An accounting system that provides information that management can use to evaluate the profitability and/or cost effectiveness of a department’s activities is a:
An expense that does not require allocation between departments is a(n):
Generally, it does not matter how cost allocations are designed and explained, because most managers do not care whether the allocations appear to be fair or not.
The Milk Chocolate Division of Mmmm Foods, Inc. had the following operating results last year:
Milk Chocolate expects identical operating results this year. The Milk Chocolate Division has the ability to produce and sell 200,000 pounds of chocolate annually. Assume that the Peanut Butter Division of Mmmm Foods wants to purchase an additional 20,000 pounds of chocolate from the Milk Chocolate Division. Assume that the Milk Chocolate Division is currently operating at its capacity of 200,000 pounds of chocolate. Also assume again that the Peanut Butter Division wants to purchase an additional 20,000 pounds of chocolate from Milk Chocolate. Under these conditions, what amount per pound of chocolate would Milk Chocolate have to charge Peanut Butter in order to maintain its current profit?
A company has two departments, A and B that incur delivery expenses. An analysis of the total delivery expense of $9,000 indicates that Dept. A had a direct expense of $1,000 for deliveries and Dept. B had no direct expense. The indirect expenses are $8,000. The analysis also indicates that 60% of regular delivery requests originate in Dept. A and 40% originate in Dept. B. Departmental delivery expenses for Dept. A and Dept. B, respectively, are:
A responsibility accounting performance report usually compares actual costs to budgeted costs amounts.
The allocation bases for assigning indirect costs include:
A profit center:
In producing oat bran, the joint cost of milling the oats into bran, oatmeal, and animal feed is considered a direct cost to the oat bran, because the oat bran cannot be produced without incurring the joint cost.
A cost incurred in producing or purchasing two or more products at the same time is a(n):
A single basis for allocating service department costs to production departments should be used for all service departments.
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You must prepare a return on investment analysis for the regional manager of Fast & Great Burgers. This growing chain is trying to decide which outlet of two alternatives to open. The first location (A) requires a $500,000 investment and is expected to yield annual net income of $70,000. The second location (B) requires a $200,000 investment and is expected to yield annual net income of $38,000. |
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Compute the return on investment for each Fast & Great Burgers alternative. |
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Advertising and purchasing department expenses of Cozy Bookstore are allocated to operating departments on the basis of dollar sales and purchase orders, respectively. Information about the allocation bases for the three operating departments follows. |
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Department |
Sales |
Purchase Orders |
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|
Books |
$ |
180,000 |
|
984 |
|
|
Magazines |
|
108,000 |
|
600 |
|
|
Newspapers |
|
72,000 |
|
816 |
|
|
|
|
|
|||
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Total |
$ |
360,000 |
|
2,400 |
|
|
|
|
|
|||
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Complete the following table by allocating the expenses of the two service departments (advertising and purchasing) to the three operating departments (see the expenses below). |
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Marathon Running Shop has two service departments (advertising and administration) and two operating departments (shoes and clothing). During 2013, the departments had the following direct expenses and occupied the following amount of floor space. |
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Department |
Direct Expenses |
Square Feet |
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|
Advertising |
$ |
15,000 |
|
|
1,086 |
|
|
Administrative |
|
18,500 |
|
|
1,152 |
|
|
Shoes |
|
101,400 |
|
|
6,338 |
|
|
Clothing |
|
11,800 |
|
|
4,222 |
|
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The advertising department developed and distributed 120 advertisements during the year. Of these, 74 promoted shoes and 46 promoted clothing. The store sold $350,000 of merchandise during the year. Of this amount, $228,000 is from the shoes department, and $122,000 is from the clothing department. The utilities expense of $64,000 is an indirect expense to all departments. |
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Complete the departmental expense allocation spreadsheet for Marathon Running Shop. Assign (1) direct expenses to each of the four departments, (2) the $64,000 of utilities expense to the four departments on the basis of floor space occupied, (3) the advertising department’s expenses to the two operating departments on the basis of the number of ads placed that promoted a department’s products, and (4) the administrative department’s expenses to the two operating departments based on the amount of sales. |
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Woh Che Co. has four departments: materials, personnel, manufacturing, and packaging. In a recent month, the four departments incurred three shared indirect expenses. The amounts of these indirect expenses and the bases used to allocate them follow. |
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Indirect Expense |
|
Cost |
Allocation Base |
|
Supervision |
$ |
84,300 |
Number of employees |
|
Utilities |
|
68,000 |
Square feet occupied |
|
Insurance |
|
31,500 |
Value of assets in use |
|
|
|
||
|
Total |
$ |
183,800 |
|
|
|
|
||
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Departmental data for the company’s recent reporting period follow. |
|
Department |
Employees |
Square Feet |
Asset Values |
||||||
|
Materials |
|
36 |
|
|
52,500 |
|
$ |
11,700 |
|
|
Personnel |
|
9 |
|
|
17,500 |
|
|
3,900 |
|
|
Manufacturing |
|
72 |
|
|
78,750 |
|
|
47,580 |
|
|
Packaging |
|
63 |
|
|
26,250 |
|
|
14,820 |
|
|
|
|
|
|
|
|
||||
|
Total |
|
180 |
|
|
175,000 |
|
$ |
78,000 |
|
|
|
|
|
|
|
|
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(1) |
Use this information to allocate each of the three indirect expenses across the four departments. |
A disadvantage of an investment with a short payback period is that it will produce revenue for only a short period of time.
The potential benefits of one alternative that are lost by choosing another is known as a(n):
Another name for relevant cost is unavoidable cost.
Which one of the following methods considers the time value of money in evaluating alternative capital expenditures?
Neither the payback period nor the accounting rate of return methods of evaluating investments considers the time value of money.
A company is considering a new project that will cost $19,000. This project would result in additional annual revenues of $6,000 for the next 5 years. The $19,000 cost is an example of a(n):
An opportunity cost:
In business decision-making, managers typically examine the two fundamental factors of:
Edgar Company is considering the purchase of new equipment costing $80,000. The projected annual after-tax net income from the equipment is $10,200, after deducting $20,000 for depreciation. The revenue is to be received at the end of each year. The machine has a useful life of 4 years and no salvage value. Edgar requires a 10% return on its investments. The present value of an annuity of 1 and present value of an annuity for different periods is presented below. Compute the net present value of the machine.
The accounting rate of return is calculated as:
The net present value decision rule is: When an asset’s expected cash flows are discounted at the required rate and yield a positive net present value, the asset should be acquired.
A machine costs $300,000 and is expected to yield an after-tax net income of $9,000 each year. Management predicts this machine has a 8-year service life and a $60,000 salvage value, and it uses straight-line depreciation. Compute this machine’s accounting rate of return. (Round your answer to 2 decimal places.)
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Cobe Company has already manufactured 24,000 units of Product A at a cost of $20 per unit. The 24,000 units can be sold at this stage for $400,000. Alternatively, the units can be further processed at a $230,000 total additional cost and be converted into 6,000 units of Product B and 11,300 units of Product C. Per unit selling price for Product B is $106 and for Product C is $54. |
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1. |
Prepare an analysis that shows whether the 24,000 units of Product A should be processed further or not. |
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Xinhong Company is considering replacing one of its manufacturing machines. The machine has a book value of $36,000 and a remaining useful life of 5 years, at which time its salvage value will be zero. It has a current market value of $46,000. Variable manufacturing costs are $33,700 per year for this machine. Information on two alternative replacement machines follows. |
|
|
Alternative A |
Alternative B |
||||
|
Cost |
$ |
125,000 |
|
$ |
119,000 |
|
|
Variable manufacturing costs per year |
|
22,100 |
|
|
10,300 |
|
|
Calculate the total change in net income if Alternative A is adopted. (Cash outflows should be indicated by a minus sign.) |
Alternative – B
A company must decide between scrapping or reworking units that do not pass inspection. The company has 16,000 defective units that cost $5.70 per unit to manufacture. The units can be sold as is for $2.50 each, or they can be reworked for $3.50 each and then sold for the full price of $9.60 each. If the units are sold as is, the company will have to build 16,000 replacement units at a cost of $5.70 each, and sell them at the full price of $9.60 each.
