Question 6.1

For each item listed, select the appropriate purpose of cost allocation from the list below. A purpose may be used more than once.

A - To provide information for economic decisions

B - To motivate managers and other employees

C - To measure income and assets for reports to external parties

D - To justify costs or compute reimbursement amounts

Required

1. To encourage simpler product design
2. To cost inventories for reporting on a company's tax return
3. To encourage the sales department to focus on high-margin products
4. To evaluate a make or buy decision
5. To cost inventories for the balance sheet
6. To decide whether to add or delete a product line
7. To decide on an appropriate selling price for a special-order product
8. To cost a product at a fair price for government contracts

Question 6.2

The Lawn Patrol Corporation has two divisions, the Lawnmower Division and the Landscaping Division, which both operate under one plant. The following data apply to the coming budget year:

Budgeted costs of the operating the plant for 4,000 to 8,000 hours:

Fixed operating costs per year $280,000

Variable operating costs $15 per hour

Practical capacity 7,000 hours per year

Budgeted long-run usage per year:

Lawnmower Division325 hours 12 months = 3,900hours per year

Landscaping Division150 hours 12 months = 1,800 hours per year

Assume that practical capacity is used to calculate the allocation rates. Further assume that actual usage of the Lawnmower Division was 350 hours and the Landscaping Division was 200 hours for the month of June.

Required

1. If a single-rate cost allocation method is used, what amount of operating costs will be budgeted for the Lawnmower Division each month? For the Landscaping Division each month?
2. For the month of June, if a single-rate cost allocation method is used, what amount of cost will be allocated to the Lawnmower Division? To the Landscaping Division? Assume actual usage is used to allocate operating costs.
3. If a dual-rate cost allocation method is used, what amount of operating costs will be budgeted for the Lawnmower Division each month? For the Landscaping Division each month?
4. For the month of June, if a dual-rate cost allocation method is used, what amount of cost will be allocated to the Lawnmower Division? To the Landscaping Division? Assume budgeted usage is used to allocate fixed operating costs and actual usage is used to allocate variable operating costs.

Question 6.3

Dad's Diner is a fast-food restaurant that sells burgers and hot dogs in a 1960s environment. The fixed operating costs of the company are $5,000 per month. The controlling shareholder, interested in product profitability and pricing, wants all costs allocated to the burgers and hot dogs. The following information is provided for the operations of the company:

Burgers Hot Dogs

Sales for March 4,000 2,400

Sales for April 6,400 2,400

Required

1. What amount of fixed operating costs is assigned to the burgers and hot dogs when actual sales are used as the allocation base for March? For April?
2. Hot dog sales for March and April remained constant. Did the amount of fixed operating costs allocated to hot dogs also remain constant for March and April? Explain why or why not. Comment on any other observations.

Question 6.4

Krum Lawn Equipment has five departments, of which Casting and Finishing are producing departments. Maintenance, Product Movement, and Inspection are service departments. The distribution of the service departments is as follows:

Service Costs Services provided to:

Maint. Prod. Move. Insp. Cast. Finish.

Maintenance $84,000 5% 25% 50% 20%

Product movement 160,000 10% 5 45 40

Inspection 38,000 15 5 20 60

Required

1. Use the direct method to allocate the service departments' costs. Prepare a schedule showing the total costs allocated to each department.