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Responsibility Accounting
Responsibility Accounting
Multiple Choice
c 5. Which of the following items is LEAST likely to appear on the performance report
of the manager of a product line?
a. Variable manufacturing costs for products in the line.
b. Selling expenses for the line.
c. A share of company-wide advertising.
d. Revenues from the line.
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a 7. The criteria used for evaluating performance
a. should be designed to help achieve goal congruence.
b. can be used only with profit centers and investment centers.
c. should be used to compare past performance with current performance.
d. motivate people to work in the company's best interests.
c 12. The cost allocation policy most likely to encourage use of a service is based on
a. budgeted total costs of the service department.
b. actual total costs of the service department.
c. budgeted variable costs for the service department.
d. actual variable costs for the service department.
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a 14. If a company allocates costs of a service department to other departments, it
should
a. consider the likely effects of the allocations on the use of the services.
b. use the method that best reflects the relative sizes of the departments.
c. turn the service department into an investment center.
d. allocate only the fixed costs of the service department.
a 15. If a computer department does work for other departments, charging a flat price
per hour, the computer department is
a. an artificial profit center.
b. a cost center.
c. an investment center.
d. none of the above.
b 17. 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 18. 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 19. 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 20. 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.
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c 21. 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.
d 23. 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.
a 26. 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.
a 28. Which of the following methods of allocating the costs of service departments
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provides the broadest recognition of departments served?
a. Reciprocal allocation.
b. Step-down allocation.
c. Direct allocation.
d. Arbitrary allocation.
d 29. 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 30. 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 31. 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 32. 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
nonincremental costs in making decisions.
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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.
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d 37. Comparing budgeted and actual amounts is important in evaluating the
performance of
a. the manager of a cost center.
b. the manager of a profit center.
c. the manager of an investment center.
d. any manager.
Planned Actual
------- -------
Sales $80,000 $78,900
Variable costs 50,000 48,500
------- -------
Contribution margin $30,000 $30,400
======= =======
Planned sales were 10,000 units; actual sales were 9,700 units. The sales price
variance is
a. $1,100 U.
b. $1,000 F.
c. $900 U.
d. $400 F.
Planned Actual
------- -------
Sales $80,000 $78,900
Variable costs 50,000 48,500
------- -------
Contribution margin $30,000 $30,400
======= =======
Planned sales were 10,000 units, actual sales were 9,700 units. The sales
volume variance is
a. $1,100 U.
b. $1,000 F.
c. $900 U.
d. $400 F.
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b 41. Certainty Stores has three stores and one service center. The percentage of
services used in the current year are Store X, 35%; Store Y, 40%; and Store Z,
25%. The service center costs were budgeted at $160,000 fixed and $240,000
variable. Actual fixed costs were $140,000 and actual variable costs were
$270,000. Actual service center costs are allocated to the stores based on
actual usage of the service center. Service center costs allocated to Store Y are
a. $64,000.
b. $164,000.
c. $410,000.
d. some other number.
c 42. Certainty Stores has three stores and one service center. The percentage of
services used in the current year are Store X, 35%; Store Y, 40%; and Store Z,
25%. The service center costs were budgeted at $350,000 fixed and $250,000
variable. Actual fixed costs were $370,000 and actual variable costs were
$280,000. Budgeted service center costs are allocated to the stores based on
actual usage of the service center. Service center costs allocated to Store Y are
a. $140,000.
b. $148,000.
c. $240,000.
d. $260,000.
c 43. Wabasha Co. has two service departments (A and B) and two producing
departments (X and Y). Data provided are as follows:
Wabasha uses the direct method to allocate service department costs. The
service department cost allocated to Department Y is
a. $88.
b. $96.
c. $130.
d. $240.
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c 44. Wabasha Co. has two service departments (A and B) and two producing
departments (X and Y). Data provided are as follows:
c 45. Wabasha Co. has two service departments (A and B) and two producing
departments (X and Y). Data provided are as follows:
Wabasha uses the reciprocal method to allocate service department costs. The
service department cost allocated to Department Y is
a. $60.
b. $75.
c. $85.
d. $135.
d 46. Olson Stores has three stores and one service center. The percentage of services
used in the current year are Store A, 40%; Store B, 25%; and Store C, 45%. The
expected long-term budgeted usages are Store A, 30%; Store B, 30%; and Store
C, 40%. The service center costs were budgeted at $450,000 fixed and $550,000
variable. Actual fixed costs were $430,000 and actual variable costs were
$570,000. Olson allocates the budgeted variable costs of the central purchasing
unit based on actual use of the unit's services, and allocates budgeted fixed
costs based on expected long-term use of the unit's services. Service center
costs allocated to Store A are
a. $135,000.
b. $220,000.
c. $300,000.
d. $355,000.
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b 47. Olson Stores has three stores and one service center. The percentage of services
used in the current year are Store A, 45%; Store B, 35%; and Store C, 20%. The
expected long-term budgeted usages are Store A, 30%; Store B, 40%; and Store
C, 30%. The service center costs were budgeted at $450,000 fixed and $550,000
variable. Actual fixed costs were $430,000 and actual variable costs were
$570,000. Olson allocates the budgeted variable costs of the central purchasing
unit based on actual use of the unit's services, and allocates budgeted fixed
costs based on expected long-term use of the unit's services. Service center
costs allocated to Store B are
a. $350,000.
b. $372,500.
c. $400,000.
d. $550,000.
d 48. Basin Co. has two service departments (A and B) and two producing
departments (X and Y). Data provided are as follows:
Basin uses the direct method to allocate service department costs. The service
department cost allocated to Department X is
a. $280.
b. $300.
c. $320.
d. $443.
a 49. Basin Co. has two service departments (A and B) and two producing
departments (X and Y). Data provided are as follows:
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c 50. Basin Co. has two service departments (A and B) and two producing
departments (X and Y). Data provided are as follows:
Basin uses the reciprocal method to allocate service department costs. The
service department cost allocated to Department X is
a. $300.
b. $340.
c. $417.
d. $468.
True-False
F 2. The sales volume variance is the difference between actual and planned unit
sales multiplied by the actual contribution margin per unit.
F 4. Allocated costs are less important to the internal reporting for a centralized
company than for a decentralized company.
T 6. It is not always possible to separate the variable and fixed components of actual
costs.
T 8. The sales price variance is the difference between the actual selling price and the
planned selling price multiplied by actual units sold.
T 9. The direct method of allocating service department costs ignores all of the
interactions between service departments.
F 10. The reciprocal method of allocating service department costs considers only the
usage by the producing departments in determining the allocations.
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Problems
1. The following data are for Billings Stores, which has two stores and one service
center.
Helena Butte
------- -----
Percentage of services used in current year 20% 80%
Expected long-term use of services 30% 70%
Budgeted central purchasing costs were $225,000 fixed and $125,000 variable.
Actual fixed costs were $240,000 and actual variable costs were $115,000. The
managers wish to allocate the actual central purchasing costs to the stores based
on actual use of the central purchasing service.
SOLUTION:
2. The following data are for Billings Stores, which has two stores and one service
center.
Helena Butte
------- -----
Percentage of services used in current year 20% 80%
Expected long-term use of services 30% 70%
Budgeted central purchasing costs were $225,000 fixed and $125,000 variable.
Actual fixed costs were $240,000 and actual variable costs were $115,000. The
company wishes to allocate the budgeted variable costs of the central purchasing
unit based on actual use of the unit's services and to allocate budgeted fixed costs
based on expected long-term use of the unit's services.
a. Compute the total cost allocated to the Helena store for the services of the
central purchasing unit.
b. Compute the total cost allocated to the Butte store for the services of the central
purchasing unit.
SOLUTION:
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b. To Butte: $257,500 ($125,000 x 80% + $225,000 x 70%)
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3. Following are data about Alphabet Co.'s two service departments and two operating
departments.
Service Depts. Operating Depts.
-------------- ---------------
A B X Y
------- ------ ------ ------
Direct costs $200 $500 $1,500 $2,000
Services performed by Dept. A 20% 40% 40%
Services performed by Dept. B. 10% 90% -
a. Alphabet allocates costs of its service departments using the direct method of
allocation. Find the total cost that will be allocated to Dept. X.
b. Alphabet allocates the costs of its service departments using the step-down
method, beginning with Dept. A. Find the total amount of cost that will be
allocated to Dept. X.
SOLUTION:
b. Allocated to X: $620
A B X Y
---- ---- ---- ----
A's direct cost $200
A's cost allocated (200) $ 40 $80 $80
B's direct cost 500
-----
Total for allocating $540
B's costs allocated (540) 540 0
---- ---
Allocated to X $620
Allocated to Y $80
4. Following are data about Alphabet Co.'s two service departments and two operating
departments.
Service Depts. Operating Depts.
-------------- ---------------
A B X Y
------- ------ ------ ------
Direct costs $400 $1,000 $3,000 $4,000
Services performed by Dept. A 20% 40% 40%
Services performed by Dept. B. 10% 90% -
Alphabet allocates costs of its service departments using the reciprocal method of
allocation. Find the total cost that will be allocated to Dept. X.
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SOLUTION:
Allocated to X: $1,195.92
A = $400 + .1B A = 510.20
B = $1,000 + .2A B = 1,102.04
A B X Y
------- ------- ------- -------
Direct costs $400.00 $1,000.00
A's cost allocated (510.20) 102.04 $204.08 $204.08
B's costs allocated 110.20 (1,102.04) 991.84 0
------- -------
Allocated to X $1,195.92
Allocated to Y $204.08
5. The following data are for Lexington Stores, which has two stores and one service
center.
Concord Graham
------- ------
Percentage of services used in current year 40% 60%
Expected long-term use of services 30% 70%
Budgeted central purchasing costs were $100,000 fixed and $75,000 variable.
Actual fixed costs were $140,000 and actual variable costs were $105,000. The
managers wish to allocate the actual central purchasing costs to the stores based
on actual use of the central purchasing service.
SOLUTION:
6. The following data are for Lexington Stores, which has two stores and one service
center.
Concord Graham
------- ------
Percentage of services used in current year 40% 60%
Expected long-term use of services 30% 70%
Budgeted central purchasing costs were $100,000 fixed and $75,000 variable.
Actual fixed costs were $140,000 and actual variable costs were $105,000. The
company wishes to allocate the budgeted variable costs of the central purchasing
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unit based on actual use of the unit's services and to allocate budgeted fixed costs
based on expected long-term use of the unit's services.
a. Compute the total cost allocated to the Concord store for the services of the
central purchasing unit.
b. Compute the total cost allocated to the Graham store for the services of the
central purchasing unit.
SOLUTION:
7. Following are data about Hamilton Co.'s two service departments and two
operating departments.
Service Depts. Operating Depts.
-------------- ---------------
A B X Y
------- ------ ------ ------
Direct costs $400 $600 $2,000 $3,000
Services performed by Dept. A 30% 30% 40%
Services performed by Dept. B. 20% 70% 10%
a. Hamilton allocates costs of its service departments using the direct method of
allocation. Find the total cost that will be allocated to each of the operating
departments.
b. Hamilton allocates the costs of its service departments using the step-down
method, beginning with Dept. A. Find the total amount of cost that will be
allocated to each of the operating departments.
c. Hamilton allocates costs of its service departments using the reciprocal method
of allocation. Find the total cost that will be allocated to each of the operating
departments.
SOLUTION:
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B's direct cost 600
----
Total for allocating $720
B's costs allocated (720) 630.00 90.00
------- ------
Allocated to X $750.00
Allocated to Y $250.00
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c. Allocated to X: $702.13, Allocated to Y: $297.87
A = $400 + .2B A = 553.19
B = $600 + .3A B = 765.96
A B X Y
------- ------- ------- -------
Direct costs $400.00 $600.00
A's cost allocated (553.19) 165.96 $165.96 $221.27
B's costs allocated 153.19 (765.96) 536.17 76.60
------- -------
Allocated to X $702.13
Allocated to Y $297.87
8. Following are data about Hawley Co.'s two service departments and three operating
departments.
Service Depts. Operating Depts.
-------------- ----------------------
A B X Y Z
------- ------ ------ ------ ------
Direct costs $400 $600
Services performed by Dept. A 30% 40% 20% 10%
Services performed by Dept. B. 40% 20% 20% 20%
Hawley allocates costs of its service departments using the reciprocal method of
allocation. Find the total costs that will be allocated to each of the operating
departments.
SOLUTION:
A B X Y Z
------- ------- ------- ------- -------
Direct costs $400.00 $600.00
A's cost allocated (727.27) 218.18 $290.91 $145.45 $ 72.72
B's costs allocated 327.27 (818.18) 163.64 163.64 163.64
------- ------- -------
Allocated to X $454.55
Allocated to Y $309.09
Allocated to Z $236.36
9. Following are data about Augusta Co.'s three service departments and two
operating departments.
Service Depts. Operating Depts.
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--------------------- ----------------
A B C X Y
------- ------ ------ ------ ------
Direct costs $150 $300 $350
Services performed by Dept. A 20% 30% 40% 10%
Services performed by Dept. B. 10% 20% 50% 20%
Services performed by Dept. C 30% 40% 15% 15%
a. Augusta allocates costs of its service departments using the direct method of
allocation. Find the total cost that will be allocated to Dept. X.
b. Augusta allocates the costs of its service departments using the step-down
method, beginning with Dept. A followed by Dept. B. Find the total amount of
cost that will be allocated to Dept. X.
SOLUTION:
b. Allocated to X: $477.50
A B C X Y
---- ---- ------- ------- -------
A's direct cost $150
A's cost allocated (150) $ 30 $ 45.00 $ 60.00 $ 15.00
B's direct cost 300
----
Total for allocating $330
B's costs allocated (330) 73.33 183.34 73.33
C's direct cost 350.00
-------
Total for allocating $468.33
C's costs allocated (468.33) 234.16 234.16
------ ------
Allocated to X $477.50
Allocated to Y $322.50
Planned Actual
-------- --------
Sales $160,000 $162,500
Variable costs at $5 per unit 100,000 102,500
-------- --------
Contribution margin $ 60,000 $ 60,000
======== ========
Planned sales were 20,000 units, actual sales were 20,500 units.
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a. Find the sales price variance. Indicate F or U
SOLUTION:
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