000$90,000
Squarefootage1,00010,0005,00022,00013,000
Laborhours4,0008,0008,000
Required:
a.Prepareascheduletoallocateservicedepartmentcoststo
theproductiondepartmentsbythedirectmethod(roundall
dollaramountstothenearestwholedollar).
b.Prepareascheduletoallocateservicedepartmentcoststo
theproductiondepartmentsbythestepmethod,allocating
CustodialServicesfirst(roundallamountstothenearest
wholedollar).
Answer:
a.
DirectMethod:
ServiceDepartmentsProduction

Departments
o
Custodial
ServicesMaintenanceCuttingMilling
Assembly
Budgetedcosts
beforeallocation$18,000$8,000$80,000$50,000
$90,000
Allocationof
CustodialServices:(18,000)
Cutting:
5,000/40,000x$18,0002,250
Milling:
22,000/40,000x$18,0009,900
Assembly:
13,000/40,000x$18,000
5,850
AllocationofMaintenance:(8,000)
Cutting:
4,000/20,000x$8,0001,600
Milling:

88 ManagerialAccounting,9/e

8,000/20,000x$8,0003,200
Assembly:
8,000/20,000x$8,000___________________________
3,200
Costsafterallocation$0$0$83,850$63,100
$99,050

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b.
StepMethod
ServiceDepartmentsProduction

Departments
o
Custodial
ServicesMaintenanceCuttingMilling
Assembly
Budgetedcosts
beforeallocation$18,000$8,000$80,000$50,000
$90,000
Allocationof
CustodialServices:(18,000)
Maintenance:
10,000/50,000x$18,0003,600
Cutting:
5,000/50,000x$18,0001,800
Milling:
22,000/50,000x$18,0007,920
Assembly:
13,000/50,000x$18,000
4,680
AllocationofMaintenance:(11,600)
Cutting:
4,000/20,000x$11,6002,320
Milling:
8,000/20,000x$11,6004,640
Assembly:
8,000/20,000x$11,600____________________________
4,640
Costsafterallocation$0$0$84,120$62,560
$99,320
72.
Medium

FlindersCompanyhastwoservicedepartments,Factory
AdministrationandMaintenance,andtwooperatingdepartments.
Selectedinformationrelatingtothesedepartmentsisgivenbelow:
FactoryOperatingDepartment
AdministrationMaintenanceXY
Departmental
costs.........$113,400$80,000$700,000$600,000
Numberof
employees.....354060
Totallabor
hours.........4,0006,00080,000120,000
Thecompanyallocatesservicedepartmentcostsbythestepmethod.
FactoryAdministrationcostsareallocatedfirstonthebasisof
numberofemployees,andthenMaintenancecostsareallocatedon
thebasisoftotallaborhours.
Required:

90 ManagerialAccounting,9/e

Prepareascheduleshowingtheallocationofservicedepartment
coststootherdepartments.

ManagerialAccounting,9/e

91

Answer:
FactoryOperatingDepartment
AdministrationMaintenanceXY
Departmental
costs.........$113,400$80,000$700,000$600,000
Allocation:
FactoryAdmin.(113,400)5,40043,20064,800
Maintenance..(85,400)34,16051,240
Departmental
costsafter
allocation....$0$0$777,360$716,040
73.
Medium

HancockCompanyhastwoservicedepartmentsFactory
AdministrationandMaintenanceandtwoproducingdepartments.
Selectedinformationrelatingtothesedepartmentsfollow:
FactoryProducingDepartments
AdministrationMaintenanceXYo
Numberof
employees...1525200300
Totallabor
hours.......20,00030,000400,000600,000
Overheadcosts$300,000$250,000$850,000$1,200,000
Thecompanyallocatesservicedepartmentcostsusingthestep
method.CostsofFactoryAdministrationareallocatedonthebasis
ofthenumberofemployees.CostsofMaintenanceareallocatedon
thebasisoflaborhours.AllocationbeginswiththeFactory
AdministrationDepartment.
Required:
Prepareascheduleshowingtheallocationofservicedepartment
coststotheotherdepartments.
Answer:
FactoryProducingDepartments
AdministrationMaintenanceXY
Overheadcosts$300,000$250,000$850,000$1,200,000
Allocation:
FactoryAdmin.($300,000)14,286114,286171,428
Maintenance.._________(264,286)105,714158,572
Overheadcosts
after
allocation....$0$0$1,070,000$1,530,000

92 ManagerialAccounting,9/e

74.
Medium

LeslieCompanyoperatesacafeteriaforthebenefitofits
employees.Thecompanysubsidizesthecafeteriaheavilyby
allowingemployeestopurchasemealsatgreatlyreducedprices.
Budgetedandactualcostsinthecafeteriafortheyearjust
endedareasfollows:
BudgetedActual
Variablecosts...$500,000$436,000
Fixedcosts......$340,000$352,000
*

Unrecoveredcostafterdeductingamountsreceivedfromemployees.

Costsofthecafeteriaareallocatedtoproducingdepartments
onthebasisofthenumberofemployeesinthesedepartments.
Fixedcostsareallocatedonthebasisofthepeakperiod
numberofemployees.Dataonemployeesinthecompany's
producingdepartmentsfollows:
MachiningAssemblyTotal
Budgetednumberofemployees.......300500800
Actualnumberofemployees.........200400600
Peakperiodnumberofemployees....4006001,000
Required:
a.Computethedollaramountofvariableandfixedcoststhat
shouldbeallocatedtoeachoftheproducingdepartmentsat
thebeginningoftheyearforplanningpurposes.
b.Computethedollaramountofvariableandfixedcoststhat
shouldbeallocatedtoeachoftheproducingdepartmentsat
theendoftheyearforpurposesofevaluatingperformance.
Identifytheamount,ifany,ofactualcoststhatshouldnot
beallocatedtotheoperatingdepartments.
Answer:
a.Budgetedvariablerate:
$500,000800employees=$625peremployee.
Fixedcostsareallocatedonthebasisofpeakperiodnumber
ofemployees:
Machining,40%;Assembly,60%.
MachiningAssembly
Variablecostallocation:
Machining:300x$625...$187,500
Assembly:500x$625...$312,500
Fixedcostallocation:
Machining:40%x$340,000136,000
Assembly:60%x$340,000204,000

ManagerialAccounting,9/e

93

b.Variablecostsareallocatedatthebudgetedrateof$625
peremployee.Fixedcostsareallocatedinthesamepre
determinedlumpsumamountsasatthebeginningoftheyear.
MachiningAssembly
Variablecostallocation:
Machining:200x$625...$125,000
Assembly:400x$625...$250,000
Fixedcostallocation:
Machining:40%x$340,000136,000
Assembly:60%x$340,000204,000
Theremainingamountsofvariableandfixedcostsare
variancesthatshouldnotbeallocated:
Actualvariablecosts................$436,000
Amountofvariablecostallocated....375,000
Variancenotallocated..............$61,000
Actualfixedcosts...................$352,000
Amountoffixedcostallocated.......340,000
Variancenotallocated..............$12,000
75.
Medium

StandardCompanyoperatesadaycarecenterforthebenefitof
itsemployees.Thecompanysubsidizesthedaycarecenter
heavily.Budgetedandactualcostsforthedaycarecenterfor
theyearjustcompletedareasfollows:
BudgetedActual
Variablecosts*..........$700,000$740,000
Fixedcosts.............$420,000$440,000
*Unrecoveredcostafterdeductingamountsreceivedfromemployees.
Costsofthedaycarecenterareallocatedtooperating
departmentsonthebasisofthenumberofemployeesinthese
departments.Fixedcostsofthedaycarecenterareallocated
onthebasisofthepeakperiodnumberofemployees.Dataon
employeesinthecompany'soperatingdepartmentsfollow:
CuttingAssemblyPackaging
Budgetednumberofemployees.....300400300
Actualnumberofemployees.......200300250
Peakperiodnumberofemployees..400400800
Required:
a.Computethedollaramountofvariableandfixedcoststhat
shouldbeallocatedtoeachoftheproducingdepartmentsat
thebeginningoftheyearforplanningpurposes.
b.Computethedollaramountofvariableandfixedcoststhat
shouldbeallocatedtoeachoftheproducingdepartmentsat
theendoftheyearforpurposesofevaluatingperformance.

94 ManagerialAccounting,9/e

Identifytheamount,ifany,ofactualcoststhatshouldnot
beallocatedtotheoperatingdepartments.

ManagerialAccounting,9/e

95

Answer:
a.Budgetedvariablerate:
$700,0001,000employees=$700peremployee.
Fixedcostsareallocatedonabasisofpeakperiodnumberof
employees:
Cutting,25%;Assembly,25%;Packaging,50%
CuttingAssemblyPackaging
Variablecostallocation:
Cutting:300x$700.........$210,000
Assembly:400x$700........$280,000
Packaging:300x$700........$210,000
Fixedcostallocation:
Cutting:25%x$420,000...105,000
Assembly:25%x$420,000....105,000
Packaging:50%x$420,000....210,000
b.Variablecostsareallocatedatthebudgetedrateof$700per
employee.Fixedcostsareallocatedinthesamepredetermined
lumpsumamountsasatthebeginningoftheyear.
CuttingAssemblyPackaging
Variablecostallocation:
Cutting:200x$700.........$140,000
Assembly:300x$700........$210,000
Packaging:250x$700........$175,000
Fixedcostallocation:
Cutting:25%x$420,000.....105,000
Assembly:25%x$420,000....105,000
Packaging:50%x$420,000....210,000
Theremainingamountsofvariableandfixedcostsare
variancesthatshouldnotbeallocated:
Actualvariablecosts...................$740,000
Amountofvariablecostallocated.......525,000
Variancenotallocated.................$215,000
Actualfixedcosts......................$440,000
Amountoffixedcostallocated..........420,000
Variancenotallocated.................$20,000

96 ManagerialAccounting,9/e

76.
Medium

Gabritz,Inc.hasamaintenancedepartmentthatprovides
servicestothecompany'stwooperatingdepartments.The
variablecostsofthemaintenancedepartmentareallocatedon
thebasisofthenumberofmaintenancehoursloggedineach
department.Lastyear,budgetedvariablemaintenancecostswere
$7.50permaintenancehourandactualvariablemaintenance
costswere$7.80permaintenancehour.
Thebudgetedandactualmaintenancehoursforeachoperating
departmentforlastyearappearbelow:
OperatingDepartments
AB
Budgetedmaintenancehours...3,0002,500
Actualmaintenancehours.....3,1002,700
Required:
a.Computetheamountofvariablemaintenancedepartmentcost
thatshouldhavebeenallocatedtoeachoperatingdepartment
atthebeginningoftheyearforflexiblebudgetplanning
purposes.
b.Computetheamountofvariablemaintenancedepartmentcost
thatshouldhavebeenchargedtoeachoperatingdepartment
attheendoftheyearforperformanceevaluationpurposes.
c.Computetheamountofactualvariablemaintenancedepartment
costthatshouldNOThavebeenchargedtotheoperating
departmentsattheendoftheyearforperformance
evaluationpurposes.
Answer:
a.AllocatedtoOperatingDepartmentA:
3,000x$7.50.....................$22,500
AllocatedtoOperatingDepartmentB:
2,500x$7.50.....................$18,750
b.ChargedtoOperatingDepartmentA:
3,100x$7.50.....................$23,250
ChargedtoOperatingDepartmentB:
2,700x$7.50.....................$20,250
c.Totalactualvariablecost:
(3,100+2,700)x$7.80............$45,240
Totalcharges:
(3,100+2,700)x$7.50............43,500
Totalunchargedcost.....................$1,740

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77.
Medium

SmurnovCompanyhasapurchasingdepartmentthatprovides
servicestotwofactoriesinTexas.OneislocatedinAustin
andtheotherinBelmont.Budgetedcostsforthepurchasing
departmentconsistof$91,000peryearoffixedcostsand$7
perpurchaseorderforvariablecosts.Thelevelofbudgeted
fixedcostsisdeterminedbythepeakperiodrequirements.The
Austinfactoryrequires3/7ofthepeakperiodcapacityandthe
Belmontfactoryrequires4/7.
Duringthecomingyear,2,700purchaseordersarebudgetedto
beprocessedfortheAustinfactoryand3,900purchaseorders
fortheBelmontfactory.
Required:
Computetheamountofpurchasingdepartmentcostthatshouldbe
allocatedtoeachfactoryatthebeginningoftheperiodfor
flexiblebudgetplanningpurposes.(Thecompanyallocates
fixedandvariablecostsseparately.)
Answer:
AustinBelmont
Variablecost:
2,700x$7.00...........$18,900
3,900x$7.00...........$27,300
Fixedcost:
3/7x$91,000...........39,000
4/7x$91,000...........52,000
Totalallocatedcost......$57,900$79,300

78.
Medium

WarehouseServicesisaservicedepartmentintheWerner
Company,providingstorageservicetothreeoperating
departments.Thecompanyallocatesthecostsofthisdepartment
tooperatingdepartmentsonthebasisofcubicfeetoccupied.
Lastyear,WarehouseServicesbudgetedvariablestoragecosts
of$0.15percubicfootoccupied,andfixedcostsof$120,000.
Actualstoragespaceoccupiedduringtheyear,alongwithlong
termstorageneedsofoperatingdepartments,isgivenbelow:

OperatingDept.o
XYZ
Longtermstorageneedsin
cubicfeet...............200,000600,000800,000
Actualstoragespaceused...160,000590,000750,000
Actualvariablestoragecostsamountedto$0.16percubicfoot
occupied.Actualfixedstoragecostswere$123,000.

98 ManagerialAccounting,9/e

Required:
a.Computetheamountofvariablestoragecostthatshouldbe
chargedtoeachoperatingdepartmentattheendoftheyear
forperformanceevaluationpurposes.
b.Computetheamountoffixedstoragecostthatshouldbe
chargedtoeachoperatingdepartmentattheendoftheyear
forperformanceevaluationpurposes.
Answer:
a.DeptX:160,000x$0.15=$24,000
DeptY:590,000x$0.15=$88,500
DeptZ:750,000x$0.15=$112,500
b.DeptX:200/1600x$120,000=$15,000
DeptY:600/1600x$120,000=$45,000
DeptZ:800/1600x$120,000=$60,000

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99