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# Sierra company incurs the following

Sierra Company allocates the estimated \$200,000 of its accounting department costs to its production and sales departments since the accounting department supports the other two departments particularly with regard to payroll and accounts payable functions. The costs will be allocated based on the number of employees using the direct method. Information regarding costs and employees follows:

Department

Employees

Accounting

4

Production

36

Sales

12

How much of the accounting department costs will be allocated to the production and sales departments?

Production Department

Sales Department

\$22,222

\$66,667

\$150,000

\$50,000

\$1,800,000

\$600,000

\$180,000

\$60,000

Velvet Company allocates costs from the payroll department (S1) and the maintenance department (S2) to the molding (P1), finishing (P2), and packaging (P3) departments. Payroll department costs are allocated based on the number of employees in the department and maintenance department costs are allocated based on the number of square feet which the production department occupies within the factory. Information about the departments is presented below:

Number of

Number of Square

Department

Costs

Employees

Feet Occupied

Payroll (S1)

\$150,000

2

2,000

Maintenance (S2)

\$220,000

8

64,000

Molding (P1)

75

100,000

Finishing (P2)

50

60,000

Packaging (P3)

25

40,000

Velvet uses the direct method to allocate costs. Round all answers to the nearest dollar. What amount of the payroll department costs will be allocated to the molding department?

\$132,353

\$75,000

\$70,313

\$185,000

Rand Company sells fine collectible statues and has implemented activity-based costing. Costs in the shipping department have been divided into three cost pools. The first cost pool contains costs that are related to packaging and shipping and Rand has determined that the number of boxes shipped is an appropriate cost driver for these costs. The second cost pool is made up of costs related to the final inspection of each item before it is shipped and the cost driver for this pool is the number of individual items that are inspected and shipped. The final cost pool is used for general operations and supervision of the department and the cost driver is the number of shipments. Information about the department is summarized below:

Cost Pool

Total Costs

Cost Driver

Annual Activity

Packaging and shipping

\$170,000

Number of boxes shipped

25,000 boxes

Final inspection

\$200,000

Number of individual items shipped

100,000 items

General operations and supervision

\$85,000

Number of orders

10,000 orders

During the period, the Far East sales office generated 680 orders for a total of 6,120 items. These orders were shipped in 1,495 boxes. What amount of shipping department costs should be allocated to these sales?

\$22,406

\$16,590

\$10,588

\$28,186

Library Resources Company uses activity-based costing. The company produces soft and hard-cover books. The estimated costs and expected activity for each of the activity pools follow:

Activity

Estimated

Expected Activity

Cost Pool

Cost

Hard-Cover

Soft-Cover

Total

Activity 1

\$15,675

800

300

1,100

Activity 2

\$11,900

500

200

700

Activity 3

\$36,000

800

400

1,200

To which of the following is the rate for activity 3 that will used to apply costs to Soft-cover books closest?

\$90.00

\$12,000

\$30.00

Not enough information is provided

Biltmore Financial is a banking services company that offers many different types of checking accounts. The bank has recently adopted an activity-based costing system to assign costs to their various types of checking accounts. The following data relate to the money market checking accounts, one of the popular checking accounts, and the ABC cost pools: Annual number of accounts = 60,000 accounts Checking account cost pools:

Cost Pool

Cost

Cost Drivers

Returned check costs

\$3,000,000

Number of returned checks

Checking account reconciliation costs

60,000

Number of account reconciliation requests

New account setup

650,000

Number of new accounts

Copies of cancelled checks

400,000

Number of cancelled check copy requests

Online banking web site maintenance

195,000

Per product group (type of account)

Total checking account costs

\$4,305,000

Annual activity information related to cost drivers:

Cost Pool

Money Market Checking

Returned check

200,000 returned checks

18,000

Check reconciliation costs

3,000 checking account

420

New accounts

60,000 new accounts

15,000

Cancelled check copy requests

100,000 cancelled check

60,000

Web site costs

10 types of accounts

1

Calculate the overhead cost per account for the Money Market Checking.

Rockwell Company owns a single restaurant which has a cantina primarily used to seat patrons while they wait on their tables. The company is considering eliminating the cantina and adding more dining tables. Segmented contribution income statements are as follows and fixed costs applicable to both segments are allocated on the basis of sales.

Restaurant

Cantina

Total

Sales

\$800,000

\$200,000

\$1,000,000

Variable costs

475,000

160,000

635,000

Direct fixed costs

50,000

15,000

65,000

Allocated fixed costs

212,500

37,500

250,000

Net Income

\$ 62,500

(\$12,500)

\$50,000

What financial effect will occur to profit if Rockwell eliminates the cantina but no more dining customers are served?

Net income will decrease to \$37,500.

Net income will decline by \$25,000.

Net income will increase by \$12,500.

Net income will be \$50,000.

Explorer Company manufactures two products, hard-tops and covers for its convertible vehicles. Data for each follows:

Hard-top

Covers

Direct labor hours required per unit

4

8

Contribution margin per unit

\$240

\$390

Only 4,200 direct labor hours are available per month. How many units of each product should Explorer make in order to maximize profits?

Hard-top

Covers

0

250

1,050

0

4,200

400

1,050

250

Superior Gaming, a computer enhancement company, has three product lines: audio enhancers, video enhancers, and connection-speed accelerators. Common costs are allocated based on relative sales. A product line income statement for the year ended December 31, 2011 follows:

Audio

Video

Accelerators

Total

Sales

\$1,045,000

\$2,255,000

\$2,200,000

\$5,500,000

Less COGS

575,000

1,240,000

1,870,000

3,685,000

Gross margin

470,000

1,015,000

330,000

1,815,000

Less other var costs

53,000

69,000

20,000

142,000

Contribution margin

417,000

946,000

310,000

1,673,000

Less direct salaries

155,000

175,000

65,000

395,000

Less common fixed costs:

Rent

11,970

25,830

25,200

63,000

Utilities

4,370

9,430

9,200

23,000

Depreciation

5,890

12,710

12,400

31,000

79,230

170,970

166,800

417,000

Net income

\$160,540

\$552,060

\$31,400

\$744,000

Since the profit for accelerators is relatively low, the company is considering dropping this product line. What is the incremental effect of dropping accelerators?

\$499,000

\$31,400

(\$310,000)

(\$245,000)

Molina Medical Supply Company is trying to decide whether or not to continue distributing hospital supplies. The following information is available for Molina’s business segments. Assume that all direct fixed costs could be avoided if a segment is dropped and that the total common fixed costs would remain unchanged if a segment is dropped.

Hospital Supplies

Retail Stores

Mail Order

Sales

\$120,000

\$440,000

\$360,000

Variable costs

64,000

200,000

140,000

Contribution Margin

56,000

240,000

220,000

Direct Fixed Costs

50,000

80,000

90,000

Allocated common fixed costs

20,000

70,000

60,000

Net Income

(\$ 14,000)

\$ 90,000

\$ 70,000

If hospital supplies are dropped, what would happen to profit?

Increase by \$14,000.

Decrease by \$114,000.

Decrease by \$6,000.

Increase by \$76,000.

Molina Medical Supply Company is trying to decide whether or not to continue distributing hospital supplies. The following information is available for Molina’s business segments. Assume that all direct fixed costs could be avoided if a segment is dropped and that the total common fixed costs would remain unchanged if a segment is dropped.

Hospital Supplies

Retail Stores

Mail Order

Sales

\$120,000

\$440,000

\$360,000

Variable costs

64,000

200,000

140,000

Contribution Margin

56,000

240,000

220,000

Direct Fixed Costs

50,000

80,000

90,000

Allocated common fixed costs

20,000

70,000

60,000

Net Income

(\$ 14,000)

\$ 90,000

\$ 70,000

Assume that if hospital supplies were dropped, retail store sales would increase by 25%. What would the impact on overall profitability be if the “Hospital Supplies” segment is eliminated?

Income will increase by \$104,000.

Income would increase by \$54,000.

Income will increase by \$14,000.

Income will increase by \$60,000.

Iguana Company sells a single product. Iguana estimates demand and costs at various activity levels as follows:

Units Sold

Price

Total Variable Costs

Fixed Costs

120,000

\$48

\$3,000,000

\$1,000,000

140,000

\$45

\$3,500,000

\$1,000,000

160,000

\$40

\$4,000,000

\$1,000,000

180,000

\$35

\$4,500,000

\$1,000,000

200,000

\$30

\$5,000,000

\$1,000,000

How would you best describe Iguana’s variable cost per unit over the range shown?

It is decreasing as volume increases.

It is first increasing as volume increases, then decreasing.

It is constant.

It is increasing as volume increases.

Jackson Company is trying to determine the optimal price to charge for its PUNCH model. Jackson has fixed costs of \$50,000 and the PUNCH has variable costs of \$12.00 per unit. Jackson has determined that the following relationships exist between price and demand:

Price

Demand

\$20

6,875

\$19

8,800

\$18

10,000

\$17

11,000

What price should Jackson charge in order to maximize its profit?

\$19

\$18

\$17

\$20

Costa Company has a capacity of 40,000 units per year and is currently selling 35,000 for \$400 each. Barton Company has approached Costa about buying 2,000 units for only \$300 each. The units would be packaged in bulk, saving Costa \$20 per unit when compared to the normal packaging cost. Normally, Costa has a variable cost of \$280 per unit. The annual fixed cost of \$2,000,000 would be unaffected by the special order. What would be the impact on profits if Costa were to accept this special order?

Profits would increase \$80,000.

Profits would increase \$60,000.

Profits would decrease \$200,000.

Profits would increase \$40,000.

The Pure Company uses cost-plus pricing with a 50% mark-up. The company is currently selling 100,000 units at \$12 per unit. Each unit has a variable cost of \$6. In addition, the company incurs \$200,000 in fixed costs annually. If demand falls to 80,000 units and the company wants to continue to earn a 50% return, what price should the company charge?

\$12.75

\$14.55

\$10.95

\$13.50

A company has \$8.00 per unit in variable costs and \$4.00 per unit in fixed costs at a volume of 50,000 units. If the company marks up total cost by 60%, what price should be charged if 60,000 units are expected to be sold?

\$11.33

\$18.13

\$19.20

\$7.20

The chief engineer at Tech Deals has proposed production of a high-tech portable electronic storage device to be sold at a 30 percent markup above its full cost. Management estimates that the fixed costs per year will be \$160,000. The quantity demanded is 40,000 units. How much is the price with a 30 percent markup?

\$20.00

\$19.60

\$20.80

A new product is being designed by an engineering team at Golem Security. Several managers and employees from the cost accounting department and the marketing department are also on the team to evaluate the product and determine the cost using a target costing methodology. An analysis of similar products on the market suggests a price of \$135 per unit. The company requires a profit of 30 percent of selling price. How much is the target cost per unit?

\$94.50

\$175.50

\$81.00

\$40.50

Carlton Products Company has analyzed the indirect costs associated with servicing its various customers in order to assess customer profitability. Results appear below:

Cost Pool

Annual Cost

Cost Driver

Annual Driver Quantity

Processing electronic orders

\$1,000,000

Number of orders

500,000

Processing non-electronic orders

\$2,000,000

Number of orders

400,000

Picking orders

\$3,000,000

Number of different products ordered

800,000

Packaging orders

\$1,500,000

Number of items ordered

50,000,000

Returns

\$2,000,000

Number of returns

50,000

If all costs were assigned to customers based on the number of items ordered, what would be the cost per item ordered?

\$6.09

\$10.62

\$0.19

\$0.09

A company using activity based pricing marks up the direct cost of goods by 30% plus charges customers for indirect costs based on the activities utilized by the customer. Indirect costs are charged as follows: \$8.00 per order placed; \$4.00 per separate item ordered; \$30.00 per return. A customer places 10 orders with a total direct cost of \$3,000, orders 300 separate items, and makes 5 returns. What will the customer be charged?

\$5,759

\$3,000

\$3,900

\$5,330

A law firm uses activity-based pricing. The company’s activity pools are as follows:

Cost Pool

Annual Estimated Cost

Cost Driver

Annual Driver Quantity

Consultation

200,000

Number of consultations

100 consultations

150,000

10,000 labor hours

Client Service

99,000

Number of clients

110 clients

The firm had two consultations with this client and required 130 administrative labor hours. What additional costs will be charged to this customer?

\$2,850

\$2,915

\$6,850

\$5,950

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