MCQ

b 1. As a general rule, the best transfer price to use to transfer the costs of a service center to an operating
department is
a. the price charged by an outside company for the same service.
b. the price that encourages goal congruence.
c. one that is based on budgeted variable cost.
d. one that is based on budgeted total cost.

b 2. Which of the following costs is LEAST likely to appear on the performance report for the foreman of
a production department?
a. Wages of direct laborers.
b. Rent on machinery used in department.
c. Repairs to machinery used in department.
d. Cost of materials used.

d 3. ABC Company operates a factory that makes components for other ABC factories to assemble. The
factory could be treated as
a. a cost center.
b. an artificial profit center.
c. an investment center.
d. any of the above.

d 4. For reports to follow the principles of responsibility accounting, which of the following must be true?
a. Each segment of the entity is an artificial profit center.
b. The company is decentralized.
c. The company uses transfer prices.
d. The reports show controllable costs separately from noncontrollable costs.
c 5. The effective use of responsibility accounting requires that performance reports for cost centers
a. show only variable costs.
b. show a fair share of allocated costs.
c. distinguish between controllable and noncontrollable costs.
d. show a fair share of revenues attributable to the center.

b 6. Criteria for evaluating performance should be carefully selected because

a. they must be approved by the IRS.
b. a manager's behavior can be affected by the criteria used to judge his or her performance.
c. managers may find out what they are.
d. stockholders inquire about them at annual meetings.

d 7. Which of the following is NOT a good reason for allocating indirect costs to operating departments?
a. To remind managers of the need to cover indirect costs.
b. So that operating managers will encourage service department managers to keep costs down.
c. To encourage managers to use services wisely.
d. To determine the true costs of operating departments.

b 8. An artificial profit center

a. has no investment.
b. does not provide its goods or services outside the entity.
c. cannot control its costs.
d. could not be operated as a cost center.

c 9. A responsibility center is
a. any department.
b. any manager.
c. any area of activity for which a manager is responsible.
d. only large departments.

a 10. ABC's actual selling price was less than planned and actual unit volume more than planned.
Therefore,
a. ABC had a favorable sales volume variance.
b. ABC's total contribution margin was more than planned.
c. ABC had a favorable sales price variance.
d. ABC's actual total sales equaled planned total sales.

b 11. The term "dual rates" refers to

a. allocating costs to several operating departments.
b. allocating fixed costs based on capacity requirements and variable costs based on use.
c. allocating both actual costs and budgeted costs.
d. using the budgeted rate to allocate some costs, the actual rate to allocate others.

a 12. Which of the following methods of allocating the costs of service departments provides the broadest
recognition of departments served?
a. Reciprocal allocation.
b. Step-down allocation.
c. Direct allocation.
d. Arbitrary allocation.

d 13. Which of the following is a good reason for allocating indirect costs to operating departments?
a. The company could lose money if the operating departments do not pay for the services they use.
b. To remind managers of the need to cover indirect costs.
c. To encourage managers to use more services.
 d. To determine the true costs of operating departments.

b 14. When a manager takes an action that benefits his or her responsibility center, but not the company
as a whole,
a. it is a non-controllable action.
b. there is a lack of goal congruence.
c. the center must be an artificial profit center.
d. the manager should be fired.

d 15. Which of the following is a good reason for NOT allocating indirect costs to operating departments?
a. The company saves money if the operating departments do not pay for the services they use.
b. To remind managers of the need to cover indirect costs.
c. To encourage managers to use more services.
d. The costs are not controllable by the operating departments.

d 16. Which of the following is a good reason for NOT allocating indirect costs to operating departments?
a. To remind managers that revenues must cover indirect costs.
b. To recognize that operating departments benefit from the services.
c. To encourage managers to use services wisely.
d. Because allocating them might prompt operating managers to use non-incremental costs in making
decisions.

b 17. A profit center is a responsibility center

a. that sells its output outside the company.
b. whose manager is responsible for both revenues and costs.
c. that provides a service to other responsibility centers.
d. within an investment center.

d 18. An investment center is

a. larger than a cost center.
b. larger than a profit center.
c. seldom the responsibility of a single manager.
d. not truthfully characterized in any of the above statements.

a 19. The managerial level at which a particular cost is controllable

a. varies from company to company.
b. depends on whether the cost is fixed or variable.
c. depends on whether the cost is direct or indirect.
d. is irrelevant to the preparation of performance reports.

d 20. If at all possible, a manager's performance report should

a. consider the results that the manager can control.
b. consider only the results that the manager can control.
c. not be influenced by the results of decisions made by other managers.
d. reflect all of the above characteristics.
Problems
A 1. A company's only service department provides the following data:

Monthly Service Hours Actual

Service Center Budget Available Monthly Expense
Carpenter Shop $40,000 1,600 $47,800

It serves three producing departments that show the following budgeted and actual cost and
service-hours data:

Estimated Actual
Services Required Services Used

Department No. Carpenter Shop Carpenter Shop

1................................................................ 350 hrs. 600 hrs.
2................................................................ 800 hrs. 750 hrs.
3................................................................ 450 hrs. 650 hrs.

The spending variance for the carpenter shop, assuming that 80% of the budgeted expense is
fixed, is:
A. $5,800 unfav.
B. $7,800 unfav.
C. $5,800 fav.
D. $7,800 fav.
E. none of the above

SUPPORTING CALCULATION:

Actual factory overhead............................................................... $ 47,800

Budget allowance:
Variable ($5 x 2,000)............................................................. 10,000
Fixed (80% x $40,000).......................................................... 32,000 42,000
Spending variance........................................................................ $ 5,800

C 2. A company's only service department provides the following data:

Monthly Service Hours Actual

Service Center Budget Available Monthly Expense
Carpenter Shop $40,000 1,600 $47,800

It serves three producing departments that show the following budgeted and actual cost and
service-hours data:

Estimated Actual
Services Required Services Used

Department No. Carpenter Shop Carpenter Shop

1................................................................ 350 hrs. 600 hrs.
2................................................................ 800 hrs. 750 hrs.
3................................................................ 450 hrs. 650 hrs.
 The sold-hour rate for the carpenter shop is:
A. $29.88
B. $20.00
C. $25.00
D. $23.90
E. none of the above

SUPPORTING CALCULATION:

$40,000  1,600 = $25

B 3. Flintstone Company uses flexible budgeting for cost control. Flintstone produced 10,800
units of a product during March, incurring indirect material costs of $13,000. Its static
budget for the year reflected variable indirect material costs of $180,000 at a production
volume of 144,000 units. A flexible budget for March production would reflect indirect
material costs of:
A. $13,000
B. $13,500
C. $13,975
D. $11,700
E. none of the above

SUPPORTING CALCULATION:

($180,000  144,000) x 10,800 = $13,500

PROBLEMS 4-9

Costs Allocated to Producing Departments; Variance Analysis. Starsky Inc. has two departments
providing service to its producing departments—the Building Services Department and the General Plant
Department. Relevant data for June are:

Building Services General Plant

Department Department
Budgeted fixed overhead........................... $50,000 $100,000
Variable overhead...................................... $25 per service hour $15 per direct labor hour
Normal activity level................................. 10,000 hours per month 50,000 direct labor hours
June activity............................................... 12,000 hours 45,000 direct labor hours
Actual department costs............................ $358,000 $755,000

[Link] is the predetermined billing rates used for allocating building service department's costs at
normal activity?
a. 30 per service hour
b. 35 per service hour
c. 15 per service hour
d. 25 per service hour

Answer: A
 Building Services Department: [$50,000 + ($25 x 10,000 hrs.)]/10,000 hrs. = $300,000/10,000
hrs. = $30 per service hour

[Link] is the predetermined billing rates used for allocating general plant department's costs at
normal activity?
a. 19 per direct labor hour
b. 14 per direct labor hour
c. 15 per direct labor hour
d. 17 per direct labor hour

Answer: D
General Plant Department: [$100,000 + ($15 x 50,000 hrs.)]/50,000 hrs. = $850,000/50,000 hrs. =
$17 per direct labor hour

[Link] much is the total cost allocated to the producing departments from building service
department, using the predetermined rates?
a. 300,000
b. 320,000
c. 360,000
d. 380,000

Answer: C
Building Services Department: 12,000 hrs. x $30 = $360,000

[Link] much is the total cost allocated to the producing departments from general plant department,
using the predetermined rates?
a. 750,000
b. 755,000
c. 765,000
d. 775,000

Answer: C
General Plant Department: 45,000 hrs. x $17 = $765,000

[Link] much is the spending and idle capacity variances for building service department?
a. 10,000 favorable
b. 10,000 unfavorable
c. 12,000 favorable
d. 12,000 unfavorable

Answer: A

[Link] much is the spending and idle capacity variances for general plant department?
a. 10,000 favorable
b. 10,000 unfavorable
c. 12,000 favorable
d. 12,000 unfavorable

Answer: B.

SOLUTION (8-9)
Building Services General Plant
Department Department
Actual overhead.................................. $ 358,000 $ 755,000
Less overhead allowed for
capacity achieved:
Fixed............................................. $ 50,000 $100,000
Variable
($25 x 12,000 hrs.).................. 300,000 350,000
($15 x 45,000 hrs.).................. 675,000 775,000
Spending variance............................... $ 8,000 unfav. $ (20,000) fav.
Overhead allowed for capacity
achieved........................................ $ 350,000 $ 775,000
Less overhead applied
[from (2)]...................................... 360,000 765,000
Idle capacity variance.......................... $ (10,000) fav. $ 10,000 unfav.
10-13
Flexible Budget. At normal capacity, Boulder Products Corp. manufactures 10,000 trail bikes. At that
level, unit variable costs for the Assembly Department are:

Direct materials............................................................................................................................. $ 30
Direct labor.................................................................................................................................... 60
Indirect labor................................................................................................................................. 30
Repairs and maintenance............................................................................................................... 15
General factory expenses............................................................................................................... 15
$ 150

Fixed expenses are $150,000 for indirect labor, $175,000 for repairs and maintenance, and $80,000 for
general factory.

10. If the flexible budget for the Assembly Department is at 70%of normal capacity, how much
would be the total cost?
a. 1,905,000
b. 1,755,000
c. 1,455,000
d. 1,605,000
Answer: C.

11. If the flexible budget for the Assembly Department is at 80%of normal capacity, how much
would be the total cost?
a. 1,905,000
b. 1,755,000
c. 1,455,000
d. 1,605,000
Answer: D.

12. If the flexible budget for the Assembly Department is at 90%of normal capacity, how much
would be the total cost?
a. 1,905,000
b. 1,755,000
c. 1,455,000
d. 1,605,000
Answer: B.

13. If the flexible budget for the Assembly Department is at 100%of normal capacity, how much
would be the total cost?
a. 1,905,000
b. 1,755,000
c. 1,455,000
d. 1,605,000
Answer: A.

SOLUTION

Assembly Department
Flexible Budget
 Percentage of capacity................................ 70% 80% 90% 100%
Units............................................................ 7,000 8,000
9,000 10,000
Variable cost:
Direct materials........................................... $ 210,000 $ 240,000 $ 270,000 $ 300,000
Direct labor................................................. 420,000 480,000 540,000 600,000
Indirect labor............................................... 210,000 240,000 270,000 300,000
Repairs and maintenance............................ 105,000 120,000 135,000 150,000
General factory expenses............................ 105,000 120,000 135,000 150,000
Total variable cost.................................. $ 1,050,000 $ 1,200,000 $ 1,350,000 $ 1,500,000

Fixed cost:
Indirect labor............................................... 150,000 150,000 150,000 150,000
Repairs and maintenance............................ 175,000 175,000 175,000 175,000
General factory........................................... 80,000 80,000 80,000 80,000
Total fixed cost...................................... $ 405,000 $ 405,000 $ 405,000 $ 405,000
Total cost.................................................... $ 1,455,000 $ 1,605,000 $ 1,755,000 $ 1,905,000

Diller Corporation

Carlos Corporation has three production departments A, B, and C. Carlos Corporation also has two
service departments, Administration and Personnel. Administration costs are allocated based on value of
assets employed, and Personnel costs are allocated based on number of employees. Assume that
Administration provides more service to the other departments than does the Personnel Department.

Dept. Direct Costs Employees Asset Value

Admin. $900,000 25 $450,000
Personnel 350,000 10 600,000
A 700,000 15 300,000
B 200,000 5 150,000
C 250,000 10 800,000

14. Refer to Carlos Corporation. Using the direct method, what amount of Administration costs is allocated to
A (round to the nearest dollar)?
a. $216,000
b. $150,000
c. $288,000
d. $54,000

ANS: A
Solution: $900,000 * (300,000/1,250,000) = $216,000
15. Refer to Carlos Corporation. Using the direct method, what amount of Personnel costs is allocated to B
(round to the nearest dollar)?
a. $50,000
b. $43,750
c. $26,923
d. $58,333

ANS: D

Solution: $350,000 * (5/30) = $58,333