Eldorado Emerald (EE) mines and processes emeralds in its mines throughout the world. Large rocks are mined, these large rocks are gently crushed and any emeralds are sifted out. The emeralds are then sorted, graded, cut, and polished. The joint cost per ton of rock is $18,000. The following table summarizes the number of emeralds per ton of mined rock, the additional costs to package and sell each emerald after its polished and graded, and the selling price for each grade of emerald.

QUESTION 1: Which of the following is true?

A. Using allocation by relative sales value will allocate identical amounts to Grade A and Grade AA emeralds.

B. The manager for Grade AAA emeralds would be indifferent to the allocation method because each allocation method allocates the smallest amount of joint costs to Grade AAA emeralds.

C. EE management should select the allocation method for each grade of emerald that maximizes the profitability for each grade of emerald.

D. The manager responsible for Grade A emeralds will select the allocation by relative sales value method.

E. None of the choices are correct

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Williams manufactures a variety of iron products, made to customer specifications, in small batches. Willie Williams, owner, is concerned that he does not have an accurate understanding of the costs of production. You, a newly-minted MBA, have researched his business and identified various costs and cost drivers.

The service departments (Janitorial, HR, and Data Services) are allocated to the two production departments (Welding and Assembly). Janitorial costs are allocated using square feet, HR using number of employees, and Data Services using number of transactions. You recall that there are several approaches to the allocation of service department costs, direct, step-down and reciprocal methods. QUESTION 2: If the step-down method is applied, allocating the most costly department first, which is true?

A. Janitorial's total costs after allocation are $18,036.48

B. Assembly's total costs after allocation are less than $100,000

C. Janitorial is allocated $3,953.28 from Data Svcs

D. HR's total costs after allocation are $50,160

E. None of the choices are correct

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QUESTION 3: The reciprocal allocation method is the most precise yet infrequently used. Which of the following is not true?

A. The reciprocal method requires the significant computing power of large computers to solve simultaneous equations, thus putting it out of reach of most companies.

B. The reciprocal method appears as a black box to managers, thus making managers responsible for costs they may not know how to compute or understand.

C. Employed carefully, the step-down method can produce results very similar to those produced by the reciprocal method.

D. Cost allocations are used primarily for decision control and financial reporting rather than for decision making.

E. Few accountants were trained in solving systems of equations and how to formulate the problem.

Number of stones per ton Sales price/emerald Additional costs to package and sell each emerald AAA AA A 35 50 90 $400 $150 $60 $125 $ 60 $10 HR Own costs Square feet # employees # transactions (thou) Power usage Data Janitorial Welding Svcs Assembly Total $12,000 $90,000 $37,200 $32,400 $54,000 $225,600 500 3,000 1,500 2,000 4,500 11,500 7 25 8 10 75 125 30 100 180 600 140 1,050 22 730 11 17 220 1,000