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Exam 12: Cost Accumulation, Tracing, and Allocation

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Question 21

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Which of the followings statements is correct regarding direct and indirect costs?

A) Direct costs cannot easily be traced to a cost object, whereas indirect costs can be easily traced to a cost object.
B) Direct costs can be easily traced to a cost object, whereas indirect costs cannot be easily traced to a cost object.
C) Direct costs are always relevant to a particular cost decision, whereas indirect costs are never relevant to a cost decision.
D) Direct costs are never relevant to a particular cost decision, whereas indirect costs are always relevant to a cost decision.

E) A) and B)
F) A) and C)

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Question 22

True/False

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Because Fenwick Company has significant swings in its monthly production, the best way to allocate its plant manager's $58,000 annual salary is to allocate 1/12^th of the cost each month.

A) True
B) False

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Question 23

Multiple Choice

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For a manufacturer, measures of volume may include:

Indicate whether each of the following statements is true or false. 1. Cost accumulation refers to identifying whether a particular cost is fixed or variable. 2. Cost objects may be departments, sales territories, or individual products. 3. Cost accumulation is not useful in a service-type business. 4. An allocation base has a cause-and-effect relationship with a cost object. 5. Timeliness of managerial accounting information is more important than its precision.

The first step in cost accumulation is to identify cost objects.

Both direct and indirect costs can be relevant to a particular decision.

Managers of a discount store chain are considering whether to add a new auto service department. In reaching this decision, the managers should consider:

Sturbridge Company manufactures fine furniture and grandfather clocks. Sturbridge has an excellent reputation, and each grandfather clock sells for several thousand dollars. Which of the following is an indirect cost, assuming the cost object is the Clock Department?

Allocation of costs to various cost objects:

Which of the following statements is incorrect?

The primary advantage of establishing cost pools is reducing the number of individual cost allocations that are made.

During 2013, the Kemp Construction Company built 23 custom homes that ranged in size from 2,500 square feet to 8,000 square feet. One home was completed each month during January, February, and March. Three homes were completed during April and May. Two homes were completed during each of the months from June through December. Based upon this information, the most appropriate allocation base (i.e., cost driver) for the assignment of indirect overhead costs to each house would be the:

Martin's is a store with three departments, Appliances, Tools, and Home Improvements. The company expects to incur the following indirect costs related to its operations: Store manager's salary Store supplies Electric bill Clerical staff salaries Payroll taxes Office supplies Water bill Sewer bill Medical insurance Vacation pay Required: 1) Organize the indirect costs into three cost pools: Store Administration, Utilities, and Fringe Benefit Costs, assuming that each department is a cost object 2) Identify an appropriate cost driver for each cost pool.

The selection of the most appropriate cost driver often requires considerable judgment in the absence of a strong cause-and-effect relationship.

At the beginning of 2013, Barcroft Co. estimated that its total annual fixed overhead costs would amount to $25,000. Further, Barcroft estimated that its volume of production would be 2,000 units of product. Based on these estimates, Barcroft computed a predetermined overhead rate that was used to allocate overhead costs to the products made in 2013. As predicted, actual fixed overhead costs did amount to $25,000. However, actual volume of production amounted to 2,200 units of product. Based on this information alone:

Jessup Company expects to incur overhead costs of $20,000 per month and direct production costs of $125 per unit. The estimated production activity for the upcoming year is 1,000 units. If the company desires to earn a gross profit of $50 per unit, the sales price per unit would be which of the following amounts?

Indicate whether each of the following statements is true or false. 1. Indirect costs cannot be traced to a cost object in a cost-effective manner. 2. For a factory with several departments, each department could be treated as a cost object. 3. Depreciation on a factory building is a direct cost for the departments in the factory. 4. For a factory with several departments, depreciation on equipment used in one department would be a direct cost to that department. 5. An individual cost cannot be both fixed and direct with respect to a particular cost object.

Volume measures serve as good cost drivers for allocating variable overhead costs because of the causal relationship that exists between those drivers and variable costs.

Alleghany Community College operates four departments. The square footage used by each department is shown below. $\begin{array}{|l|r|}\hline{\text { De partment }} & \text { Square Footage } \\\hline \text { Accounting } & 3,000 \\\hline \text { Marketing } & 4,000 \\\hline \text { Technology } & 6,000 \\\hline \text { Sciences } & 3,000 \\\hline {\text { Total }} & \mathbf{1 6 , 0 0 0} \\\hline\end{array}$ Alleghany's annual building rental cost is $320,000 What amount of rent expense that should be allocated to the Sciences Department?

Parr Corporation makes three products, X, Y, and Z. Expected overhead costs for the coming year include: $\begin{array} { | l | r | } \hline \text { Depreciation on factory building } & \$ 140,000 \\\hline \text { Factory utility costs } & 160,000 \\\hline \text { Supervisory salaries } & 250,000 \\\hline \text { Factory supplies } & 50,000 \\\hline \text { Total } & \$ 600,000 \\\hline\end{array}$ Parr uses direct labor hours as the cost driver to allocate overhead costs. Budgeted direct labor hours for each product are: Product X, 15,000 direct labor hours Product Y, 10,000 direct labor hours Product Z, 5,000 direct labor hours Required: 1) Determine the amount of manufacturing overhead that should be allocated to each of the three products. 2) Assume that each unit of Product X requires $40 in direct materials and 3 direct labor hours at a rate of $15 per hour. Calculate the budgeted or expected cost of each unit of X.