Fundamentals of Management Control Systems: True / False Questions

Chapter 12
Fundamentals of Management Control Systems

True / False Questions

1. The design and use of management control systems affects how an individual makes and implements
decisions.

True False

2. In general, there is a direct relationship between the quality of the information provided to managers and
the quality of decisions made using that information.

True False

3. Rational managers will always make decisions that are in the best interest of the organization employing
them.

True False

4. Decentralization is the delegation of the authority to make decisions in the organization's name to
subordinates.

True False

5. In general, organizations are more centralized in the early stages of their existence and more decentralized
as they grow.

True False

6. One advantage of decentralization is faster response time to changes in the organization's environment by
local managers.

True False

7. One advantage of centralization is better use of top management's time on strategic decisions.

True False

8. Properly developed and implemented management control systems influence subordinates to act in the
organization's best interest.

True False

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McGraw-Hill Education.
9. Delegated decision authority is the specification of what decisions a subordinate can make in the
organization.

True False

10. It is important to not consider an organization's compensation and reward system when designing its
performance evaluation system.

True False

11. Managers in a cost center are held responsible for both the costs and volumes of inputs used to produce a
product or provide a service.

True False

12. In general, profit centers are found at higher levels in an organization than investment centers.

True False

13. Properly designed management control systems can totally eliminate the inherent conflict between
individual behavior and organizational goals.

True False

14. There is no single accounting measure that can fully measure the performance of a profit or investment
center.

True False

15. Fixed compensation is generally not linked to measured performance; i.e., it is independent of measured
performance.

True False

16. Properly designed management control systems have both fixed compensation and contingent
compensation.

True False

17. Cost allocations based on dual rates assume that a common cost can be separated into a fixed and variable
component.

True False

18. The primary reason to use a dual rate allocation system is to focus a manager's performance evaluation on
factors under the manager's direct control.

True False

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19. It is possible for performance evaluation systems and/or management control systems to contribute to
unethical or fraudulent behavior.

True False

20. Properly designed management control systems will eliminate fraudulent behavior by maximizing goal
congruence within the organization.

True False

21. One of the key internal controls for any organization is segregation of duties.

True False

22. Internal controls are not legally required for publicly traded companies.

True False

Multiple Choice Questions

23. The design and use of management control systems uses concepts from which of the following disciplines?

A. demography
B. economics
C. trigonometry
D. physics

24. What is the purpose of the management control system?

A. To align more closely the interests of the manager and the interests of the organization.
B. To allow individuals to obtain business experience.
C. To define the performance measures for employees.
D. To focus on the well-being of employees.

25. Which of the following correctly defines a principal-agent relationship?

A. The relationship between a superior and a subordinate.

B. The relationship between two superiors.
C. The relationship between two subordinates.
D. The relationship between a supervisor and a subversive.

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26. What is the primary managerial responsibility in an organization?

A. development of employees.
B. development of profits.
C. decision making.
D. development of performance measurements.

27. Which of the following would be considered a principal in the principal-agent relationship?

A. A stockbroker in an investment arrangement.

B. A real estate agent for someone buying a house.
C. A customer leasing a car.
D. An employer hiring an employee.

28. Which of the following statements is(are) true regarding managerial decisions?
(A) The design and use of management control systems affects how an individual makes and implements
decisions.
(B) Rational managers will always make decisions that are in the best interest of the organization
employing them.

A. Only A is true.
B. Only B is true.
C. Both A and B are true.
D. Neither A nor B is true.

29. Decentralization refers to the delegation of decision-making authority to:

A. top management.
B. superiors.
C. board of directors.
D. subordinates.

30. Which of the following is not a characteristic of a decentralized organization?

A. Better use of local knowledge.

B. Better use of top management's time.
C. Reduced response time to environmental changes.
D. More decisions made by relatively few individuals.

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31. Which of the following statements is false?

A. The U.S. military is a good example of an organization that is highly decentralized.

B. The degree of decentralization depends on how many decisions principals delegate to agents.
C. Management control systems are used to measure the performance of an agent's decisions.
D. Most organizations have some operating units that are centralized and some that are decentralized.

32. Which of the following is not a cost of decentralization?

A. Managers in a decentralized organization might have a narrow focus on their own unit's performance
rather than the attainment of their organization's overall goals.
B. Managers might have a tendency to ignore the consequences of their actions on the organization's other
subunits.
C. Delegating decision making to the lowest level possible enables an organization to respond in a timely
way to opportunities and problems.
D. Both A and B.

33. Which one of the following will not occur in an organization that gives managers throughout the
organization maximum freedom to make decisions? (CMA adapted)

A. More effective solutions to operational problems.

B. Individual managers regarding the managers of other segments as they do external parties.
C. Two divisions of the organization having competing models that aim for the same market segments.
D. Delays in securing approval for the introduction of new products.

34. ____________ is the delegation of decision-making authority to lower management levels within the
organization.

A. Transfer pricing
B. Centralization
C. Decentralization
D. Goal congruence

35. Which of the following is not a benefit of decentralization?

A. Allowing managers some autonomy in decision making provides managerial training for future higher-
level managers.
B. In a decentralized organization some tasks or services may be duplicated unnecessarily.
C. Managers with some decision-making authority usually exhibit greater motivation than those who
merely execute the decisions of others.
D. Managers of the organization's subunits are specialists, thereby enabling them to manage their
departments most effectively.

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36. Which of the following statements is true regarding decentralization?

A. Decentralization increases the complexity of problems.

B. Managers in a decentralized organization have less knowledge about local business advantages.
C. Decentralization limits fast responses to business changes.
D. Decentralization allows managers to receive on-the-job training in decision making.

37. What does dysfunctional decision making refer to?

A. Administrative duplication.
B. Local managers making decisions in their interests, which can differ from those of the organization.
C. Delegated decision authority.
D. Poor decisions based on incomplete information.

38. Which of the following elements is not part of a management control system?

A. Delegated decision authority.

B. Performance evaluation system.
C. Knowledge of local conditions.
D. Compensation and reward system.

39. An operating unit of an organization is called a cost center if it is responsible:

A. only for costs.

B. only for revenues.
C. for costs and revenues.
D. for investments in assets.

40. An operating unit of an organization is called an investment center if it is responsible:

A. only for costs.


41. An operating unit of an organization is called a revenue center if it is responsible:

A. only for costs.


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42. An operating unit of an organization is called a profit center if it is responsible:

A. only for costs.


43. An operating unit that is responsible for revenues and costs is commonly referred to as a(n):

A. expense center.
B. revenue center.
C. profit center.
D. asset center.

44. An operating unit that is responsible for revenues only is commonly referred to as a(n):

A. expense center.
B. revenue center.
C. profit center.
D. asset center.

45. An operating unit that is responsible for only costs is commonly referred to as a(n):

A. cost center.
B. revenue center.
C. profit center.
D. asset center.

46. When managers are held responsible for costs but the input-output relationship is not well specified, a(n)
________________________ is established.

A. standard cost center

B. revenue center
C. discretionary cost center
D. asset center

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47. When managers are held responsible for costs and the input-output relationship is well specified, a(n)
________________________ is established.


B. revenue center
D. asset center

48. Decentralized organizations can delegate authority and still maintain control and monitor managers'
performance by designing appropriate management control systems. Which of the following responsibility
centers would be evaluated similar to an independent business? (CMA, adapted)

A. Profit center.
B. Revenue center.
C. Investment center.
D. Discretionary cost center.

49. Controllable revenue is included in a performance report of a:
Profit Center Investment Center

A. Yes No
B. Yes Yes
C. No No
D. No Yes

A. Option A
B. Option B
C. Option C
D. Option D

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Revenue Center Cost Center

A. Yes No
B. Yes Yes
C. No No
D. No Yes

A. Option A
B. Option B
C. Option C
D. Option D


Cost Center Profit Center
A. Yes No
B. Yes Yes
C. No No
D. No Yes

A. Option A
B. Option B
C. Option C
D. Option D

52. Assets invested in a responsibility center are included in a performance report of a:

A. Yes No
B. Yes Yes
C. No No
D. No Yes

A. Option A
B. Option B
C. Option C
D. Option D

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Profit Center Cost Center

A. Yes No
B. Yes Yes
C. No No
D. No Yes

A. Option A
B. Option B
C. Option C
D. Option D

54. A manager makes a decision that is beneficial for a specific investment center and for the entire
organization. From the organization's perspective, this decision results in:

A. goal congruence.
B. decentralization.
C. contingent compensation.
D. fixed compensation.

55. Responsibility accounting defines an operating center that is responsible for revenue and costs as a(n):
(CMA adapted)

A. profit center.
B. revenue center.
C. division.
D. operating unit.

56. The least complex segment or area of responsibility for which costs are allocated is a(n): (CMA adapted)

A. profit center.
B. investment center.
C. contribution center.
D. cost center.

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57. Which of the following statements is(are) correct?
I. A profit center has control over both cost and revenue.

II. An investment center has control over invested funds, but not over costs and revenue.
III. A cost center has no control over sales.

A. Only I
B. Only
II
C. Only I and III
D. Only I and II

58. The purpose of the Data Processing Department of Haslam Corporation is to assist the various departments
of the corporation with their information needs free of charge. The Data Processing Department would best
be evaluated as a(n):

A. cost center.
B. revenue center.
C. profit center.
D. investment center.

59. Which of the following departments would not be a cost center?

A. County fire department

B. University book store
C. University power plant
D. City building and grounds department

60. Which of the following subunits would most likely be considered a only cost center?

A. Jewelry department.
B. Parts department.
C. Legal department.
D. Electronics department.

61. A successful responsibility accounting reporting system is dependent upon (CMA adapted):

A. The correct allocation of controllable variable costs.

B. Identification of the management level at which all costs are controllable.
C. The proper delegation of responsibility and authority.
D. A reasonable separation of costs into their fixed and variable components since fixed costs are not
controllable and must be eliminated from the responsibility report.

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62. The following is a summarized income statement for McClaron Manor Co.'s profit center 12608 for April:

Contribution Margin $175,000
Period Expenses $11,000
Manager' s Salary $2,000
Corporate Expense Allocation $8,000 ($21,000)
$154,000
Which of the following amounts is most likely subject to the control of the profit center's manager? (CPA,
adapted)

A. Contribution Margin of $175,000.

B. Contribution Margin of $175,000 and Period Expenses of $11,000.
C. Contribution Margin of $175,000 and Period Expenses of $13,000.
D. Contribution Margin of $175,000 and Period Expenses of $21,000.

63. Revenue center and profit center managers are both responsible for meeting:

A. Budgeted income.
B. Budgeted costs.
C. Budgeted revenues.
D. Minimum return on investment as established by the company as a whole.

64. Which of the following subunits is most likely to be considered an investment center?

A. Accounting department.
B. Assembly department.
C. Petrochemical division.
D. Research and development department.

65. The controllability concept states that managers should be held responsible for:

A. all items over which they have decision-making authority.

B. costs and revenues, but not investments in assets used in their division.
C. only items that are allocated to their divisions on a per-unit basis.
D. fixed compensation items, but not contingent compensation items.

66. Relative performance evaluations (RPE) are not designed to:

A. compare managers to other comparable managers.

B. compare divisions with other comparable divisions.
C. remove the effect of environmental factors that are beyond a manager's control.
D. restate departmental goals so meaningful comparisons can be made.

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67. Which of the following items would be classified as a fixed compensation item?

A. Administrative salaries.
B. Sales commissions.
C. Stock options.
D. Piece rates.

68. Which of the following items would not be classified as a contingent compensation item?

C. Stock options.
D. Piece rates.

69. Which of the following statements is(are) true regarding compensation?
(A) Fixed compensation is generally not linked to measured performance; i.e., it is independent of
measured performance.
(B) Properly designed management control systems have contingent compensation items but not fixed
compensation items.

A. Only A is true.
B. Only B is true.

70. In responsibility accounting, a center's performance is measured by those costs which are controllable.
Controllable costs are best described as including: (CMA adapted)

A. direct materials and direct labor only.

B. only those costs that the manager can influence in the current period.
C. only discretionary costs.
D. those costs about which the manager is knowledgeable and informed.

71. Banglor Manufacturing Corporation uses a responsibility accounting system in its operations. Which one of
the following items is least likely to appear in a performance report for a manager of one of Banglor's
assembly lines? (CMA adapted)

A. Direct labor.
B. Materials.
C. Repairs and maintenance.
D. Depreciation on the manufacturing facility.

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72. When comparing performance report information for top management with that of lower-level
management: (CMA adapted)

A. top management reports are more detailed.

B. lower-level management reports are typically for longer time periods.
C. top management reports show control over fewer costs.
D. lower-level management reports are likely to contain more quantitative data and less financial data.

73. Which of the following is considered a responsibility center?

A. Investment center.
B. Profit center.
C. Revenue center.
D. All are responsibility centers.

74. The use of dual rates in a cost allocation system assumes that common costs can be:

A. separated into their fixed and variable components.

B. traced directly to a specific division or manager.
C. allocated based on a physical quantities measure.
D. assigned to an investment responsibility center.

75. Which of the following statements is(are) false regarding the effective use of management control systems?
(A) In general, single rate cost allocations should not be used in management control systems because
clear control over the cost being allocated cannot be determined.
(B) The primary reason to use a dual rate allocation system is to focus a manager's performance evaluation
on factors under the manager's direct control.

A. Only A is false.
B. Only B is false.
C. Both A and B are false.
D. Neither A nor B is false.

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76. Barrington Box Enterprises has two divisions, large and small, that share the common costs of the
company's communications network. The annual common costs are $4,500,000. You have been provided
with the following information for the upcoming year:
Time on

Calls Network (hours)
Large 100,000 120,000
Small 80,000 330,000
What is the allocation rate for the upcoming year, assuming Barrington Box uses the single-rate method
and allocates common costs based on the number of calls?

A. $10.00.
B. $15.00.
C. $20.00.
D. $25.00.

Time on

Large 100,000 120,000
Small 80,000 330,000
What is the allocation rate for the upcoming, year assuming Barrington Box uses the single-rate method
and allocates common costs based on the time on the network?

A. $10.98.
B. $10.00.
C. $8.00.
D. $7.14.

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Time on

Large 100,000 120,000
Small 80,000 330,000
The cost accountant determined $2,700,000 of the communication network's costs were fixed and should
be allocated based on the number of calls. The remaining costs should be allocated based on the time on the
network. What is the total communication network costs allocated to the Large Box Division, assuming the
company uses dual-rates to allocate common costs?

A. $2,700,000.
B. $2,520,000.
C. $1,980,000.
D. $1,500,000.

Time on

Large 100,000 120,000
Small 80,000 330,000
be allocated based on the number of calls. The remaining costs should be allocated based on the time on the
network. What is total communication network costs allocated to the Small Box Division, assuming the

A. $2,520,000.
B. $1,800,000.
C. $1,320,000.
D. $1,200,000.

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80. The Copy Department in the College of Business at State University provides photocopying service for
both the Marketing and Economics Department. The following budget has been prepared for the year.
Available capacity 6,000,000 pages

Budgeted usage:
Marketing 3,600,000 pages
Economics 1,800,000 pages
Cost equation $120,000 + $0.025 per page
If the Copy Department uses a dual rate for allocating its costs based on usage, how much cost will be
allocated to the Marketing Department?

A. $85,000.
B. $90,000.
C. $150,000.
D. $170,000.


Budgeted usage:
allocated to the Economics Department?

A. $85,000.
B. $90,000.
C. $105,000.
D. $120,000.

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Budgeted usage:
If the Copy Department uses a dual-rate for allocating its costs, how much cost will be allocated to the
Economics Department, assuming the Economics Department actually made 2,100,000 copies during the
year?

A. $85,000.
B. $92,500.
C. $132,500.
D. $112,500.


Budgeted usage:
Marketing Department, assuming the Marketing Department actually made 3,000,000 copies during the
year?

A. $135,000.
B. $150,000.
C. $155,000.
D. $170,000.

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Budgeted usage:
Economics Department, assuming the Economics Department actually made 1,500,000 copies during the
year?

A. $77,500.
B. $92,500.
C. $132,500.
D. $112,500.


Budgeted usage:
year?

A. $135,000.
B. $150,000.
C. $155,000.
D. $175,000.

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86. Mesa Telcom has three divisions, commercial, retail, and consumer, that share the common costs of the
company's computer server network. The annual common costs are $2,400,000. You have been provided
Time on

Connections Network (hours)
Commercial 60,000 120,000
Retail 80,000 150,000
Consumer 100,000 330,000
What is the allocation rate for the upcoming year, assuming Mesa Telcom uses the single-rate method and
allocates common costs based on the number of connections?

A. $10.00.
B. $15.00.
C. $20.00.
D. $40.00.

Time on

Retail 80,000 150,000
Consumer 100,000 330,000
Mesa Telcom uses the single rate method and allocates common costs based on the number of connections.
What is the total computer server network cost allocated to the Commercial Division?

A. $480,000.
B. $514,286.
C. $600,000.
D. $1,200,000.

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Time on

Retail 80,000 150,000
Consumer 100,000 330,000
What is the allocation rate for the upcoming year, assuming Mesa Telcom uses the single-rate method and
allocates common costs based on the time on the network?

A. $20.00.
B. $16.00.
C. $4.00.
D. $2.86.

Time on

Retail 80,000 150,000
Consumer 100,000 330,000
Mesa Telcom uses the single rate method and allocates common costs based on the time on the network.
What is the total computer server network cost allocated to the Retail Division?

A. $429,000.
B. $600,000.
C. $657,800.
D. $3,000,000.

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Time on

Retail 80,000 150,000
Consumer 100,000 330,000
The cost accountant determined $1,700,000 of the server network's costs were fixed and should be
allocated based on the number of connections. The remaining costs should be allocated based on the time
on the network. What is the total server network costs allocated to the Commercial Division, assuming the

A. $514,286.
B. $480,000.
C. $600,000.
D. $565,000.

Time on

Retail 80,000 150,000
Consumer 100,000 330,000
on the network. What is total server network costs allocated to the Retail Division, assuming the company
uses dual-rates to allocate common costs?

A. $741,667.
B. $657,143.
C. $425,000.
D. $211,765.

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Time on

Retail 80,000 150,000
Consumer 100,000 330,000
on the network. What is total server network costs allocated to the Consumer Division, assuming the

A. $1,200,000.
B. $1,093,333.
C. $954,896.
D. $750,000.

93. The Document Creation Center (DCC) for Arlington Corp. provides photocopying and document services
for three departments in the Minneapolis office. The following budget has been prepared for the year.

Budgeted usage:
Software Development 1,600,000 pages
Training 3,000,000 pages
Management 2,400,000 pages
If DCC uses a dual rate for allocating its costs based on usage, how much cost will be allocated to the
Software Development Department?

A. $98,000.
B. $104,000.
C. $112,000.
D. $118,857.

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Budgeted usage:
Training Department?

A. $183,750.
B. $210,000.
C. $195,000.
D. $222,857.


Budgeted usage:
Management Department?

A. $168,000.
B. $156,000.
C. $178,286.
D. $147,000.

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Budgeted usage:
If DCC uses a dual-rate for allocating its costs, how much cost will be allocated to the Management
Department, assuming the Management Department actually made 2,100,000 copies during the year?

A. $147,000.
B. $136,500.
C. $159,000.
D. $150,761.


Budgeted usage:

A. $184,500.
B. $191,750.
C. $211,783.
D. $206,500.

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Budgeted usage:
If DCC uses a dual-rate for allocating its costs, how much cost will be allocated to the Training
Department, assuming the Training Department actually made 3,250,000 copies during the year?

A. $227,500.
B. $211,250.
C. $217,500.
D. $223,017.


Budgeted usage:

A. $180,050.
B. $190,079.
C. $193,900.
D. $203,100.

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Budgeted usage:
If DCC uses a dual-rate for allocating its costs, how much cost will be allocated to the Software
Development Department, assuming the Software Development Department actually made 1,160,000
copies during the year?

A. $75,400.
B. $98,800.
C. $81,200.
D. $84,312.


Budgeted usage:

A. $117,400.
B. $115,700.
C. $124,600.
D. $129,376.

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102. Darren Corporation's Maintenance Department provides services to the company's two operating divisions
- the Paints Division and the Stains Division. The variable costs of the Maintenance Department are
budgeted based on the number of cases produced by the operating departments. The fixed costs of the
Maintenance Department are budgeted based on the number of cases produced by the operating
departments during the peak period. Data appear below:
Maintenance Department:
Budgeted variable cost $2 per case
Budgeted total fixed cost $830,000
Paints Division:
Percentage of peak period capacity
30%
required
Actual cases 20,000
Stains Division:
70%
required
Actual cases 63,000
For performance evaluation purposes, how much Maintenance Department cost should be charged to the
Paints Division at the end of the year?

A. $298,800.
B. $498,000.
C. $289,000.
D. $240,000.

103. The fixed costs of Black Company's personnel department are allocated to operating departments on the
basis of direct labor-hours. The following data have been provided:
Operating

Department
X Y
Direct labor-hours - Long-run
15,000 10,000
average
Direct labor-hours - Actual 10,000 6,000
The fixed costs of the personnel department are budgeted at $56,000 per year and are incurred in order to
support long-run average requirements. How much of this fixed cost should be charged to Operating
Department X at the end of the year for performance evaluation purposes?

A. $35,000.
B. $33,600.
C. $52,500.
D. $22,400.

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104. Poole Corporation's Maintenance Department provides services to the company's two operating divisions -
the Paints Division and the Stains Division. The variable costs of the Maintenance Department are
Maintenance Department are budgeted based on the number of cases produced by the operating
Actual total variable cost $322,504
Actual total fixed cost $561,490
Paints Division:
30%
required
Budgeted cases 15,000
Actual cases 15,040
Stains Division:
70%
required
Actual cases 46,980
For performance evaluation purposes, how much Maintenance Department cost should be charged to the
Stains Division at the end of the year?

A. $669,623.
B. $637,339.
C. $625,500.
D. $657,584.

105. Waterford Company maintains a cafeteria for its employees. For June, variable food costs were budgeted at
$45 per employee based on a budgeted level of 200 employees in other departments. During the month, an
average of 190 employees worked in other departments and actual food costs totaled $9,250. How much
food cost should be charged to the other departments at the end of the month for performance evaluation
purposes?

A. $9,000.
B. $9,250.
C. $8,550.
D. $9,737.

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106. Cost allocation of shared facilities cost is intended to remind managers of:

A. The cost of using a shared resource.

B. Both the cost and value of using shared resources.
C. How much capacity a firm has.
D. Why the firm invests in these facilities.

107. Dual allocation is a cost allocation approach that separates direct and indirect costs, tracing the direct costs
directly to the department that:

A. can bear the cost.

B. relates best to the cost.
C. is first identified with the cost.
D. caused the cost.

108. If a budgeted activity base is used as the base in cost allocation, each department's cost allocation will be
predictable, and not influenced by the:

A. actual total cost.

B. change in activity.
C. variations from budget.
D. actual usage in other departments.

109. The concepts of cost allocation that are used in manufacturing can also apply in:

A. service and not-for-profit industries.

B. service industries only.
C. not-for-profit industries only.
D. limited instances outside of manufacturing.

110. Which of the following is not one of the objectives of cost allocation?

A. Motivate managers to exert a high-level of effort.

B. Provide useful departmental and product costs.
C. Identify production constraints.
D. Provide the right incentive for managers to make decisions.

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111. Examples of pressures that can lead to financial fraud do not include:

A. unrealistic budgets.
B. inappropriate bonus plans.
C. overemphasis on long-term results.
D. overemphasis on short-term results.

112. Which one of the following firms is likely to experience dysfunctional motivation on the part of its
managers due to its allocation methods? (CMA adapted)

A. To allocate depreciation of forklifts used by workers at its central warehouse, Amir Electronics uses
predetermined amounts calculated on the basis of the long term average use of the services provided by
the warehouse to the various segments.
B. Seattle Electronics uses the sales revenue of its various divisions to allocate costs connected with the
upkeep of its headquarters building. It also uses ROI to evaluate the divisional performance.
C. Rose Industrial does not allow its service departments to pass on their cost overruns to production
departments.
D. Xi Enterprises' management information system (MIS) is operated out of headquarters and serves its
various divisions. Xi's allocation of MIS-related costs to its divisions is limited to costs the divisions
will incur if they were to outsource their MIS needs.

113. The Sarbanes-Oxley Act of 2002 requires that management of publicly traded companies:

A. use investment centers to evaluate top managers.

B. report on the adequacy of the company's internal controls over financial reporting.
C. compensate managers with fixed compensation plans only.
D. eliminate stock options for managerial compensation.

114. Which of the following is not an internal control?

A. Rotating personnel among tasks.

B. Separation of duties.
C. Setting limits on the amount of expenditures.
D. Using absolute performance standards.

115. Internal controls include all of the following except:

A. using contingent compensation plans.

B. requiring management authorization for the use of a company's assets.
C. reconciling various sets of books.
D. requiring employees to take vacations.

12-31
Essay Questions

12-32
116. Maryland Hotels operates a centralized call center for the reservation needs of its time-share units. Costs
associated with use of the center are charged to the time-share group (Luxury, Resort, Standard, and
Budget) where a reservation is made on the basis of time on a call. Idle time of the reservation agents, time
spent on calls where no reservation is made, and the fixed cost of the equipment are allocated on the
number of reservations made in each group. Due to recent increased competition in the time-share
business, the company has decided that it is necessary to more accurately allocate its costs to price its
services competitively and profitably. During the current period, the use of the call center for each group
was as follows (in thousands of seconds for time usage and in number of reservations):
Division Time Usage Number of Reservations

Luxury 750,000 50,000
Resort 1,250,000 100,000
Standard 2,000,000 300,000
Budget 1,500,000 250,000
During this period, the cost of the computer center amounted to $2,410,000 for personnel and $1,240,000
for equipment and other costs.
Required:
Determine the allocation to each of the divisions using (you may round all decimals to three places):
a. a single rate based on time used.
b. multiple rates based on time used (for personnel costs) and number of reservations (for equipment and
other cost).

12-33
117. Atlantic Resorts operates a centralized call center for the reservation needs of its time-share units. Costs
associated with use of the center are charged to the time-share group (Luxury, Standard, and Budget)
where a reservation is made on the basis of time spent on a call. Due to recent increased competition in the
time-share business, the company has decided that it is necessary to more accurately allocate its costs to
price its services competitively and profitably. During the current period, the use of the call center for each
group was as follows (in thousands of seconds for time usage and in number of reservations):
Number of
Division Time Usage Reservations
Luxury 500,000 50,000
Standard 2,000,000 300,000
Budget 1,500,000 250,000
During this period, the cost of the computer center amounted to $1,760,000 for personnel and $1,240,000
Required:
Determine the allocation to each of the divisions using (round all decimals to three places):
other cost).

12-34
118. Seaside Resorts operates a centralized call center for the reservation needs of its time-share units. Costs
associated with use of the center are charged to the time-share group (Luxury and Standard) where a
reservation is made on the basis of time spent on a call. Due to recent increased competition in the time-
share business, the company has decided that it is necessary to more accurately allocate its costs to price its
services competitively and profitably. During the current period, the use of the call center for each group
was as follows (in thousands of seconds for time usage and in number of reservations):

Luxury 500,000 50,000
Standard 2,000,000 300,000
During this period, the cost of the computer center amounted to $1,220,000 for personnel and $960,000
Required:
other cost).

12-35
119. The Document Creation Center (DCC) for Atlas Corp. provides document services for three departments in
the St. Louis office. The following budget has been prepared for the month.
Budgeted usage:
Software Development 160,000 pages
Training 300,000 pages
Management 340,000 pages
Required (use three decimal places in your calculations):
three user departments?

12-36
120. The legal department for Trump Corporation provides legal services for four departments in the Manhattan
office. The following budget has been prepared for the month.
Budgeted usage:
Purchasing 160 contracts
Marketing 200 contracts
Training 300 contracts
Management 340 contracts
Cost equation $167,500 + $50 per contract
If Trump uses a dual rate for allocating its costs based on usage, how much cost will be allocated to the
four user departments?

12-37
121. The Human Resources Department for Vargis Corp. provides personnel services for two departments in the
Kansas City office. The following budget has been prepared for the month.
Budgeted:
Production 860 employees
Management 140 employees
Cost equation $46,500 + $20 per employee
If Vargis uses a dual rate for allocating its costs based on employees, how much cost will be allocated to
the two departments?

12-38
122. The Document Creation Center (DCC) for Atlas Corp. provides document services for three departments in
the St. Louis office. The following budget has been prepared for the month.
Budgeted usage: Pages Documents

Software Development 320,000 2,500
Training 600,000 5,500
Management 480,000 6,000
Costs:
Fixed $63,000
Variable $35,000
If DCC uses a dual rate for allocating its costs; allocating fixed costs based on number of documents and
variable costs based on number of pages, how much cost will be allocated to the three user departments?

12-39
123. The legal department for Trump Corp. provides legal services for four departments in the Manhattan
Budgeted usage: Contracts Pages Reviewed

Purchasing 160 3,200
Marketing 200 7,200
Training 300 9,000
Management 240 2,400
Costs:
Fixed $267,000
Variable $105,000
If Trump uses a dual rate for allocating its costs, allocating fixed costs based on number of contracts and
variable costs based on number of pages reviewed, how much cost will be allocated to the four user
departments?

12-40
124. Waverley Services has three divisions, commercial, retail, and consumer, that share the common costs of
the company's computer server network. The annual common costs are $1,200,000. You have been
provided with the following information for the upcoming year:
Time on

Retail 40,000 150,000
Consumer 50,000 330,000
a. What is the allocation rate for the upcoming year assuming Waverley uses the single-rate method and
allocates common costs based on the number of connections? Calculate the allocated amount for each
division.
b. What is the allocation rate for the upcoming year assuming Waverley uses the single-rate method and
allocates common costs based on the time on network? Calculate the allocated amount for each division.
c. The cost accountant determined $850,000 of the server network's costs were fixed and should be
on the network. What is the total server network costs allocated to each division?

12-41
125. Collins Enterprises has four divisions, commercial, retail, research, and consumer, that share the common
costs of the company's computer server network. The annual common costs are $2,400,000. You have been
Time on

Retail 80,000 150,000
Research 40,000 100,000
Consumer 100,000 330,000
a. What is the allocation rate for the upcoming year assuming Collins uses the single-rate method and
division.
b. What is the allocation rate for the upcoming year assuming Collins uses the single-rate method and
c. The cost accountant determined $1,700,000 of the server network's costs were fixed and should be

12-42
126. Jamison Industries has three divisions, commercial, retail, and consumer, that share the common costs of
Time on

Retail 80,000 150,000
Consumer 100,000 330,000
a. What is the allocation rate for the upcoming year assuming Jamison uses the single-rate method and
division.
b. What is the allocation rate for the upcoming year assuming Jamison uses the single-rate method and

12-43
127. Markov Engineering has three divisions, commercial, retail, and consumer, that share the common costs of
Time on

Retail 80,000 150,000
Consumer 100,000 330,000

12-44
128. Sumner Corporation has four divisions, commercial, retail, research, and consumer, that share the common
Time on

Retail 90,000 150,000
Research 20,000 100,000
Consumer 100,000 330,000
a. What is the allocation rate for the upcoming year assuming Sumner uses the single-rate method and
b. What is the allocation rate for the upcoming year assuming Sumner uses the single-rate method and

12-45
129. Kingston Industries has four divisions, commercial, retail, research, and consumer, that share the common
Time on
Connections
Network (hours)
Retail 70,000 150,000
Research 20,000 70,000
Consumer 100,000 330,000
a. The cost accountant determined $2,300,000 of the server network's costs were fixed and should be

12-46
130. Roadways Enterprises has two divisions, Production and Support, that share the common costs of the
Time on

Production 200,000 240,000
Support 160,000 660,000
a. What is the allocation rate for the upcoming year assuming Roadways uses the single-rate method and
allocates common costs based on the number of calls? Calculate the costs allocated to each division.
b. What is the allocation rate for the upcoming year assuming Roadways uses the single-rate method and
allocates common costs based on the time on the network? Calculate the costs allocated to each division.
c. The cost accountant determined $2,700,000 of the communication network's costs were fixed and
should be allocated based on the number of calls. The remaining costs should be allocated based on the
time on the network. What is the total communication network costs allocated to each division?

12-47
131. Santa Fe Industries has two divisions, Marketing and Finance, that share the common costs of the
Time on

Marketing 50,000 120,000
Finance 40,000 330,000
a. What is the allocation rate for the upcoming year assuming Santa Fe uses the single-rate method and
b. What is the allocation rate for the upcoming year assuming Santa Fe uses the single-rate method and
allocates common costs based on the time on the network? Calculate the costs allocated to each division.

12-48
132. Talent Engineering has two divisions, Research and Sales, that share the common costs of the company's
communications network. The annual common costs are $2,250,000. You have been provided with the
following information for the upcoming year:
Time on

Research 50,000 60,000
Sales 40,000 165,000
be allocated based on the number of calls. The remaining costs should be allocated based on the time on
the network. What is the total communication network costs allocated to each division?

12-49
133. The Barton Creek Company has three client-contact departments: Market Research, Branding, and
Promotion. Each department requires the services of the Legal Department for the contracts that each
undertakes. The size of the Legal Department was based on long-run estimates of contracts. Information on
the Legal Department's budgeted and actual costs is as follows:
The budget for the Legal Department is $300,000 + $10/contract. The budgeted volume of contracts is as
follows:
Market Research 300

Branding 500
Promotion 700
The actual number of contracts for Market Research was 315, for Branding was 450, and for Promotion
was 720.
a. If a single charging rate based on budgeted usage is used, how much of the cost of the Legal
Department would be allocated to each of the producing departments?
b. If a dual charging rate is used, how much of the cost of the Legal Department would be allocated to
each of the producing departments

12-50
The budget for the Legal Department is $200,000 + $7.50/contract. The budgeted volume of contracts is as
follows:
Market Research 300

Branding 500
Promotion 700
was 675.

12-51
The budget for the Legal Department is $400,000 + $15/contract. The budgeted volume of contracts is as
follows:
Market Research 200

Branding 500
Promotion 800
was 820.

12-52
136. Seattle Corporation has two operating divisions - Inland Division and Coast Division. The company's
Customer Service Department provides services to both divisions. The variable costs of the Customer
Service Department are budgeted at $29 per order. The Customer Service Department's fixed costs are
budgeted at $381,600 for the year. The fixed costs of the Customer Service Department are determined
based on the peak period orders.
Percentage of Peak Period

Budgeted
Capacity Required
Orders
Inland
25% 1,500
Division
Coast
75% 5,700
Division
At the end of the year, actual Customer Service Department variable costs totaled $219,905 and fixed
costs totaled $383,860. The Inland Division had a total of 1,520 orders and the Coast Division had a total
of 5,690 orders for the year.
Required:
a. Prepare a report showing how much of the Customer Service Department's costs should be charged to
each of the operating divisions at the end of the year.
b. How much of the actual Customer Service Department costs should not be charged to the operating
divisions at the end of the year? Who should be held responsible for these uncharged costs?

12-53
137. Warehouse Services is a service department in the Vancouver Company, providing storage service to three
operating departments. The company charges the costs of this department to operating departments on the
basis of cubic feet occupied.
Last year, Warehouse Services budgeted variable storage cost of $0.15 per cubic foot occupied. The
budgeted total fixed cost was $120,000, and was determined by the long-term storage needs of the
operating departments. Actual storage space occupied during the year, along with long-term storage needs
of operating departments, is given below:
Operating Department
X Y Z
Long-term storage needs in
200,000 600,000 800,000
cubic feet
Actual storage space used 160,000 590,000 750,000
Actual variable storage costs amounted to $0.16 per cubic foot occupied. Actual fixed storage costs were
$123,000.
Required:
a. Compute the amount of variable storage cost that should be charged to each operating department at the
end of the year for performance evaluation purposes.
b. Compute the amount of fixed storage cost that should be charged to each operating department at the

12-54
138. Terrain, Inc. has a maintenance department that provides services to the company's two operating
departments. The variable costs of the maintenance department are charged on the basis of the number of
maintenance hours logged in each department. Last year, budgeted variable maintenance costs were $8.60
per maintenance hour and actual variable maintenance costs were $8.75 per maintenance hour.
The budgeted and actual maintenance hours for each operating department for last year appear below:
Operating Departments
A B
Budgeted maintenance hours 1,000 2,000
Actual maintenance hours 1,100 1,700
Required:
a. Compute the amount of variable maintenance department cost that should have been charged to each
operating department at the end of the year for performance evaluation purposes.
b. Compute the amount of actual variable maintenance department cost that should not have been charged
to the operating departments at the end of the year for performance evaluation purposes.

12-55
139. Layton Company operates a cafeteria for the benefit of its employees. The company subsidizes the
cafeteria heavily by allowing employees to purchase meals at greatly reduced prices. Budgeted and actual
costs in the cafeteria for the year just ended are as follows:
Budgeted Actual
Variable costs $500,000 $436,000
Fixed costs $340,000 $352,000
Costs of the cafeteria are charged to producing departments on the basis of the number of employees in
these departments. Fixed costs are charged on the basis of the peak-period number of employees. Data on
employees in the company's producing departments follows:
Machinin
Assembly Total
g
Budgeted number of
300 500 800
employees
Actual number of
200 400 600
employees
Peak-period number of
400 600 1,000
employees
Required:
a. Compute the dollar amount of variable and fixed costs that should be charged to each of the producing
departments at the end of the year for purposes of evaluating performance.
b. Identify the amount, if any, of actual costs that should not be charged to the operating departments.

12-56

140. The Sunset Corporation operates one central plant that has two divisions, the Flashlight Division and the
Night Light Division. The following data apply to the coming budget year.
Budgeted costs of operating the plant for 2,000 to 3,000

hours:
Fixed operating costs per
$900,000
year
Variable operating costs $1,200 per hour
Budgeted long-run usage per

year:
Flashlight Division 2,000 hours
Night Light Division 500 hours
Practical capacity 3,000 hours
Assume that practical capacity is used to calculate the allocation rates. Actual usage for the year by the
Flashlight Division was 1,400 hours and by the Night Light Division was 600 hours.
Required:
1. If a single-rate cost-allocation method is used, what amount of cost will be allocated to the Flashlight
Division? Assume actual usage is used to allocate operating costs.
2. If a dual-rate cost-allocation method is used, what amount of operating costs will be budgeted for the
Night Light Division?
3. If a dual-rate cost-allocation method is used, what amount of cost will be allocated to the Night Light
Division? Assume budgeted usage is used to allocate fixed operating costs and actual usage is used to
allocate variable operating costs.

12-57
141. Smash Burgers is a fast-food restaurant that sells vegetarian burgers and hot dogs in a 1950s 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 either the burgers or the hot dogs. The
following information is provided for the operations of the company:
Burgers Hot Dogs

Sales for January 4,000 2,400
Sales for February 6,400 2,400
Required:
a. What amount of fixed operating costs is assigned to the burgers and hot dogs when actual sales are used
as the allocation base for January? For February?
b. Hot dog sales for January and February remained constant. Did the amount of fixed operating costs
allocated to hot dogs also remain constant for January and February? Explain why or why not. Comment
on any other observations.

12-58
142. Cost allocation bases are factors that cost management analysts use to assign indirect costs to cost objects.
Ideally, cost-allocation bases should reflect a cause-and-effect relationship between resource spending and
use. Ideally, an Activity-Based-Costing (ABC) approach will provide a more accurate and useful
accounting for an organization's resources. Recent studies have found that, in spite of increasing costs and
diminishing resources, very few Higher Education Institutions use the tools and techniques of an ABC cost
allocation system to assign costs to academic departments. While direct costs, such as faculty salaries, are
traceable to individual academic departments or courses, many indirect costs, such as facility use,
computer use, and student support services, are more difficult to assign. In a traditional approach, many
higher education institutions assign such costs based on a single factor, such as the number of courses
taught in the university. (Source: Activity-Based Costing for Higher Education Institutions, Management
Accounting Quarterly, Winter, 2001)
Required:
(a) Explain why the use of a single-cost driver such as the number of courses may result in inaccurate
management information as to the cost of running courses in individual academic departments.
(b) For each of the indirect costs listed below, identify an appropriate cost-driver that might be used to
allocate costs to determine the cost of offering a single course in an academic department if an Activity-
Based-Costing model were used.
• Computer use
• Facility use
• Student services
• Course design
• Lecturing/class meeting time
• Assignment grading

12-59
143. Affordable Credit Checks produces two styles of credit reports: personal and corporate. The difference
between the two is the amount of background information and data collection required. The corporate
report uses more skilled personnel because additional checking and data are required. The relevant figures
for the year just completed follow: Total support service costs to be allocated are $3,200,000.
Allocation base Individual Corporate

Data purchased $40,000 $80,000
Research hours 24,000 30,000
Interview hours 1,000 10,000
Number of reports 16,000 3,000
Required:
(a) Which method would be preferred by each manager? Which method would be least preferred?
(b) Provide arguments that each manager would make for his/her preferred method. How would each
manager argue against his/her least preferred method?

12-60
144. Rainier Company has a purchasing department that provides services to two factories located in
Carbondale and the other in Peoria. Budgeted costs for the purchasing department consist of $55,000 per
year of fixed costs and $8 per purchase order for variable costs. The level of budgeted fixed costs is
determined by the peak-period requirements. The Carbondale factory requires 40% of the peak-period
capacity and the Peoria factory requires 60%.
During the coming year, 1,800 purchase orders were processed for the Carbondale factory and 2,700
purchase orders for the Peoria factory.
Required:
Compute the amount of purchasing department cost that should be charged to each factory for the year.

12-61
145. Koski Corporation's Maintenance Department provides services to the company's two operating divisions -
the Paints Division and the Stains Division. The variable costs of the Maintenance Department are
Maintenance Department are determined based on the number of cases produced by the operating
Paints Division:
40%
required
Actual cases 26,010
Stains Division:
60%
required
Actual cases 60,980
Required:
a. Prepare a report showing how much of the Maintenance Department's costs should be charged to each
of the operating divisions at the end of the year.
b. How much of the actual Maintenance Department costs should not be charged to the operating divisions
at the end of the year? Who should be held responsible for these uncharged costs?

12-62
146. Decentralization is the delegation of decision-making authority to subordinates in the organization's name.
A key part of this is the principal-agent relationship. Explain what this relationship is and give examples.

147. Describe five advantages of decentralization.

148. Describe two disadvantages of decentralization.

12-63
149. Logistics Services Company has recently expanded by acquiring two smaller companies in the
transportation industry. Prior to these acquisitions, Logistics Services used a centralized style of
organization because it was small enough that the top management team was heavily involved in the day-
to-day activities of the firm. Ms. Trane, the CEO, feels that this style is no longer suitable for the larger,
more diverse organization.
She has hired a consultant to help her and her management team create a new structure which, when
developed on paper, will be described to the affected employees and their inputs will be sought. Since no
one in the company knows much about management styles, Ms. Trane felt this would be an efficient way
to get the ball rolling, but realized the consultants would not have the specialized knowledge about her
company and the two acquisitions.
One of the first things she feels she will need to do is to explain the benefits of decentralization that will
accrue to both the company and the affected employees.
Required:
Ms. Trane has asked you, as the consultant, to provide her with a general list of advantages of
decentralization that she will tailor to her company before presenting it to the executives and other affected
employees.

12-64
150. Langsam, Inc. has used a decentralized form of organizational structure for the past five years. The
controller, Ms. Terrance, has noticed that some of the divisions are still using fixed assets that are fully
depreciated and that there has been little acquisition activity in these divisions. Coupled with this are very
high ROIs, especially when compared to the other divisions that seem to have a regular program of
disposition and replacement of fixed assets.
She takes her concerns and observations to the Financial Vice President who says he will review her
findings and look into the problem.
Required:
1) What are the potential negative effects of decentralization?

2) Specifically discuss the issues involved in suboptimization.

151. Describe the three main elements of a management control system.

152. Describe the five basic types of decentralized units in responsibility accounting.

12-65
153. There are five common types of responsibility centers listed below.
Required:
Briefly describe each of the following terms and provide an example of each term.
(a) Cost Center

(b) Discretionary Cost Center
(c) Revenue Center
(d) Profit Center
(e) Investment Center

154. Explain the difference between fixed compensation and contingent compensation. Give an example of
each.

12-66
155. The order entry department of Dano Associated Industries is considering improvements in the order entry
process, which includes preparing quotations based on customers' requests (via the sales representative)
and processing orders received from customers.
A typical sequence of events might begin with a sales representative meeting with a customer to discuss
the type of system desired. The sales representative then fills out a paper form and faxes it or phones it in
to an order entry associate, who might make several subsequent phone calls to the sales representative, the
potential customer, or the manufacturing department to prepare the quote properly. These phone calls deal
with such questions as exchangeability of parts, part numbers, current prices for parts, or allowable sales
discounts. Order entry staff then keys in the configuration of the desired system, including part numbers,
and informs the sales representative of the quoted price. Each quote is assigned a quotation number. To
smooth production, manufacturing often produces systems with standard configurations in anticipation of
obtaining orders from recent quotes for systems. The systems usually involve adding on special features to
the standard configuration. Production in advance of orders sometimes results in duplication in
manufacturing, however, because customers often fail to put the assigned quotation numbers on their
orders. When order entry receives an order, the information on the order is reentered into the computer to
produce an order acknowledgement. This order acknowledgement is sent to the manufacturing department,
which produces the system ordered by customer. When the order acknowledgement is sent to the invoicing
department, the information is reviewed again to generate an invoice to send to the customer.
Enrique Ramos, the order entry manager, has received many complaints from the order entry department's
internal customers regarding quality and timeliness problems, and is considering ways to improve the
efficiency and quality of the order entry process.
Required:
(a) Develop some indicators that Ramos could use to assess the performance of the order entry process.
(b) List four possible errors that might be found in the quote and/or the order acknowledgement (i.e., the
outputs of the order entry process).
(c) What do you think are the likely causes of delays and quality problems?

12-67
156. Vargas, Inc. is just starting up. The management team has decided from the beginning that decentralization
was the preferred organizational style and has made this clear in all interviews and discussions with
potential employees. Mr. Ross, the CEO, is unsure about the best way to evaluate his division managers.
He has heard the terms return on investment, residual income, economic value added, and flexible budgets
but wants to know the pros and cons of each.
Required:
Briefly describe ROI, residual income, EVA, and other approaches to performance evaluation. Discuss,
where appropriate, how to calculate the measure and problem areas in the development of some of the
numbers.

157. The executive vice president of Wyse Pen Company wants to establish an accounting-based performance
measurement system for the company's new plant. The company has an accounting information system
sufficient to support a fairly sophisticated performance measurement system. The new plant is going to be
considered an investment center since its products will be markedly different from others the company
currently sells. The new plant will have no internal dealings with other plants within the company.
Required:
What are some of the key steps that should be undertaken in the establishment of an accounting-based
performance measurement system?

12-68
158. The manager of a business unit of a large corporation made some projections regarding sales and profits
for the upcoming final quarter of the year. The managers' performance evaluation and compensation
depended significantly on his ability to meet budget goals. The manager discovered that the final quarter
would have to be a particularly good quarter in order to meet these goals. He decided to implement a sales
program offering liberal payment terms in order to pull some sales that would normally occur next year
into the current year. Customers accepting delivery in the fourth quarter would not have to pay the invoice
for 140 days. Also, he sold some equipment that was not being used and realized a significant profit on the
sale.
Required:
Are these actions ethical? Why or why not?

159. The controller of one division of a large diversified firm is compensated by salary plus bonus. The bonus is
a significant part of total compensation, and is based directly on the profits of the division. Thus, the
controller has an incentive to find ways to increase profits, including the delay of discretionary expenses
such as research and development, delay of maintenance and repair of manufacturing equipment, and delay
of sales promotions.
Required:
Is finding ways to increase profits as described above unethical? Why or why not? Who is to blame, if
anyone?

12-69
160. How does the separation of duties help prevent financial fraud?

12-70
161. The fixed costs of operating the maintenance facility of Indian River Hospital are $4,500,000 annually.
Variable costs are incurred at the rate of $30 per maintenance-hour. The facility averages 40,000
maintenance-hours a year. Budgeted and actual hours per user for 20X3 are as follows:
Budgeted Actual

hours hours
Building and grounds 10,000 12,000
Operating and emergency 8,000 8,000
Patient care 21,000 22,000
Administration 1,000 1,200
Total 40,000 43,200
Assume that budgeted maintenance-hours are used to calculate the allocation rates.
Required:
a. If a single-rate cost-allocation method is used, what amount of maintenance cost will be budgeted for
each department?
b. If a single-rate cost-allocation method is used, what amount of maintenance cost will be allocated to
each department based on actual usage? Based on budgeted usage?
c. If a dual-rate cost-allocation method is used, what amount of maintenance cost will be budgeted for
each department?
d. If a dual-rate cost-allocation method is used, what amount of maintenance cost will be allocated to each
department based on actual usage? Based on budgeted usage for fixed operating costs and actual usage for
variable operating costs?

12-71

12-72
162. The Michael Vamosi Corporation operates one central plant that has two divisions, the Lamp Division and
the Flashlight Division. The following data apply to the coming budget year:
Budgeted costs of the operating

the plant
for 10,000 to 20,000 hours:
Fixed operating costs per year $240,000
Variable operating costs $10 per hour
hours per
Practical capacity 20,000
year
Budgeted long-run

usage per year:
800 hours × 12 hours per
Lamp Division 9,600
months = year
Flashlight Division 5,400
months = year
Assume that practical capacity is used to calculate the allocation rates. Further assume that actual usage of
the Lamp Division was 700 hours and the Flashlight Division was 400 hours for the month of June.
Required:
a. If a single-rate cost-allocation method is used, what amount of operating costs will be budgeted for the
Lamp Division each month? For the Flashlight Division each month?
b. For the month of June, if a single-rate cost-allocation method is used, what amount of cost will be
allocated to the Lamp Division? To the Flashlight Division? Assume actual usage is used to allocate
operating costs.
c. If a dual-rate cost-allocation method is used, what amount of operating costs will be budgeted for the
d. For the month of June, if a dual-rate cost-allocation method is used, what amount of cost will be
allocated to the Lamp Division? To the Flashlight Division? Assume budgeted usage is used to allocate
fixed operating costs and actual usage is used to allocate variable operating costs.

12-73
Chapter 12 Fundamentals of Management Control Systems Answer Key
True / False Questions

1. The design and use of management control systems affects how an individual makes and implements
decisions.

TRUE
Control systems influence behavior.

AACSB: Analytical Thinking
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 12-01 Explain the role of a management control system.
Topic: Why a Management Control System?

2. In general, there is a direct relationship between the quality of the information provided to managers and
the quality of decisions made using that information.

TRUE
Normally, the better the information, the higher the quality of the decision.

Blooms: Remember
Gradable: automatic

3. Rational managers will always make decisions that are in the best interest of the organization employing
them.

FALSE
Rational managers will often make decisions that are in their best personal interest.

12-74
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

4. Decentralization is the delegation of the authority to make decisions in the organization's name to
subordinates.

TRUE
This is the definition of decentralization.

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 12-02 Identify the advantages and disadvantages of decentralization.
Topic: Decentralized Organizations

5. In general, organizations are more centralized in the early stages of their existence and more
decentralized as they grow.

TRUE
Decentralization normally is the result of growth.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

6. One advantage of decentralization is faster response time to changes in the organization's environment
by local managers.

TRUE
Local managers have the authority to make decisions, so the response time is faster.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
12-75

7. One advantage of centralization is better use of top management's time on strategic decisions.

FALSE
In a centralized system, top management is required to make many operating decisions, so there is less
time for strategic decision making.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

8. Properly developed and implemented management control systems influence subordinates to act in the
organization's best interest.

TRUE
A properly designed system will promote goal congruence.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 12-03 Describe and explain the basic framework for management control systems.
Topic: Framework for Evaluating Management Control Systems

9. Delegated decision authority is the specification of what decisions a subordinate can make in the
organization.

TRUE
Authority defines what a person can and cannot do.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

12-76
10. It is important to not consider an organization's compensation and reward system when designing its
performance evaluation system.

FALSE
It is important to consider the system.

Blooms: Remember
Gradable: automatic

11. Managers in a cost center are held responsible for both the costs and volumes of inputs used to produce
a product or provide a service.

TRUE
The manager does not have control over the price of the output, or authority over it.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 12-04 Explain the relation between organization structure and responsibility centers.
Topic: Measuring Performance

12. In general, profit centers are found at higher levels in an organization than investment centers.

FALSE
Investment centers are found at higher levels.

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic

12-77
13. Properly designed management control systems can totally eliminate the inherent conflict between
individual behavior and organizational goals.

FALSE
Conflict cannot be totally eliminated.

Blooms: Remember
Difficulty: 3 Hard
Gradable: automatic
Topic: Delegated Decision Authority: Responsibility Accounting

14. There is no single accounting measure that can fully measure the performance of a profit or investment
center.

TRUE
There is no one single perfect measure.

Blooms: Remember
Gradable: automatic

15. Fixed compensation is generally not linked to measured performance; i.e., it is independent of measured
performance.

TRUE
Contingent compensation is linked with performance.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 12-05 Understand how managers evaluate performance.
Topic: Compensation Systems

12-78
16. Properly designed management control systems have both fixed compensation and contingent
compensation.

TRUE
If contingent is too small there is not enough incentive, if the proportion of contingent is too high there
is too much risk.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

17. Cost allocations based on dual rates assume that a common cost can be separated into a fixed and
variable component.

TRUE
The dual refers to fixed and variable.

Blooms: Remember
Gradable: automatic
Learning Objective: 12-06 Analyze the effect of dual- versus single-rate allocation systems.
Topic: Illustration: Corporate Cost Allocation

18. The primary reason to use a dual rate allocation system is to focus a manager's performance evaluation
on factors under the manager's direct control.

TRUE
The allocation reflects the cost behavior.

Blooms: Remember
Difficulty: 3 Hard
Gradable: automatic

12-79
19. It is possible for performance evaluation systems and/or management control systems to contribute to
unethical or fraudulent behavior.

TRUE
Systems do not guarantee ethical behavior.

Blooms: Remember
Gradable: automatic
Learning Objective: 12-07 Understand the potential link between incentives and illegal or unethical behavior.
Topic: Do Performance Evaluation Systems Create Incentives to Commit Fraud?

20. Properly designed management control systems will eliminate fraudulent behavior by maximizing goal
congruence within the organization.

FALSE
Fraud cannot be eliminated by control systems, it can only be reduced.

Blooms: Remember
Gradable: automatic

21. One of the key internal controls for any organization is segregation of duties.

TRUE
A key internal control in any organization is separation of duties.

Blooms: Remember
Gradable: automatic
Learning Objective: 12-08 Understand how internal controls can help protect assets.
Topic: Internal Controls to Protect Assets and Provide Quality Information

12-80
22. Internal controls are not legally required for publicly traded companies.

FALSE
Internal controls are not just good business practice but also legally required for publicly traded
companies.

Blooms: Remember
Gradable: automatic

Multiple Choice Questions

23. The design and use of management control systems uses concepts from which of the following
disciplines?

A. demography
B. economics
C. trigonometry
D. physics
The design and use of management control systems uses concepts from human and organizational
behavior as well as accounting and economics.

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic

12-81
24. What is the purpose of the management control system?

A. To align more closely the interests of the manager and the interests of the organization.
B. To allow individuals to obtain business experience.
C. To define the performance measures for employees.
D. To focus on the well-being of employees.
The purpose of the management control system is to align more closely the interest of the manager and
the interest of the organization.

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic

25. Which of the following correctly defines a principal-agent relationship?

A. The relationship between a superior and a subordinate.

B. The relationship between two superiors.
C. The relationship between two subordinates.
D. The relationship between a supervisor and a subversive.
The principal-agent relationship is defined as the relationship between a superior and a subordinate.

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic

26. What is the primary managerial responsibility in an organization?

A. development of employees.

B. development of profits.
C. decision making.
D. development of performance measurements.
The primary managerial responsibility in an organization is decision making.

12-82
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic

27. Which of the following would be considered a principal in the principal-agent relationship?

A. A stockbroker in an investment arrangement.

B. A real estate agent for someone buying a house.
C. A customer leasing a car.
D. An employer hiring an employee.
The principal is the superior; in these choices, the employer hiring an employee is the superior offering
a job to an agent or employee.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

28. Which of the following statements is(are) true regarding managerial decisions?
(A) The design and use of management control systems affects how an individual makes and
implements decisions.
(B) Rational managers will always make decisions that are in the best interest of the organization
employing them.

A. Only A is true.

B. Only B is true.
Rational managers will not always make the best decisions for the organization.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

12-83
29. Decentralization refers to the delegation of decision-making authority to:

A. top management.

B. superiors.
C. board of directors.
D. subordinates.
Delegation is to the subordinates; delegation is from the superiors/top management.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

30. Which of the following is not a characteristic of a decentralized organization?

A. Better use of local knowledge.

B. Better use of top management's time.
C. Reduced response time to environmental changes.
D. More decisions made by relatively few individuals.
Decisions are made by more individuals, not fewer, under decentralization.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

31. Which of the following statements is false?

A. The U.S. military is a good example of an organization that is highly decentralized.
B. The degree of decentralization depends on how many decisions principals delegate to agents.
C. Management control systems are used to measure the performance of an agent's decisions.
D. Most organizations have some operating units that are centralized and some that are decentralized.
The U.S. military is a centralized organization.

12-84
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

32. Which of the following is not a cost of decentralization?

A. Managers in a decentralized organization might have a narrow focus on their own unit's
performance rather than the attainment of their organization's overall goals.
B. Managers might have a tendency to ignore the consequences of their actions on the organization's
other subunits.
C. Delegating decision making to the lowest level possible enables an organization to respond in a
timely way to opportunities and problems.
D. Both A and B.
Local managers can react to a changing environment more quickly than top management can.

AACSB: Reflective Thinking
AICPA: FN Measurement
AICPA: FN Reporting
Blooms: Remember
Difficulty: 3 Hard
Gradable: automatic

33. Which one of the following will not occur in an organization that gives managers throughout the
organization maximum freedom to make decisions? (CMA adapted)

A. More effective solutions to operational problems.

B. Individual managers regarding the managers of other segments as they do external parties.
C. Two divisions of the organization having competing models that aim for the same market segments.
D. Delays in securing approval for the introduction of new products.
Decentralization implies fewer approvals.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

12-85
34. ____________ is the delegation of decision-making authority to lower management levels within the
organization.

A. Transfer pricing

B. Centralization
C. Decentralization
D. Goal congruence
Delegation of decision-making is a basic tenant of decentralization.

AICPA: FN Reporting
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

35. Which of the following is not a benefit of decentralization?

A. Allowing managers some autonomy in decision making provides managerial training for future
higher-level managers.
B. In a decentralized organization some tasks or services may be duplicated unnecessarily.
C. Managers with some decision-making authority usually exhibit greater motivation than those who
D. Managers of the organization's subunits are specialists, thereby enabling them to manage their
departments most effectively.
Some duplication is a basic disadvantage of decentralization.

AICPA: FN Reporting
Blooms: Remember
Difficulty: 3 Hard
Gradable: automatic

12-86
36. Which of the following statements is true regarding decentralization?

A. Decentralization increases the complexity of problems.

B. Managers in a decentralized organization have less knowledge about local business advantages.
C. Decentralization limits fast responses to business changes.
D. Decentralization allows managers to receive on-the-job training in decision making.
Decentralization allows managers to receive on-the-job training in decision making.

AICPA: FN Reporting
Blooms: Remember
Difficulty: 3 Hard
Gradable: automatic

37. What does dysfunctional decision making refer to?

A. Administrative duplication.

B. Local managers making decisions in their interests, which can differ from those of the organization.
C. Delegated decision authority.
D. Poor decisions based on incomplete information.
Dysfunctional decision making refers to decisions made in the interests of local managers that are not in
the interests of the organization.

AICPA: FN Reporting
Blooms: Remember
Gradable: automatic

12-87
38. Which of the following elements is not part of a management control system?

A. Delegated decision authority.

B. Performance evaluation system.
C. Knowledge of local conditions.
D. Compensation and reward system.
Knowledge of local conditions is an advantage of a decentralized organization, not an element of

management control.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

39. An operating unit of an organization is called a cost center if it is responsible:

A. only for costs.

This is the definition of a cost center.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

40. An operating unit of an organization is called an investment center if it is responsible:

A. only for costs.

This is the definition of an investment center.

12-88
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

41. An operating unit of an organization is called a revenue center if it is responsible:

A. only for costs.

This is the definition of a revenue center.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

42. An operating unit of an organization is called a profit center if it is responsible:

A. only for costs.

This is the definition of a profit center.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

12-89
43. An operating unit that is responsible for revenues and costs is commonly referred to as a(n):

A. expense center.

B. revenue center.
C. profit center.
D. asset center.
Revenues - costs = profit.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

44. An operating unit that is responsible for revenues only is commonly referred to as a(n):

A. expense center.

B. revenue center.
C. profit center.
D. asset center.
This is the definition of a revenue center.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

45. An operating unit that is responsible for only costs is commonly referred to as a(n):

A. cost center.

B. revenue center.
C. profit center.
D. asset center.
This is the definition of a cost center.

12-90
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

46. When managers are held responsible for costs but the input-output relationship is not well specified,
a(n) ________________________ is established.


B. revenue center
D. asset center
Key is input-output not well established.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

47. When managers are held responsible for costs and the input-output relationship is well specified, a(n)
________________________ is established.


B. revenue center
D. asset center
Key is the well specified input-output.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

12-91
48. Decentralized organizations can delegate authority and still maintain control and monitor managers'
performance by designing appropriate management control systems. Which of the following
responsibility centers would be evaluated similar to an independent business? (CMA, adapted)

A. Profit center.

B. Revenue center.
C. Investment center.
D. Discretionary cost center.
An investment center has authority over profits and can make asset decisions, just like an independent
business. The key is "asset decisions."

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic


A. Yes No
B. Yes Yes
C. No No
D. No Yes

A. Option A
B. Option B
C. Option C
D. Option D
Both are responsible for revenues and costs.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

12-92
Revenue Center Cost Center

A. Yes No
B. Yes Yes
C. No No
D. No Yes

A. Option A
B. Option B
C. Option C
D. Option D
Cost centers do not have authority over revenues.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic


Cost Center Profit Center
A. Yes No
B. Yes Yes
C. No No
D. No Yes

A. Option A
B. Option B
C. Option C
D. Option D
Profit centers have revenue authority, cost centers do not.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
12-93


A. Yes No
B. Yes Yes
C. No No
D. No Yes

A. Option A
B. Option B
C. Option C
D. Option D
Only investment centers have asset authority.

Blooms: Remember
Gradable: automatic

Profit Center Cost Center

A. Yes No
B. Yes Yes
C. No No
D. No Yes

A. Option A
B. Option B
C. Option C
D. Option D
Neither have asset authority.

12-94
Blooms: Remember
Gradable: automatic

54. A manager makes a decision that is beneficial for a specific investment center and for the entire
organization. From the organization's perspective, this decision results in:

A. goal congruence.

B. decentralization.
C. contingent compensation.
D. fixed compensation.
This is a definition of goal congruence.

Blooms: Remember
Gradable: automatic

55. Responsibility accounting defines an operating center that is responsible for revenue and costs as a(n):
(CMA adapted)

A. profit center.

B. revenue center.
C. division.
D. operating unit.
Revenues and costs = profit center.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

12-95
56. The least complex segment or area of responsibility for which costs are allocated is a(n): (CMA
adapted)

A. profit center.

B. investment center.
C. contribution center.
D. cost center.
Less complex implies less responsibility. Cost centers have the least responsibility.

Blooms: Apply
Gradable: automatic

57. Which of the following statements is(are) correct?
I. A profit center has control over both cost and revenue.

II. An investment center has control over invested funds, but not over costs and revenue.
III. A cost center has no control over sales.

A. Only I
B. Only
II
C. Only I and III
D. Only I and II
Investment centers combine both a measure of profit and a measure of asset usage.

Blooms: Remember
Gradable: automatic

12-96
58. The purpose of the Data Processing Department of Haslam Corporation is to assist the various
departments of the corporation with their information needs free of charge. The Data Processing
Department would best be evaluated as a(n):

A. cost center.

B. revenue center.
C. profit center.
D. investment center.
A data center creates expenses, not revenues.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

59. Which of the following departments would not be a cost center?

A. County fire department

B. University book store
C. University power plant
D. City building and grounds department
This is a profit center.

AICPA: FN Reporting
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

12-97
60. Which of the following subunits would most likely be considered a only cost center?

A. Jewelry department.

B. Parts department.
C. Legal department.
D. Electronics department.
This is a cost center, generating only expense.

AICPA: FN Reporting
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

61. A successful responsibility accounting reporting system is dependent upon (CMA adapted):

A. The correct allocation of controllable variable costs.

B. Identification of the management level at which all costs are controllable.
C. The proper delegation of responsibility and authority.
D. A reasonable separation of costs into their fixed and variable components since fixed costs are not
controllable and must be eliminated from the responsibility report.
A successful responsibility accounting system is tailored to an organizational structure so that costs and
revenues are reported at the level within the organization having the related responsibility.

AICPA: FN Reporting
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

12-98
62. The following is a summarized income statement for McClaron Manor Co.'s profit center 12608 for
April:

Contribution Margin $175,000
Period Expenses $11,000
Manager' s Salary $2,000
Corporate Expense Allocation $8,000 ($21,000)
$154,000
Which of the following amounts is most likely subject to the control of the profit center's manager?
(CPA, adapted)

A. Contribution Margin of $175,000.

B. Contribution Margin of $175,000 and Period Expenses of $11,000.
C. Contribution Margin of $175,000 and Period Expenses of $13,000.
D. Contribution Margin of $175,000 and Period Expenses of $21,000.
A profit center manager is responsible for revenue and expense of the product or service, but not for all
the period costs.

AICPA: FN Reporting
Blooms: Apply
Gradable: automatic

63. Revenue center and profit center managers are both responsible for meeting:

A. Budgeted income.

B. Budgeted costs.
C. Budgeted revenues.
D. Minimum return on investment as established by the company as a whole.
A revenue center, by definition, would only be responsible for revenue.

AICPA: FN Reporting
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
12-99

64. Which of the following subunits is most likely to be considered an investment center?

A. Accounting department.

B. Assembly department.
C. Petrochemical division.
D. Research and development department.
Managers of investment centers have responsibility for profits and investment in assets. These managers
have relatively large amounts of money with which to make capital budgeting and other decisions
affecting the use of assets.

AICPA: FN Reporting
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

65. The controllability concept states that managers should be held responsible for:

A. all items over which they have decision-making authority.

B. costs and revenues, but not investments in assets used in their division.
C. only items that are allocated to their divisions on a per-unit basis.
D. fixed compensation items, but not contingent compensation items.
This is the definition of controllability.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Topic: Evaluating Performance

12-100
66. Relative performance evaluations (RPE) are not designed to:

A. compare managers to other comparable managers.

B. compare divisions with other comparable divisions.
C. remove the effect of environmental factors that are beyond a manager's control.
D. restate departmental goals so meaningful comparisons can be made.
Goals are not restated. RPE defines what is being compared against.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

67. Which of the following items would be classified as a fixed compensation item?


C. Stock options.
D. Piece rates.
Salaries are fixed amounts, the other three vary.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

68. Which of the following items would not be classified as a contingent compensation item?


C. Stock options.
D. Piece rates.
Salaries are fixed amounts, the other three vary.

12-101
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

69. Which of the following statements is(are) true regarding compensation?
(A) Fixed compensation is generally not linked to measured performance; i.e., it is independent of
measured performance.
(B) Properly designed management control systems have contingent compensation items but not fixed
compensation items.

A. Only A is true.

B. Only B is true.
Both fixed and contingent compensation should be included.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

70. In responsibility accounting, a center's performance is measured by those costs which are controllable.
Controllable costs are best described as including: (CMA adapted)

A. direct materials and direct labor only.

B. only those costs that the manager can influence in the current period.
C. only discretionary costs.
D. those costs about which the manager is knowledgeable and informed.
A controllable cost is one that can be influenced.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

12-102
71. Banglor Manufacturing Corporation uses a responsibility accounting system in its operations. Which
one of the following items is least likely to appear in a performance report for a manager of one of
Banglor's assembly lines? (CMA adapted)

A. Direct labor.

B. Materials.
C. Repairs and maintenance.
D. Depreciation on the manufacturing facility.
An assembly line would be a cost center with no control over assets.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

72. When comparing performance report information for top management with that of lower-level
management: (CMA adapted)

A. top management reports are more detailed.

B. lower-level management reports are typically for longer time periods.
C. top management reports show control over fewer costs.
D. lower-level management reports are likely to contain more quantitative data and less financial data.
Top management reports are less detailed, long time period, and more financial oriented. Lower
management is more detailed, shorter time, and more operational.

Blooms: Apply
Gradable: automatic

12-103
73. Which of the following is considered a responsibility center?

A. Investment center.

B. Profit center.
C. Revenue center.
D. All are responsibility centers.
All three entities undergo performance evaluation by responsible managers.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

74. The use of dual rates in a cost allocation system assumes that common costs can be:

A. separated into their fixed and variable components.

B. traced directly to a specific division or manager.
C. allocated based on a physical quantities measure.
D. assigned to an investment responsibility center.
Dual allocation needs the fixed/variable breakdown.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

12-104
75. Which of the following statements is(are) false regarding the effective use of management control
systems?
(A) In general, single rate cost allocations should not be used in management control systems because
clear control over the cost being allocated cannot be determined.
(B) The primary reason to use a dual rate allocation system is to focus a manager's performance
evaluation on factors under the manager's direct control.

A. Only A is false.

B. Only B is false.
C. Both A and B are false.
D. Neither A nor B is false.
Both are true.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

company's communications network. The annual common costs are $4,500,000. You have been
Time on

Large 100,000 120,000
Small 80,000 330,000
What is the allocation rate for the upcoming year, assuming Barrington Box uses the single-rate method
and allocates common costs based on the number of calls?

A. $10.00.
B. $15.00.
C. $20.00.
D. $25.00.
[$4,500,000/(100,000 + 80,000)] = $25.00

Blooms: Apply
12-105
Difficulty: 1 Easy
Gradable: automatic

Time on

Large 100,000 120,000
Small 80,000 330,000
What is the allocation rate for the upcoming, year assuming Barrington Box uses the single-rate method

A. $10.98.
B. $10.00.
C. $8.00.
D. $7.14.
[$4,500,000/(120,000 + 330,000)] = $10.00

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

12-106

Time on

Large 100,000 120,000
Small 80,000 330,000
The cost accountant determined $2,700,000 of the communication network's costs were fixed and
time on the network. What is the total communication network costs allocated to the Large Box
Division, assuming the company uses dual-rates to allocate common costs?

A. $2,700,000.
B. $2,520,000.
C. $1,980,000.
D. $1,500,000.
(100,000/180,000 × $2,700,000) + (120,000/450,000 × $1,800,000) = $1,980,000

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

12-107
Time on

Large 100,000 120,000
Small 80,000 330,000
time on the network. What is total communication network costs allocated to the Small Box Division,
assuming the company uses dual-rates to allocate common costs?

A. $2,520,000.
B. $1,800,000.
C. $1,320,000.
D. $1,200,000.
(80,000/180,000 × $2,700,000) + (330,000/450,000 × $1,800,000) = $2,520,000

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

12-108

Budgeted usage:
allocated to the Marketing Department?

A. $85,000.
B. $90,000.
C. $150,000.
D. $170,000.
(3,600,000/5,400,000 × $120,000) + [$.025 × 3,600,000] = $170,000

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

12-109

Budgeted usage:
allocated to the Economics Department?

A. $85,000.
B. $90,000.
C. $105,000.
D. $120,000.
(1,800,000/5,400,000 × $120,000) + [$.025 × 1,800,000] = $85,000

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

12-110

Budgeted usage:
Economics Department, assuming the Economics Department actually made 2,100,000 copies during
the year?

A. $85,000.
B. $92,500.
C. $132,500.
D. $112,500.
(1,800,000/5,400,000 × $120,000) + [$.025 × 2,100,000] = $92,500

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

12-111

Budgeted usage:
year?

A. $135,000.
B. $150,000.
C. $155,000.
D. $170,000.
(3,600,000/5,400,000 × $120,000) + [$.025 × 3,000,000] = $155,000

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

12-112

Budgeted usage:
Economics Department, assuming the Economics Department actually made 1,500,000 copies during
the year?

A. $77,500.
B. $92,500.
C. $132,500.
D. $112,500.
(1,800,000/5,400,000 × $120,000) + [$.025 × 1,500,000] = $77,500

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

12-113

Budgeted usage:
year?

A. $135,000.
B. $150,000.
C. $155,000.
D. $175,000.
(3,600,000/5,400,000 × $120,000) + [$.025 × 3,800,000] = $175,000

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

12-114
company's computer server network. The annual common costs are $2,400,000. You have been
Time on

Retail 80,000 150,000
Consumer 100,000 330,000
What is the allocation rate for the upcoming year, assuming Mesa Telcom uses the single-rate method
and allocates common costs based on the number of connections?

A. $10.00.
B. $15.00.
C. $20.00.
D. $40.00.
[$2,400,000/(60,000 + 80,000 + 100,000)] = $10.00

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

12-115
Time on

Retail 80,000 150,000
Consumer 100,000 330,000
Mesa Telcom uses the single rate method and allocates common costs based on the number of
connections. What is the total computer server network cost allocated to the Commercial Division?

A. $480,000.
B. $514,286.
C. $600,000.
D. $1,200,000.
$10.00 × 60,000 = $600,000

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

12-116
Time on

Retail 80,000 150,000
Consumer 100,000 330,000
What is the allocation rate for the upcoming year, assuming Mesa Telcom uses the single-rate method

A. $20.00.
B. $16.00.
C. $4.00.
D. $2.86.
[$2,400,000/(120,000 + 150,000 + 330,000)] = $4.00

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

12-117
Time on

Retail 80,000 150,000
Consumer 100,000 330,000
Mesa Telcom uses the single rate method and allocates common costs based on the time on the network.
What is the total computer server network cost allocated to the Retail Division?

A. $429,000.
B. $600,000.
C. $657,800.
D. $3,000,000.
$4.00 × 150,000 = $600,000

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

12-118
Time on

Retail 80,000 150,000
Consumer 100,000 330,000
allocated based on the number of connections. The remaining costs should be allocated based on the
time on the network. What is the total server network costs allocated to the Commercial Division,
assuming the company uses dual-rates to allocate common costs?

A. $514,286.
B. $480,000.
C. $600,000.
D. $565,000.
(60,000/240,000 × $1,700,000) + (120,000 × ($700,000/600,000)) = $565,000

Blooms: Apply
Gradable: automatic

12-119
Time on

Retail 80,000 150,000
Consumer 100,000 330,000
time on the network. What is total server network costs allocated to the Retail Division, assuming the

A. $741,667.
B. $657,143.
C. $425,000.
D. $211,765.
(80,000/240,000 × $1,700,000) + (150,000 × ($700,000/600,000)) = $741,667

Blooms: Apply
Gradable: automatic

12-120
Time on

Retail 80,000 150,000
Consumer 100,000 330,000
time on the network. What is total server network costs allocated to the Consumer Division, assuming
the company uses dual-rates to allocate common costs?

A. $1,200,000.
B. $1,093,333.
C. $954,896.
D. $750,000.
(100,000/240,000 × $1,700,000) + (330,000 × ($700,000/600,000)) = $1,093,333

Blooms: Apply
Gradable: automatic

12-121
93. The Document Creation Center (DCC) for Arlington Corp. provides photocopying and document
services for three departments in the Minneapolis office. The following budget has been prepared for
the year.

Budgeted usage:
Software Development Department?

A. $98,000.
B. $104,000.
C. $112,000.
D. $118,857.
(1,600,000/7,000,000 × $280,000) + [$0.03 × 1,600,000] = $112,000

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

12-122
the year.

Budgeted usage:
Training Department?

A. $183,750.
B. $210,000.
C. $195,000.
D. $222,857.
(3,000,000/7,000,000 × $280,000) + [$0.03 × 3,000,000] = $210,000

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

12-123
the year.

Budgeted usage:
Management Department?

A. $168,000.
B. $156,000.
C. $178,286.
D. $147,000.
(2,400,000/7,000,000 × $280,000) + [$0.03 × 2,400,000] = $168,000

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

12-124
the year.

Budgeted usage:

A. $147,000.
B. $136,500.
C. $159,000.
D. $150,761.
(2,400,000/7,000,000 × $280,000) + [$0.03 × 2,100,000] = $159,000

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

12-125
the year.

Budgeted usage:

A. $184,500.
B. $191,750.
C. $211,783.
D. $206,500.
(2,400,000/7,000,000 × $280,000) + [$0.03 × 2,950,000] = $184,500

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

12-126
the year.

Budgeted usage:

A. $227,500.
B. $211,250.
C. $217,500.
D. $223,017.
(3,000,000/7,000,000 × $280,000) + [$0.03 × 3,250,000] = $217,500

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

12-127
the year.

Budgeted usage:

A. $180,050.
B. $190,079.
C. $193,900.
D. $203,100.
(3,000,000/7,000,000 × $280,000) + [$0.03 × 2,770,000] = $203,100

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

12-128
the year.

Budgeted usage:

A. $75,400.
B. $98,800.
C. $81,200.
D. $84,312.
(1,600,000/7,000,000 × $280,000) + [$0.03 × 1,160,000] = $98,800

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

12-129
the year.

Budgeted usage:

A. $117,400.
B. $115,700.
C. $124,600.
D. $129,376.
(1,600,000/7,000,000 × $280,000) + [$0.03 × 1,780,000] = $117,400

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

12-130
102. Darren Corporation's Maintenance Department provides services to the company's two operating
divisions - the Paints Division and the Stains Division. The variable costs of the Maintenance
Department are budgeted based on the number of cases produced by the operating departments. The
fixed costs of the Maintenance Department are budgeted based on the number of cases produced by the
operating departments during the peak period. Data appear below:
Paints Division:
30%
required
Actual cases 20,000
Stains Division:
70%
required
Actual cases 63,000
For performance evaluation purposes, how much Maintenance Department cost should be charged to
the Paints Division at the end of the year?

A. $298,800.
B. $498,000.
C. $289,000.
D. $240,000.
See calculations below.
Paints Division
Variable cost charges:
$2 per case × 20,000 cases $40,000
Fixed cost charges:
30% × $830,000 249,000
Total charges $289,000

Blooms: Apply
Gradable: automatic

12-131
103. The fixed costs of Black Company's personnel department are allocated to operating departments on the
basis of direct labor-hours. The following data have been provided:
Operating

Department
X Y
Direct labor-hours - Long-run
15,000 10,000
average
Direct labor-hours - Actual 10,000 6,000
The fixed costs of the personnel department are budgeted at $56,000 per year and are incurred in order
to support long-run average requirements. How much of this fixed cost should be charged to Operating
Department X at the end of the year for performance evaluation purposes?

A. $35,000.
B. $33,600.
C. $52,500.
D. $22,400.
$56,000 ÷ 25,000 = $2.24

$2.24 × 15,000 = $33,600

Blooms: Apply
Gradable: automatic

12-132
104. Poole Corporation's Maintenance Department provides services to the company's two operating
fixed costs of the Maintenance Department are budgeted based on the number of cases produced by the
operating departments during the peak period. Data appear below:
Paints Division:
30%
required
Actual cases 15,040
Stains Division:
70%
required
Actual cases 46,980
For performance evaluation purposes, how much Maintenance Department cost should be charged to
the Stains Division at the end of the year?

A. $669,623.
B. $637,339.
C. $625,500.
D. $657,584.
Stains Division
$5 per case × 46,980 cases $234,900
Fixed cost charges:
70% × $558,000 390,600
Total charges $625,500

Blooms: Apply
Gradable: automatic
12-133

105. Waterford Company maintains a cafeteria for its employees. For June, variable food costs were
budgeted at $45 per employee based on a budgeted level of 200 employees in other departments. During
the month, an average of 190 employees worked in other departments and actual food costs totaled
$9,250. How much food cost should be charged to the other departments at the end of the month for
performance evaluation purposes?

A. $9,000.
B. $9,250.
C. $8,550.
D. $9,737.
190 employees × $45 per employee = $8,550

Blooms: Apply
Gradable: automatic

106. Cost allocation of shared facilities cost is intended to remind managers of:

A. The cost of using a shared resource.

B. Both the cost and value of using shared resources.
C. How much capacity a firm has.
D. Why the firm invests in these facilities.
There is an accompanying cost to shared resources that must be utilized near capacity to maximize
value received.

AICPA: FN Reporting
Blooms: Remember
Gradable: automatic

12-134
107. Dual allocation is a cost allocation approach that separates direct and indirect costs, tracing the direct
costs directly to the department that:

A. can bear the cost.

B. relates best to the cost.
C. is first identified with the cost.
D. caused the cost.
This is a basic advantage to the dual-rate allocation method.

AICPA: FN Reporting
Blooms: Remember
Gradable: automatic

108. If a budgeted activity base is used as the base in cost allocation, each department's cost allocation will
be predictable, and not influenced by the:

A. actual total cost.

B. change in activity.
C. variations from budget.
D. actual usage in other departments.
Then costs applicable are determined by cause and effect based on activities related only to the
department in question.

AICPA: FN Reporting
Blooms: Remember
Gradable: automatic

12-135
109. The concepts of cost allocation that are used in manufacturing can also apply in:

A. service and not-for-profit industries.

B. service industries only.
C. not-for-profit industries only.
D. limited instances outside of manufacturing.
Cost allocation techniques are applicable to the gamut of organizations alike.

AICPA: FN Reporting
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

110. Which of the following is not one of the objectives of cost allocation?

A. Motivate managers to exert a high-level of effort.

B. Provide useful departmental and product costs.
C. Identify production constraints.
D. Provide the right incentive for managers to make decisions.
Identifying production constraints is not an objective of cost allocation.

AICPA: FN Reporting
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

12-136
111. Examples of pressures that can lead to financial fraud do not include:

A. unrealistic budgets.

B. inappropriate bonus plans.
C. overemphasis on long-term results.
D. overemphasis on short-term results.
This example does not lead to financial fraud.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

112. Which one of the following firms is likely to experience dysfunctional motivation on the part of its
managers due to its allocation methods? (CMA adapted)

A. To allocate depreciation of forklifts used by workers at its central warehouse, Amir Electronics uses
predetermined amounts calculated on the basis of the long term average use of the services provided
by the warehouse to the various segments.
B. Seattle Electronics uses the sales revenue of its various divisions to allocate costs connected with the
upkeep of its headquarters building. It also uses ROI to evaluate the divisional performance.
C. Rose Industrial does not allow its service departments to pass on their cost overruns to production
departments.
D. Xi Enterprises' management information system (MIS) is operated out of headquarters and serves its
various divisions. Xi's allocation of MIS-related costs to its divisions is limited to costs the divisions
will incur if they were to outsource their MIS needs.
Allocating on the basis of sales revenue often creates dysfunctional behavior.

Blooms: Analyze
Gradable: automatic

12-137
113. The Sarbanes-Oxley Act of 2002 requires that management of publicly traded companies:

A. use investment centers to evaluate top managers.

B. report on the adequacy of the company's internal controls over financial reporting.
C. compensate managers with fixed compensation plans only.
D. eliminate stock options for managerial compensation.
Sarbanes-Oxley requires management to report on the adequacy of internal controls.

AICPA: FN Risk Analysis
Blooms: Remember
Gradable: automatic

114. Which of the following is not an internal control?

A. Rotating personnel among tasks.

B. Separation of duties.
C. Setting limits on the amount of expenditures.
D. Using absolute performance standards.
Absolute performance standards are not part of internal control.

Blooms: Remember
Gradable: automatic

115. Internal controls include all of the following except:

A. using contingent compensation plans.

B. requiring management authorization for the use of a company's assets.
C. reconciling various sets of books.
D. requiring employees to take vacations.
Internal controls do not address contingent or fixed compensation.

12-138
Blooms: Remember
Gradable: automatic

Essay Questions

12-139
116. Maryland Hotels operates a centralized call center for the reservation needs of its time-share units. Costs
associated with use of the center are charged to the time-share group (Luxury, Resort, Standard, and
Budget) where a reservation is made on the basis of time on a call. Idle time of the reservation agents,
time spent on calls where no reservation is made, and the fixed cost of the equipment are allocated on
the number of reservations made in each group. Due to recent increased competition in the time-share
business, the company has decided that it is necessary to more accurately allocate its costs to price its
services competitively and profitably. During the current period, the use of the call center for each

Luxury 750,000 50,000
Resort 1,250,000 100,000
Standard 2,000,000 300,000
Budget 1,500,000 250,000
During this period, the cost of the computer center amounted to $2,410,000 for personnel and
$1,240,000 for equipment and other costs.
Required:
Determine the allocation to each of the divisions using (you may round all decimals to three places):
b. multiple rates based on time used (for personnel costs) and number of reservations (for equipment
and other cost).

a. Luxury: $496,400; Resort: $828,550; Standard: $1,328,600; Budget: $996,450

b. Luxury: $415,800; Resort: $724,390; Standard: $1,409,200; Budget: $1,100,610
Feedback:
a. total cost allocated: $2,410,000 + 1,240,000 =

$3,650,000
Time Proporti Allocatio
Division
Usage on n
.136 ×
Luxury 750,000 .136 $496,400 $3,650,00
0
.227 ×
Resort 1,250,000 .227 828,550 $3,650,00
0
.364 ×
Standard 2,000,000 .364 1,328,600 $3,650,00
0
12-140
.273 ×
Budget 1,500,000 .273 996,450 $3,650,00
0
$3,650,00
5,500,000
0
b. Personnel costs
Time Proporti Allocatio
Division
Usage on n
.136 ×
Luxury 750,000 .136 $327,760 $2,410,00
0
.227 ×
Resort 1,250,000 .227 547,070 $2,410,00
0
.364 ×
Standard 2,000,000 .364 877,240 $2,410,00
0
.273 ×
Budget 1,500,000 .273 657,930 $2,410,00
0
$2,410,00
5,500,000
0
Equipme

nt costs
Reservatio Proporti Allocatio
Division
ns on n
.071 ×
Luxury 50,000 .071 $88,040 $1,240,00
0
.143 ×
Resort 100,000 .143 177,320 $1,240,00
0
.429 ×
Standard 300,000 .429 531,960 $1,240,00
0
.357 ×
Budget 250,000 .357 442,680 $1,240,00
0
$1,240,00
700,000
0
Totals:
Luxury: $327,760 + 88,040 = $415,800
Resort: $547,070 + 177,320 = $724,390
Standard: $877,240 + 531,960 = $1,409,200
Budget: $657,930 + 442,680 = $1,100,610

Blooms: Analyze
12-141
Difficulty: 3 Hard
Gradable: manual

12-142
12-143
117. Atlantic Resorts operates a centralized call center for the reservation needs of its time-share units. Costs
associated with use of the center are charged to the time-share group (Luxury, Standard, and Budget)
where a reservation is made on the basis of time spent on a call. Due to recent increased competition in
the time-share business, the company has decided that it is necessary to more accurately allocate its
costs to price its services competitively and profitably. During the current period, the use of the call
center for each group was as follows (in thousands of seconds for time usage and in number of
reservations):
Number of
Division Time Usage Reservations
Luxury 500,000 50,000
Standard 2,000,000 300,000
Budget 1,500,000 250,000
During this period, the cost of the computer center amounted to $1,760,000 for personnel and
$1,240,000 for equipment and other costs.
Required:
and other cost).

a. Luxury: $375,000; Standard: $1,500,000; Budget: $1,125,000

b. Luxury: $322,920; Standard: $1,500,000; Budget: $1,177,080
Feedback:
a. total cost allocated: $1,760,000 + 1,240,000 =

$3,000,000
Proporti Allocatio
Division Time Usage
on n
.125 ×
Luxury 500,000 .125 $375,000 $3,000,00
0
.500 ×
Standar
2,000,000 .500 1,500,000 $3,000,00
d
0
.375 ×
Budget 1,500,000 .375 1,125,000 $3,000,00
0
$3,000,00
4,000,000
0
12-144
b. Personnel costs
Proporti Allocatio
Division Time Usage
on n
.125 ×
Luxury 500,000 .125 220,000 $1,760,00
0
.500 ×
Standar
2,000,000 .500 880,000 $1,760,00
d
0
.375 ×
Budget 1,500,000 .375 660,000 $1,760,00
0
$1,760,00
4,000,000
0
Equipment costs
Division
ns on n
.083 ×
Luxury 50,000 .083 102,920 $1,240,00
0
.500 ×
Standar
300,000 .500 620,000 $1,240,00
d
0
.417 ×
Budget 250,000 .417 517,080 $1,240,00
0
$1,240,00
600,000
0
Totals:
Luxury: $220,000 + 102,920 = $322,920
Standard: $880,000 + 620,000 = $1,500,000
Budget: $660,000 + 517,080 = $1,177,080

Blooms: Analyze
Difficulty: 3 Hard
Gradable: manual

12-145
12-146
118. Seaside Resorts operates a centralized call center for the reservation needs of its time-share units. Costs
associated with use of the center are charged to the time-share group (Luxury and Standard) where a
reservation is made on the basis of time spent on a call. Due to recent increased competition in the time-
share business, the company has decided that it is necessary to more accurately allocate its costs to price
its services competitively and profitably. During the current period, the use of the call center for each

Luxury 500,000 50,000
Standard 2,000,000 300,000
During this period, the cost of the computer center amounted to $1,220,000 for personnel and $960,000
Required:
and other cost).

a. Luxury: $436,000; Standard: $1,744,000

b. Luxury: $381,280; Standard: $1,798,720
Feedback:
a. total cost allocated: $1,220,000 + 960,000 =

$2,180,000
Proporti Allocatio
Division Time Usage
on n
.200 ×
Luxury 500,000 0.200 $436,000 $2,180,00
0
.800 ×
Standar
2,000,000 0.800 1,744,000 $2,180,00
d
0
$2,180,00
2,500,000
0
b. Personnel costs
Proporti Allocatio
Division Time Usage
on n
.200 ×
Luxury 500,000 0.200 244,000 $1,220,00
0
12-147
.800 ×
Standar
2,000,000 0.800 976,000 $1,220,00
d
0
$1,220,00
2,500,000
0
Equipment costs
Division
ns on n
.143 ×
Luxury 50,000 0.143 $137,280
$960,000
Standar .857 ×
300,000 0.857 $822,720
d $960,000
350,000 $960,000
Totals:
Luxury: $244,000 + 137,280 = $381,280
Standard: $976,000 + 822,720 = $1,798,720

Blooms: Analyze
Difficulty: 3 Hard
Gradable: manual

12-148
119. The Document Creation Center (DCC) for Atlas Corp. provides document services for three
departments in the St. Louis office. The following budget has been prepared for the month.
Budgeted usage:
Software Development 160,000 pages
Training 300,000 pages
Management 340,000 pages
three user departments?

Software Development: $11,000; Training: $20,625; Management: $23,375
Feedback:
Fixed costs allocated

Proportio Allocatio
Division Pages
n n
Software .200 ×
160,000 .200 $6,200
Development $31,000
.375 ×
Training 300,000 .375 11,625
$31,000
.425 ×
Management 340,000 .425 13,175
$31,000
800,000 $31,000
total costs:
Division Total Fixed Variable
Software 160,000
$11,000 $6,200 $4,800
Development × .03
300,000
Training 20,625 11,625 9,000
× .03
340,000
Management 23,375 13,175 10,200
× .03
$55,000 $31,000 $24,000

Blooms: Analyze
Gradable: manual
12-149

12-150
120. The legal department for Trump Corporation provides legal services for four departments in the
Manhattan office. The following budget has been prepared for the month.
Budgeted usage:
Purchasing 160 contracts
Marketing 200 contracts
Training 300 contracts
Management 340 contracts
Cost equation $167,500 + $50 per contract
If Trump uses a dual rate for allocating its costs based on usage, how much cost will be allocated to the
four user departments?

Purchasing: $34,800; Marketing: $43,500; Training: $65,250; Management: $73,950
Feedback:

Contract Proportio Allocatio
Division
s n n
.16 ×
Purchasing 160 .16 $26,800
$167,500
.20 ×
Marketing 200 .20 33,500
$167,500
.30 ×
Training 300 .30 50,250
$167,500
.34 ×
Management 340 .34 56,950
$167,500
1,000 $167,500
total costs:
160 ×
Purchasing $34,800 $26,800 $8,000
$50
200 ×
Marketing 43,500 33,500 10,000
$50
300 ×
Training 65,250 50,250 15,000
$50
340 ×
Management 73,950 56,950 17,000
$50
$217,500 $167,500 $50,000
12-151

Blooms: Analyze
Gradable: manual

121. The Human Resources Department for Vargis Corp. provides personnel services for two departments in
the Kansas City office. The following budget has been prepared for the month.
Budgeted:
Production 860 employees
Management 140 employees
Cost equation $46,500 + $20 per employee
If Vargis uses a dual rate for allocating its costs based on employees, how much cost will be allocated
to the two departments?

Production: $57,190; Management: $9,310
Feedback:

Employee Proportio Allocatio
Division
s n n
.86 ×
Production 860 .86 $39,990
$46,500
.14 ×
Management 140 .14 6,510
$46,500
1000 $46,500
total costs:
860 ×
Production $57,190 $39,990 $17,200
$20
140 ×
Management 9,310 6,510 2,800
$20
$66,500 $46,500 $20,000

Blooms: Analyze
12-152
Gradable: manual

12-153
12-154
122. The Document Creation Center (DCC) for Atlas Corp. provides document services for three
departments in the St. Louis office. The following budget has been prepared for the month.
Budgeted usage: Pages Documents

Software Development 320,000 2,500
Training 600,000 5,500
Management 480,000 6,000
Costs:
Fixed $63,000
Variable $35,000
If DCC uses a dual rate for allocating its costs; allocating fixed costs based on number of documents
and variable costs based on number of pages, how much cost will be allocated to the three user
departments?

Software Development: $19,277; Training: $39,759; Management: $39,027
Feedback:
Document Proportio Allocatio

Division
s n n
Software
.179 ×
Developmen 2,500 .179 $11,277
$63,000
t
.393 ×
Training 5,500 .393 24,759
$63,000
.429 ×
Management 6,000 .429 27,027
$63,000
14,000 $63,063
variable rate: $35,000/(320,000 + 600,000 + 480,000) =
$0.025/page
total costs:
Software 320,000
Developmen $19,277 $11,277 $8,000 ×
t $0.025
600,000
Training 39,759 24,759 15,000 ×
$0.025
Management 39,027 27,027 12,000 480,000
×
12-155
$0.025
$98,063 $63,063 $35,000

Blooms: Analyze
Gradable: manual

12-156
12-157
123. The legal department for Trump Corp. provides legal services for four departments in the Manhattan
Budgeted usage: Contracts Pages Reviewed

Purchasing 160 3,200
Marketing 200 7,200
Training 300 9,000
Management 240 2,400
Costs:
Fixed $267,000
Variable $105,000
If Trump uses a dual rate for allocating its costs, allocating fixed costs based on number of contracts
and variable costs based on number of pages reviewed, how much cost will be allocated to the four user
departments?

Purchasing: $62,940; Marketing: $93,956; Training: $132,264; Management: $82,850
Feedback:

Division
s n n
.178 ×
Purchasing 160 .178 $47,526
$267,000
.222 ×
Marketing 200 .222 59,274
$267,000
.333 ×
Training 300 .333 88,911
$267,000
.267 ×
Management 240 .267 71,289
$267,000
900 267,000
variable rate: $105,000/(3,200 + 7,200 + 9,000 + 2,400)
= $4.817
total costs:
3,200 ×
Purchasing $62,940 $47,526 $15,414
$4.817
7,200 ×
Marketing 93,956 59,274 34,682
$4.817
9,000 ×
Training 132,264 88,911 43,353
$4.817
12-158
2,400 ×
Management 82,850 71,289 11,561
$4.817
$372,010 $267,000 $105,010

Blooms: Analyze
Gradable: manual

12-159
12-160
124. Waverley Services has three divisions, commercial, retail, and consumer, that share the common costs
of the company's computer server network. The annual common costs are $1,200,000. You have been
Time on

Retail 40,000 150,000
Consumer 50,000 330,000
a. What is the allocation rate for the upcoming year assuming Waverley uses the single-rate method and
division.
b. What is the allocation rate for the upcoming year assuming Waverley uses the single-rate method
and allocates common costs based on the time on network? Calculate the allocated amount for each
division.
c. The cost accountant determined $850,000 of the server network's costs were fixed and should be
time on the network. What is the total server network costs allocated to each division?

a. Rate: $10/connection; Commercial: $300,000; Retail: $400,000; Consumer: $500,000

b. Rate: $2/hour; Commercial: $240,000; Retail: $300,000; Consumer: $660,000
c. Commercial: $282,460; Retail: $370,500; Consumer: $546,840
Feedback:
a. Rate: $1,200,000/(30,000 + 40,000 + 50,000) = $10/connection

Commercial: 30,000 × $10 = $300,000; Retail: 40,000 × $10 = $400,000; Consumer: 50,000 × $10 =
$500,000
b. Rate: $1,200,000/(120,000 + 150,000 + 330,000) = $2/hour
$660,000
c.
Connection Proporti Allocatio

Division
s on n
.250 ×
Commercia
30,000 .250 $212,500 $850,00
l
0
Retail 40,000 .333 283,050 .333 ×
$850,00
12-161
0
.417 ×
Consumer 50,000 .417 354,450 $850,00
0
120,000 $850,000
variable rate: ($1,200,000 - 850,000)/(120,000 +
150,000 + 330,000) = $0.583/hr
total costs:
Commercia $0.583 ×
$282,460 $212,500 $69,960
l 120,000
$0.583 ×
Retail 370,500 283,050 87,450
150,000
$0.583 ×
Consumer 546,840 354,450 192,390
330,000
1,199,800 $850,000 $349,800

Blooms: Analyze
Gradable: manual

12-162
12-163
125. Collins Enterprises has four divisions, commercial, retail, research, and consumer, that share the
common costs of the company's computer server network. The annual common costs are $2,400,000.
You have been provided with the following information for the upcoming year:
Time on

Retail 80,000 150,000
Research 40,000 100,000
Consumer 100,000 330,000
a. What is the allocation rate for the upcoming year assuming Collins uses the single-rate method and
division.
b. What is the allocation rate for the upcoming year assuming Collins uses the single-rate method and
c. The cost accountant determined $1,700,000 of the server network's costs were fixed and should be

a. Rate: $8.571/connection; Commercial: $514,260; Retail: $685,680; Research: $342,840; Consumer:

$857,100
b. Rate: $3.429/hour; Commercial: $411,480; Retail: $514,350; Research: $342,900; Consumer:
$1,131,570
c. Commercial: $483,800; Retail: $636,200; Research: $343,100; Consumer: $936,900
Feedback:
a. Rate: $2,400,000/(60,000 + 80,000 + 40,000 + 100,000) = $8.571/connection

Commercial: 60,000 × $8.571 = $514,260; Retail: 80,000 × $8.571 = $685,680; Research: 40,000 ×
$8.571 = $342,840; Consumer: 100,000 × $8.571 = $857,100
b. Rate: $2,400,000/(120,000 + 150,000 + 100,000 + 330,000) = $3.429/hour
Commercial: 120,000 × $3.429 = $411,480; Retail: 150,000 × $3.429 = $514,350; Research: 100,000 ×
$3.429 = $342,900; Consumer: 330,000 × $3.429 = $1,131,570
c.
Connectio Proporti Allocatio

Division
ns on n
Commerci 60,000 .214 $363,800 .214 ×
al $1,700,00
12-164
0
.286 ×
Retail 80,000 .286 486,200 $1,700,00
0
.143 ×
Research 40,000 .143 243,100 $1,700,00
0
.357 ×
Consumer 100,000 .357 606,900 $1,700,00
0
$1,700,00
280,000
0
variable rate: ($2,400,000 - 1,700,000)/(120,000 +
150,000 + 100,000 + 330,000) = $1/hr
total costs:
Commerci $1 ×
$483,800 $363,800 $120,000
al 120,000
$1 ×
Retail 636,200 486,200 150,000
150,000
$1 ×
Research 343,100 243,100 100,000
100,000
$1 ×
Consumer 936,900 606,900 330,000
330,000
1,700,00
2,400,000 $700,000
0

Blooms: Analyze
Gradable: manual

12-165
126. Jamison Industries has three divisions, commercial, retail, and consumer, that share the common costs
Time on

Retail 80,000 150,000
Consumer 100,000 330,000
a. What is the allocation rate for the upcoming year assuming Jamison uses the single-rate method and
division.
b. What is the allocation rate for the upcoming year assuming Jamison uses the single-rate method and
a. Rate: $10/connection; Commercial: $600,000; Retail: $800,000; Consumer: $1,000,000

b. Rate: $4/hour; Commercial: $480,000; Retail: $600,000; Consumer: $1,320,000
Feedback: (need to show rate in answer for a & b because asked for it in problem)
a. Rate: $2,400,000/(60,000 + 80,000 + 100,000) = $10/connection

$1,000,000
b. Rate: $2,400,000/(120,000 + 150,000 + 330,000) = $4/hour
$1,320,000

Blooms: Analyze
Gradable: manual

12-166
12-167
127. Markov Engineering has three divisions, commercial, retail, and consumer, that share the common costs
Time on

Retail 80,000 150,000
Consumer 100,000 330,000

Commercial: $570,000; Retail: $749,400; Consumer: $1,080,600
Feedback:
Connectio Proporti Allocatio

Division
ns on n
.250 ×
Commerci
60,000 .250 $450,000 $1,800,00
al
0
.333 ×
Retail 80,000 .333 599,400
$1,80,000
.417 ×
Consumer 100,000 .417 750,600 $1,800,00
0
$1,800,00
240,000
0
variable rate: ($2,400,000 - 1,800,000)/(120,000 +
150,000 + 330,000) = $1/hr
total costs:
Commerci $1 ×
$570,000 $450,000 $120,000
al 120,000
$1 ×
Retail 749,400 599,400 150,000
150,000
$1 ×
Consumer 1,080,600 750,600 330,000
330,000
1,800,00
2,400,000 $600,000
0
12-168

Blooms: Analyze
Gradable: manual

128. Sumner Corporation has four divisions, commercial, retail, research, and consumer, that share the
Time on

Retail 90,000 150,000
Research 20,000 100,000
Consumer 100,000 330,000
a. What is the allocation rate for the upcoming year assuming Sumner uses the single-rate method and
b. What is the allocation rate for the upcoming year assuming Sumner uses the single-rate method and
a. Allocation rate = $12.50 per connection; Commercial: $875,000; Retail: $1,125,000; Research:
$250,000; Consumer: $1,250,000
b. Allocation rate = $5 per hour; Commercial: $600,000; Retail: $750,000; Research: $500,000;
Consumer: $1,650,000
Feedback:
a. Rate: $3,500,000/(70,000 + 90,000 + 20,000 + 100,000) = $12.50/connection

Commercial: 70,000 × $12.50 = $875,000; Retail: 90,000 × $12.50 = $1,125,000; Research: 20,000 ×
$12.50 = $250,000; Consumer: 100,000 × $12.50 = $1,250,000
b. Rate: $3,500,000/(120,000 + 150,000 + 100,000 + 330,000) = $5/hour
Commercial: 120,000 × $5 = $600,000; Retail: 150,000 × $5 = $750,000; Research: 100,000 × $5 =
$500,000; Consumer: 330,000 × $5 = $1,650,000

Blooms: Analyze
Gradable: manual
12-169

12-170
12-171
129. Kingston Industries has four divisions, commercial, retail, research, and consumer, that share the
Time on
Connections
Network (hours)
Retail 70,000 150,000
Research 20,000 70,000
Consumer 100,000 330,000
a. The cost accountant determined $2,300,000 of the server network's costs were fixed and should be

Commercial: $752,000; Retail: $944,000; Research: $324,000; Consumer: $1,580,000
Feedback:
a. Connectio Proporti Allocatio

Division ns on n
.240 ×
Commerci
60,000 .240 $552,000 $2,300,00
al
0
.280 ×
Retail 70,000 .280 644,000 $2,300,00
0
.080 ×
Research 20,000 .080 184,000 $2,300,00
0
.400 ×
Consumer 100,000 .400 920,000 $2,300,00
0
$2,300,00
250,000
0
variable rate: ($3,600,000 - 2,300,000)/(100,000 +
150,000 + 70,000 + 330,000) = $2/hr
total costs:
Commerci $2 ×
$752,000 $552,000 $200,000
al 100,000
Retail 944,000 644,000 300,000 $2 ×
12-172
150,000
$2 ×
Research 324,000 184,000 140,000
70,000
$2 ×
Consumer 1,580,000 920,000 660,000
330,000
2,300,00 $1,300,00
3,600,000
0 0

Blooms: Analyze
Gradable: manual

12-173
12-174
130. Roadways Enterprises has two divisions, Production and Support, that share the common costs of the
Time on

Production 200,000 240,000
Support 160,000 660,000
a. What is the allocation rate for the upcoming year assuming Roadways uses the single-rate method
and allocates common costs based on the number of calls? Calculate the costs allocated to each division.
b. What is the allocation rate for the upcoming year assuming Roadways uses the single-rate method
and allocates common costs based on the time on the network? Calculate the costs allocated to each
division.
c. The cost accountant determined $2,700,000 of the communication network's costs were fixed and

a. Rate: $12.50/call; Production: $2,500,000; Support: $2,000,000

b. Rate: $5/hour; Production: $1,200,000; Support: $3,300,000
c. Production: $1,981,200; Support: $2,518,800
Feedback:
a. Rate: $4,500,000/(200,000 + 160,000) = $12.50/call

Production: 200,000 × $12.50 = $2,500,000; Support: 160,000 × $12.50 = $2,000,000
b. Rate: $4,500,000/(240,000 + 660,000) = $5/hour
Production: 240,000 × $5 = $1,200,000; Support: 660,000 × $5 = $3,300,000
c.
Proportio Allocatio
Division Calls
n n
.556 ×
Productio $1,501,20
200,000 .556 $2,700,00
n 0
0
.444 ×
Support 160,000 .444 1,198,800 $2,700,00
0
$2,700,00
360,000
0
variable rate: ($4,500,000 - 2,700,000)/(240,000 +
12-175
660,000) = $2/hr
total

costs:
Productio $1,981,20 $1,501,20 $2 ×
$480,000
n 0 0 240,000
$2 ×
Support 2,518,800 1,198,800 1,320,000
660,000
$4,500,00 $2,700,00 $1,800,00

0 0 0

Blooms: Analyze
Gradable: manual

131. Santa Fe Industries has two divisions, Marketing and Finance, that share the common costs of the
Time on

Marketing 50,000 120,000
Finance 40,000 330,000
a. What is the allocation rate for the upcoming year assuming Santa Fe uses the single-rate method and
b. What is the allocation rate for the upcoming year assuming Santa Fe uses the single-rate method and
allocates common costs based on the time on the network? Calculate the costs allocated to each
division.

a. Rate: $25/call; Marketing: $1,250,000; Finance: $1,000,000

b. Rate: $5/hour; Marketing: $600,000; Finance: $1,650,000
Feedback:
a. Rate: $2,250,000/(50,000 + 40,000) = $25/call

Marketing: 50,000 × $25 = $1,250,000; Finance: 40,000 × $25 = $1,000,000
b. Rate: $2,250,000/(120,000 + 330,000) = $5/hour
Marketing: 120,000 × $5 = $600,000; Finance: 330,000 × $5 = $1,650,000

12-176
Blooms: Analyze
Gradable: manual

12-177
132. Talent Engineering has two divisions, Research and Sales, that share the common costs of the
Time on

Research 50,000 60,000
Sales 40,000 165,000

Research: $990,600; Sales: $1,259,400
Feedback:
Proportio
Division Calls Allocation
n
.556 ×
Research 50,000 .556 $750,600 $1,350,00
0
.444 ×
Sales 40,000 .444 599,400 $1,350,00
0
$1,350,00
90,000
0
variable rate: ($2,250,000 - 1,350,000)/(60,000 +
165,000) = $4/hr
total

costs:
$4 ×
Research $990,600 $750,600 $240,000
60,000
1,259,40 $4 ×
Sales 599,400 660,000
0 165,000
$2,250,00 $1,350,00
$900,000
0 0

Blooms: Analyze
12-178
Gradable: manual

12-179
12-180
undertakes. The size of the Legal Department was based on long-run estimates of contracts. Information
on the Legal Department's budgeted and actual costs is as follows:
The budget for the Legal Department is $300,000 + $10/contract. The budgeted volume of contracts is
as follows:
Market Research 300

Branding 500
Promotion 700
was 720.

a. Market Research: $66,150; Branding: $94,500; Promotion: $151,200

b. Market Research: $63,150; Branding: $104,400; Promotion: $147,300
Feedback:
a. Rate = [$300,000 + $10 × (300 + 500 + 700)]/(300 + 500 + 700) = $210/contract

Market Research: 315 × $210 = $66,150; Branding: 450 × $210 = $94,500; Promotion: 720 × $210 =
$151,200
b.

Division
s n n
Market .200 ×
300 .200 $60,000
Res $300,000
.333 ×
Branding 500 .333 99,900
$300,000
.467 ×
Promotion 700 .467 140,100
$300,000
1,500 $300,000
total costs:
12-181
Market $10 ×
$63,150 $60,000 $3,150
Res 315
$10 ×
Branding 104,400 99,900 4,500
450
$10 ×
Promotion 147,300 140,100 7,200
720
314,850 $300,000 $14,850

Blooms: Analyze
Gradable: manual

12-182
12-183
The budget for the Legal Department is $200,000 + $7.50/contract. The budgeted volume of contracts
is as follows:
Market Research 300

Branding 500
Promotion 700
was 675.


Feedback:
a. Rate = [$200,000 + $7.50 × (300 + 500 + 700)]/(300 + 500 + 700) = $140.833/contract

Market Research: 286 × $140.833 = $40,278; Branding: 450 × $140.833 = $63,375; Promotion: 675 ×
$140.833 = $95,062
b.

Division
s n n
Market .200 ×
300 .200 $40,000
Res $200,000
.333 ×
Branding 500 .333 66,600
$200,000
.467 ×
Promotion 700 .467 93,400
$200,000
1,500 $200,000
total costs:
12-184
Market $7.50 ×
$42,145 $40,000 $2,145
Res 286
$7.50 ×
Branding 69,975 66,600 3,375
450
$7.50 ×
Promotion 98,463 93,400 5,063
675
$210,583 $200,000 $10,583

Blooms: Analyze
Gradable: manual

12-185
12-186
The budget for the Legal Department is $400,000 + $15/contract. The budgeted volume of contracts is
as follows:
Market Research 200

Branding 500
Promotion 800
was 820.


Feedback:
a. Rate = [$400,000 + $15 × (200 + 500 + 800)]/(200 + 500 + 800) = $281.667/contract

Market Research: 207 × $281.667 = $58,305; Branding: 512 × $281.667 = $144,214; Promotion: 820 ×
$281.667 = $230,967
b. Contract Proportio Allocatio

Division s n n
Market .133 ×
200 .133 $53,200
Res $400,000
.333 ×
Branding 500 .333 133,200
$400,000
.533 ×
Promotion 800 .533 213,200
$400,000
1,500 $399,600
total costs:
Market $56,305 $53,200 $3,105 $15 ×
12-187
Res 207
$15 ×
Branding 140,880 133,200 7,680
512
$15 ×
Promotion 225,500 213,200 12,300
820
$422,685 $399,600 $23,085

Blooms: Analyze
Gradable: manual

12-188
12-189
136. Seattle Corporation has two operating divisions - Inland Division and Coast Division. The company's
Customer Service Department provides services to both divisions. The variable costs of the Customer
Service Department are budgeted at $29 per order. The Customer Service Department's fixed costs are
budgeted at $381,600 for the year. The fixed costs of the Customer Service Department are determined
based on the peak period orders.
Percentage of Peak Period

Budgeted
Capacity Required
Orders
Inland
25% 1,500
Division
Coast
75% 5,700
Division
At the end of the year, actual Customer Service Department variable costs totaled $219,905 and fixed
costs totaled $383,860. The Inland Division had a total of 1,520 orders and the Coast Division had a
total of 5,690 orders for the year.
Required:
a. Prepare a report showing how much of the Customer Service Department's costs should be charged
to each of the operating divisions at the end of the year.
b. How much of the actual Customer Service Department costs should not be charged to the operating

a. The operating divisions would be charged the following amounts at the end of the year:
Inland Coast

Division Division
$29 per order × 1,520
$44,080
orders
$29 per order × 5,690
$165,010
orders
Fixed cost charges:
25% × $381,600 95,400
75% × $381,600 286,200
Total charges $139,480 $451,210
b. The uncharged costs are:
Variable Fixed
12-190
Total actual costs
$219,905 $383,860
incurred
Costs charged 209,090 381,600
Spending variance $10,815 $2,260
The spending variance represents the difference between the Customer Service Department’s actual
costs and what those costs should have been, given the actual level of activity. This difference is
properly the responsibility of the Customer Service Department and should not be charged to the
operating divisions.

Blooms: Apply
Gradable: manual

12-191
137. Warehouse Services is a service department in the Vancouver Company, providing storage service to
three operating departments. The company charges the costs of this department to operating
departments on the basis of cubic feet occupied.
Last year, Warehouse Services budgeted variable storage cost of $0.15 per cubic foot occupied. The
budgeted total fixed cost was $120,000, and was determined by the long-term storage needs of the
operating departments. Actual storage space occupied during the year, along with long-term storage
needs of operating departments, is given below:
Operating Department
X Y Z
Long-term storage needs
200,000 600,000 800,000
in cubic feet
Actual storage space used 160,000 590,000 750,000
Actual variable storage costs amounted to $0.16 per cubic foot occupied. Actual fixed storage costs
were $123,000.
Required:
a. Compute the amount of variable storage cost that should be charged to each operating department at
the end of the year for performance evaluation purposes.
b. Compute the amount of fixed storage cost that should be charged to each operating department at the

a. Dept X: 160,000 cubic feet × $0.15 per cubic foot = $24,000

Dept Y: 590,000 cubic feet × $0.15 per cubic foot = $88,500
Dept Z: 750,000 cubic feet × $0.15 per cubic foot = $112,500
b. Dept X: 200/1600 × $120,000 = $15,000

Dept Y: 600/1600 × $120,000 = $45,000
Dept Z: 800/1600 × $120,000 = $60,000

Blooms: Apply
Gradable: manual

12-192
138. Terrain, Inc. has a maintenance department that provides services to the company's two operating
departments. The variable costs of the maintenance department are charged on the basis of the number
of maintenance hours logged in each department. Last year, budgeted variable maintenance costs were
$8.60 per maintenance hour and actual variable maintenance costs were $8.75 per maintenance hour.
The budgeted and actual maintenance hours for each operating department for last year appear below:
Operating

Departments
A B
Budgeted maintenance hours 1,000 2,000
Actual maintenance hours 1,100 1,700
Required:
a. Compute the amount of variable maintenance department cost that should have been charged to each
operating department at the end of the year for performance evaluation purposes.
b. Compute the amount of actual variable maintenance department cost that should not have been
charged to the operating departments at the end of the year for performance evaluation purposes.

a. Charges to Operating Department A:

1,100 hours × $8.60 per hour $9,460
Charges to Operating Department B:
1,700 hours × $8.60 per hour $14,620
b. Total actual variable cost incurred:
(1,100 hours + 1,700 hours) × $8.75 per
$24,500
hour
Total charges:
(1,100 hours + 1,700 hours) × $8.60 per
24,080
hour
Spending variance-uncharged $420

Blooms: Apply
Gradable: manual

12-193
12-194
139. Layton Company operates a cafeteria for the benefit of its employees. The company subsidizes the
cafeteria heavily by allowing employees to purchase meals at greatly reduced prices. Budgeted and
actual costs in the cafeteria for the year just ended are as follows:
Budgeted Actual
Variable costs $500,000 $436,000
Fixed costs $340,000 $352,000
Costs of the cafeteria are charged to producing departments on the basis of the number of employees in
these departments. Fixed costs are charged on the basis of the peak-period number of employees. Data
on employees in the company's producing departments follows:
Machinin
Assembly Total
g
Budgeted number of
300 500 800
employees
Actual number of
200 400 600
employees
Peak-period number of
400 600 1,000
employees
Required:
a. Compute the dollar amount of variable and fixed costs that should be charged to each of the
producing departments at the end of the year for purposes of evaluating performance.
b. Identify the amount, if any, of actual costs that should not be charged to the operating departments.

a. Variable costs are charged at the budgeted rate of $625 per employee. Fixed costs are charged in
predetermined lump-sum amounts.
Machinin
Assembly
g
Machining: 200 employees ×
$125,000
$625 per employee
Assembly: 400 employees ×
$250,000
$625 per employee
Fixed cost charges:
Machining: 40% × $340,000 $136,000
Assembly: 60% × $340,000 $204,000
b. The remaining amounts of variable and fixed costs are variances that should not be charged:
12-195
Actual variable cost incurred $436,000
Amount of variable cost charged 375,000
Spending variance-not charged $61,000
Actual fixed cost incurred $352,000
Amount of fixed cost charged 340,000
Spending variance-not charged $12,000

Blooms: Apply
Gradable: manual

12-196
140. The Sunset Corporation operates one central plant that has two divisions, the Flashlight Division and the
Night Light Division. The following data apply to the coming budget year.
Budgeted costs of operating the plant for 2,000 to

3,000 hours:
$900,000
year
per
Variable operating costs $1,200
hour
Budgeted long-run usage

per year:
Flashlight Division 2,000 hours
Night Light Division 500 hours
Practical capacity 3,000 hours
Assume that practical capacity is used to calculate the allocation rates. Actual usage for the year by the
Flashlight Division was 1,400 hours and by the Night Light Division was 600 hours.
Required:
1. If a single-rate cost-allocation method is used, what amount of cost will be allocated to the Flashlight
Division? Assume actual usage is used to allocate operating costs.
2. If a dual-rate cost-allocation method is used, what amount of operating costs will be budgeted for the
Night Light Division?
3. If a dual-rate cost-allocation method is used, what amount of cost will be allocated to the Night Light
Division? Assume budgeted usage is used to allocate fixed operating costs and actual usage is used to
allocate variable operating costs.

1. $3,000,000/2,000 × 1,400 = $2,100,000

2. [(500/3,000) × $900,000] + (500 × $1,200) = $750,000
3. [(500/3,000) × $900,000] + (600 × $1,200) = $870,000

Blooms: Apply
Gradable: manual

12-197
141. Smash Burgers is a fast-food restaurant that sells vegetarian burgers and hot dogs in a 1950s
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 either the burgers
or the hot dogs. The following information is provided for the operations of the company:
Burgers Hot Dogs

Sales for January 4,000 2,400
Sales for February 6,400 2,400
Required:
a. What amount of fixed operating costs is assigned to the burgers and hot dogs when actual sales are
used as the allocation base for January? For February?
b. Hot dog sales for January and February remained constant. Did the amount of fixed operating costs
allocated to hot dogs also remain constant for January and February? Explain why or why not.
Comment on any other observations.

a. January sales:
Burgers $5,000 × 4,000/(4,000 + 2,400) = $3,125

Hot dogs $5,000 × 2,400/6,400 = $1,875
February sales:
Burgers $5,000 × 6,400/(6,400 + 2,400) = $3,636.36

Hot dogs $5,000 × 2,400/(6,400 + 2,400) = $1,363.64
b. Even though hot dog sales remained constant for both months, the allocation of fixed operating costs
decreased by more than $500. The reason is that fixed overhead costs are allocated based on actual
sales. The dollar amount is fixed, and since burger sales increased, more of the fixed costs were
allocated to the burgers.
Another observation is that burger sales increased by more than 50% from January to February, while
the fixed operating costs assigned to burgers increased by only 16%.

Blooms: Apply
Gradable: manual

12-198
142. Cost allocation bases are factors that cost management analysts use to assign indirect costs to cost
objects. Ideally, cost-allocation bases should reflect a cause-and-effect relationship between resource
spending and use. Ideally, an Activity-Based-Costing (ABC) approach will provide a more accurate and
useful accounting for an organization's resources. Recent studies have found that, in spite of increasing
costs and diminishing resources, very few Higher Education Institutions use the tools and techniques of
an ABC cost allocation system to assign costs to academic departments. While direct costs, such as
faculty salaries, are traceable to individual academic departments or courses, many indirect costs, such
as facility use, computer use, and student support services, are more difficult to assign. In a traditional
approach, many higher education institutions assign such costs based on a single factor, such as the
number of courses taught in the university. (Source: Activity-Based Costing for Higher Education
Institutions, Management Accounting Quarterly, Winter, 2001)
Required:
(a) Explain why the use of a single-cost driver such as the number of courses may result in inaccurate
management information as to the cost of running courses in individual academic departments.
(b) For each of the indirect costs listed below, identify an appropriate cost-driver that might be used to
allocate costs to determine the cost of offering a single course in an academic department if an Activity-
Based-Costing model were used.
• Computer use
• Facility use
• Student services
• Course design
• Lecturing/class meeting time
• Assignment grading

(a) Using a single cost allocation base to assign costs does not take into account the level of resources
consumed by the cost objects. Some courses may require the use of more resources, such as computer
and lab time. No distinction is made between fixed costs and variable costs. This method assumes that
all courses consume the same activities in the same proportions; in reality, some programs may be
subsidizing others.
(b) Computer use - number of computer hours

Facility use - square footage
Student services - number of students
Course design - number of courses
Class meeting time - number of classroom hours
Grading assignments - number of assignments

AICPA: BB Critical Thinking
Blooms: Understand
Gradable: manual
12-199

143. Affordable Credit Checks produces two styles of credit reports: personal and corporate. The difference
between the two is the amount of background information and data collection required. The corporate
report uses more skilled personnel because additional checking and data are required. The relevant
figures for the year just completed follow: Total support service costs to be allocated are $3,200,000.
Allocation base Individual Corporate

Data purchased $40,000 $80,000
Research hours 24,000 30,000
Interview hours 1,000 10,000
Number of reports 16,000 3,000
Required:
(a) Which method would be preferred by each manager? Which method would be least preferred?
(b) Provide arguments that each manager would make for his/her preferred method. How would each
manager argue against his/her least preferred method?

(a) This case points out the arbitrary nature of cost allocation and underscores the fact that no method
will please all of the recipients of allocated costs. In this case the manager of the individual department
would most favor interview hours, where his/her total percentage of the allocation is only 9%. This
manager would least favor number of reports, where the department would receive a total of 84% of the
allocation. The manager of the corporate department would most favor number of reports, with a 16%
total allocation and least favor interview hours, where over 90% of the cost would be allocated to the
corporate department.
(b) Arguments for:

Number of reports: The corporate manager would argue that the final output represents the cost effort
of each department. Since corporate provided far fewer total reports, that department would receive a
relatively small allocation.
Interview hours: The individual manager would argue that interview hours are the most valuable source
of information and that they reflect an appropriate use of his/her department resources.
Arguments Against:
Number of reports: The individual manager would argue that just because there are more individual
customers generating the reports, the number of reports does not reflect the work done and cost incurred
by each department. The number of reports reflects great productivity and the department should not be
penalized for being productive.
Interview hours: The corporate manager would argue that while his/her department does more
interviewing, that is not a fair reflection of the resources consumed, since the number of interviews is
relatively small, but the hours put into them are extensive. The manager would argue that other methods
of gathering information more appropriately reflect the resource use of the Department.

AICPA: BB Resource Management
12-200
Blooms: Apply
Gradable: manual

144. Rainier Company has a purchasing department that provides services to two factories located in
Carbondale and the other in Peoria. Budgeted costs for the purchasing department consist of $55,000
per year of fixed costs and $8 per purchase order for variable costs. The level of budgeted fixed costs is
determined by the peak-period requirements. The Carbondale factory requires 40% of the peak-period
capacity and the Peoria factory requires 60%.
During the coming year, 1,800 purchase orders were processed for the Carbondale factory and 2,700
purchase orders for the Peoria factory.
Required:
Compute the amount of purchasing department cost that should be charged to each factory for the year.

Fargo Custer
1,800 purchase orders × $8.00 per
$14,400
purchase order
2,700 purchase orders × $8.00 per
$21,600
purchase order
Fixed cost charges:
2/5 × $55,000 22,000
3/5 × $55,000 33,000
Total charges $36,400 $54,600

Blooms: Apply
Gradable: manual

12-201
12-202
145. Koski Corporation's Maintenance Department provides services to the company's two operating
fixed costs of the Maintenance Department are determined based on the number of cases produced by
the operating departments during the peak period. Data appear below:
Paints Division:
40%
required
Actual cases 26,010
Stains Division:
60%
required
Actual cases 60,980
Required:
a. Prepare a report showing how much of the Maintenance Department's costs should be charged to
each of the operating divisions at the end of the year.
b. How much of the actual Maintenance Department costs should not be charged to the operating

a. The operating divisions would be charge the following amounts at the end of the year:
Paints Stains

Division Division
$4 per case × 26,010
$104,040
cases
$4 per case × 60,980
$243,920
cases
Fixed cost charges:
40% × $870,000 348,000
60% × $870,000 522,000
Total charges $452,040 $765,920
12-203
b. The uncharged costs are:
Variable Fixed
Total actual costs incurred $382,756 $871,590
Total charges 347,960 870,000
Spending variance $34,796 $1,590
The spending variance represents the difference between the Maintenance Department's actual costs
and what those costs should have been, given the actual level of activity. This difference is the
responsibility of the Maintenance Department and should not be charged to the operating divisions.

Blooms: Apply
Difficulty: 1 Easy
Gradable: manual

146. Decentralization is the delegation of decision-making authority to subordinates in the organization's
name. A key part of this is the principal-agent relationship. Explain what this relationship is and give
examples.

The principal-agent relationship is a relationship between a superior, referred to as the principal, and a
subordinate, called the agent. When authority is decentralized, a superior, whom we call a principal,
delegates duties to a subordinate, whom we call an agent. These relationships exist in many settings.
Those given as examples in the text include:
Principals Agents
eBay stockholders Top eBay management
Corporate General Business unit managers (e.g.,
Electric (GE) the GE Transportation
managers Business)
The President of the Cabinet officers (e.g., the
United States Secretary of the Interior)
You (as an investor or Your stockbroker or real estate
apartment seeker) agent

Blooms: Remember
Gradable: manual

12-204
147. Describe five advantages of decentralization.

1. Better use of local knowledge; 2. faster response; 3. wiser use of top management's time; 4. reduction
of problems to manageable size, and 5. training, evaluation, and motivation of local managers.

Blooms: Remember
Gradable: manual

148. Describe two disadvantages of decentralization.

One disadvantage is that local managers can make decisions that are not in the best interests of the
organization as a whole. Second, decentralization can create administrative duplication.

Blooms: Remember
Gradable: manual

12-205
149. Logistics Services Company has recently expanded by acquiring two smaller companies in the
transportation industry. Prior to these acquisitions, Logistics Services used a centralized style of
organization because it was small enough that the top management team was heavily involved in the
day-to-day activities of the firm. Ms. Trane, the CEO, feels that this style is no longer suitable for the
larger, more diverse organization.
She has hired a consultant to help her and her management team create a new structure which, when
developed on paper, will be described to the affected employees and their inputs will be sought. Since
no one in the company knows much about management styles, Ms. Trane felt this would be an efficient
way to get the ball rolling, but realized the consultants would not have the specialized knowledge about
her company and the two acquisitions.
One of the first things she feels she will need to do is to explain the benefits of decentralization that will
accrue to both the company and the affected employees.
Required:
Ms. Trane has asked you, as the consultant, to provide her with a general list of advantages of
decentralization that she will tailor to her company before presenting it to the executives and other
affected employees.

(a) Managers of the organization's subunits are specialists. They have specialized information that
enables them to manage their departments most effectively.
(b) Allowing managers some autonomy in decision making provides managerial training for future
higher-level managers.
(c) Managers with some decision-making authority usually exhibit greater motivation than those who
(d) Delegating some decisions to lower-level managers provides time-relief to upper-level managers,
enabling them to devote time to strategic planning.
(e) Empowering employees to make decisions draws on the knowledge and expertise of those closest to
day-to-day operations.
(f) Delegating decision-making to the lowest level possible enables an organization to give a timely
response to opportunities and problems as they arise.

AICPA: FN Reporting
Blooms: Understand
Difficulty: 3 Hard
Gradable: manual

12-206
150. Langsam, Inc. has used a decentralized form of organizational structure for the past five years. The
controller, Ms. Terrance, has noticed that some of the divisions are still using fixed assets that are fully
depreciated and that there has been little acquisition activity in these divisions. Coupled with this are
very high ROIs, especially when compared to the other divisions that seem to have a regular program of
disposition and replacement of fixed assets.
She takes her concerns and observations to the Financial Vice President who says he will review her
findings and look into the problem.
Required:
1) What are the potential negative effects of decentralization?

2) Specifically discuss the issues involved in suboptimization.

(1) (a) Managers in a decentralized organization sometimes have a narrow focus on their unit's
performance, rather than the attainment of their organization's overall goals.
(b) As a result of this narrow focus, managers may tend to ignore the consequences of their actions on
the organization's other subunits.
(c) In a decentralized organization, some tasks or services may be duplicated unnecessarily.
(2) The divisions with the high ROI and low replacements of fixed assets are comparing the returns on
potential replacements to their own high ROI and rejecting the replacements because they do not meet
this number. Their fear is that these replacements would reduce their ROI, a valid concern because the
invested capital component of the ROI formula would increase.
The suboptimization occurs if these replacements meet the company's minimum desired rate of return
on invested capital; it would have been to the overall benefit of the company to acquire the assets. This
is the type of issue addressed by residual income.

AICPA: FN Reporting
Blooms: Understand
Difficulty: 3 Hard
Gradable: manual

12-207
151. Describe the three main elements of a management control system.

1) Delegated decision authority is what decisions a subordinate manager can make in the name of the
organization. 2) Performance evaluation and measurement system: how the performance of the
subordinate manager is to be measured and how the results of the measurement will be used in
evaluation. 3) Compensation and reward systems: how will the subordinate manager be paid for his/her
performance.

Blooms: Apply
Gradable: manual

152. Describe the five basic types of decentralized units in responsibility accounting.

1) Cost Center: responsible for the cost of the activity of a center with a well-defined input-output
relationship. 2) Discretionary Cost Center: responsible for the cost of the activity of a center where the
input-output relationship is not well specified. 3) Revenue Center: responsible for selling a product. 4)
Profit Center: has responsibility for both costs and revenues. 5) Investment Center: has responsibility for
costs and revenues (profits) and also the investment in assets.

Blooms: Remember
Gradable: manual

12-208
153. There are five common types of responsibility centers listed below.
Required:
Briefly describe each of the following terms and provide an example of each term.
(a) Cost Center

(b) Discretionary Cost Center
(c) Revenue Center
(d) Profit Center
(e) Investment Center

(a) Cost center: an organizational subunit whose manager is responsible for the cost of an activity for
which a well-defined relationship exists between inputs and outputs. Production department in a
manufacturing firm; check processing department in a bank; laundry, laboratory, food service
department in a hospital.
(b) Discretionary cost center: an organizational subunit whose manager is held accountable for costs,
but the subunit's input-output relationship is not well specified. Administrative and marketing
departments such as legal, accounting, research and development, advertising.
(c) Revenue center: an organizational subunit whose manager is held accountable for the revenue
attributed to the subunit. Reservations department of an airline; sales department of a manufacturer.
(d) Profit center: an organizational subunit whose manager is held accountable for profit—both
revenues and expenses attributed to the subunit. Company-owned restaurant in a fast-food chain.
(e) Investment center: an organizational subunit whose manager is held accountable for the subunit's
profit and the invested capital used by the subunit to generate its profit. Divisions of a large corporation.

AICPA: FN Reporting
Blooms: Remember
Gradable: manual

12-209
154. Explain the difference between fixed compensation and contingent compensation. Give an example of
each.

Fixed compensation is paid to the manager independent of measured performance. A manager's salary is
an example. Contingent compensation is the amount of compensation that is paid based on measured
performance. Sales commissions would be an example of this.

Blooms: Remember
Gradable: manual

12-210
12-211
155. The order entry department of Dano Associated Industries is considering improvements in the order
entry process, which includes preparing quotations based on customers' requests (via the sales
representative) and processing orders received from customers.
A typical sequence of events might begin with a sales representative meeting with a customer to discuss
the type of system desired. The sales representative then fills out a paper form and faxes it or phones it
in to an order entry associate, who might make several subsequent phone calls to the sales
representative, the potential customer, or the manufacturing department to prepare the quote properly.
These phone calls deal with such questions as exchangeability of parts, part numbers, current prices for
parts, or allowable sales discounts. Order entry staff then keys in the configuration of the desired
system, including part numbers, and informs the sales representative of the quoted price. Each quote is
assigned a quotation number. To smooth production, manufacturing often produces systems with
standard configurations in anticipation of obtaining orders from recent quotes for systems. The systems
usually involve adding on special features to the standard configuration. Production in advance of orders
sometimes results in duplication in manufacturing, however, because customers often fail to put the
assigned quotation numbers on their orders. When order entry receives an order, the information on the
order is reentered into the computer to produce an order acknowledgement. This order
acknowledgement is sent to the manufacturing department, which produces the system ordered by
customer. When the order acknowledgement is sent to the invoicing department, the information is
reviewed again to generate an invoice to send to the customer.
Enrique Ramos, the order entry manager, has received many complaints from the order entry
department's internal customers regarding quality and timeliness problems, and is considering ways to
improve the efficiency and quality of the order entry process.
Required:
(a) Develop some indicators that Ramos could use to assess the performance of the order entry process.
(b) List four possible errors that might be found in the quote and/or the order acknowledgement (i.e.,
the outputs of the order entry process).
(c) What do you think are the likely causes of delays and quality problems?

(a) Ramos could use several indicators to assess the quality of the order entry process in this company.
Examples include: number of errors, percentage of errors (number of order acknowledgements with
errors divided by total number of order acknowledgements), number of change orders, change order
costs, total quality costs.
(b) Errors that can be found on either of the two output documents:
• Incorrect part number(s)

• More than one part number when only one is required
• Missing part number(s)
• Incorrect sales tax calculation
• Errors that can be found on the order acknowledgement:
• Incorrect business unit code
• Freight terms missing
• Incorrect shipping or billing address
• Credit approval missing
12-212
• There are several possible causes of the errors:
• Incomplete/incorrect information provided by the sales representative
• Order entry staff not having updated information from marketing regarding prices, discounts, etc.
• Incorrect entry of order by staff
(c) Causes of delays and quality problems include:
• Lack of proper communication between sales and production regarding special orders
• The primary cause is poor communication.

Blooms: Apply
Difficulty: 3 Hard
Gradable: manual

12-213
156. Vargas, Inc. is just starting up. The management team has decided from the beginning that
decentralization was the preferred organizational style and has made this clear in all interviews and
discussions with potential employees. Mr. Ross, the CEO, is unsure about the best way to evaluate his
division managers. He has heard the terms return on investment, residual income, economic value
added, and flexible budgets but wants to know the pros and cons of each.
Required:
Briefly describe ROI, residual income, EVA, and other approaches to performance evaluation. Discuss,
where appropriate, how to calculate the measure and problem areas in the development of some of the
numbers.

Formulas: ROI = divisional income/divisional invested capital = (divisional income/divisional sales

revenue) times (divisional sales revenue/divisional invested capital).
Residual income = divisional income - (divisional invested capital × imputed interest rate) where the
imputed interest rate is the minimum desired rate of return on invested capital.
EVA = divisional after-tax operating income - (divisional total assets - divisional current liabilities)
(WACC).
All three approaches use invested capital and divisional profit. Invested capital may be calculated using
total assets or total productive assets (which are total assets less current liabilities) A second issue
relates to the method of measuring the invested capital: gross book value or net book value. One might
say that net book value has some advantages because it is the approach used on the balance sheet and
the income statement, but it uses depreciation methods that are somewhat arbitrary and as time passes
the ROI can increase just because the net book value of the assets declines. Common centrally
controlled assets need to be allocated to the investment centers, e.g. cash, accounts receivable.
Divisional income is measured using the concept of controllability; deciding which items are controlled
by the division manager may not be clear cut.
Alternative approaches include flexible budgets, variance analysis and postaudits of major investment
decisions. While these are more complicated approaches, they help avoid the myopic problems of the
single-period measures such as ROI, RI, and EVA.

AICPA: FN Reporting
Blooms: Understand
Difficulty: 3 Hard
Gradable: manual

12-214
157. The executive vice president of Wyse Pen Company wants to establish an accounting-based
performance measurement system for the company's new plant. The company has an accounting
information system sufficient to support a fairly sophisticated performance measurement system. The
new plant is going to be considered an investment center since its products will be markedly different
from others the company currently sells. The new plant will have no internal dealings with other plants
within the company.
Required:
What are some of the key steps that should be undertaken in the establishment of an accounting-based
performance measurement system?

Key steps include:
1. Choose performance measures that align with top management's financial goals for the plant. They
would include those that relate to the plant as an investment center.
2. Choose the time horizon of each performance measure in step 1.
3. Choose a definition of the components in each performance measure in step 1. For example, how
should investment be defined?
4. Choose a measurement alternative for each performance measure in step 1. For example, should
historical cost or current cost be used to measure investment?
5. Choose a target level of performance.
6. Choose the timing of feedback.

Blooms: Remember
Gradable: manual

12-215
158. The manager of a business unit of a large corporation made some projections regarding sales and profits
for the upcoming final quarter of the year. The managers' performance evaluation and compensation
depended significantly on his ability to meet budget goals. The manager discovered that the final quarter
would have to be a particularly good quarter in order to meet these goals. He decided to implement a
sales program offering liberal payment terms in order to pull some sales that would normally occur next
year into the current year. Customers accepting delivery in the fourth quarter would not have to pay the
invoice for 140 days. Also, he sold some equipment that was not being used and realized a significant
profit on the sale.
Required:
Are these actions ethical? Why or why not?

Each of the manager's actions needs to be considered separately:
• Liberal credit terms - OK, a business strategy that should be judged on how it affects the firm's
operations and profits.
• Attempt to pull sales from one period to another - may not be OK. If the purpose of the change in
credit terms is simply to move sales from one period to another, then the result is misleading financial
reports and fraudulent; if the objective is to increase sales through management of credit policies, then
OK.
• Sale of equipment - may be OK, a business decision that should be judged on how it affects the firm's
operations and profits; may not be OK if done just to show a short term gain that would improve current
period profit.

Blooms: Remember
Gradable: manual

12-216
159. The controller of one division of a large diversified firm is compensated by salary plus bonus. The
bonus is a significant part of total compensation, and is based directly on the profits of the division.
Thus, the controller has an incentive to find ways to increase profits, including the delay of
discretionary expenses such as research and development, delay of maintenance and repair of
manufacturing equipment, and delay of sales promotions.
Required:
Is finding ways to increase profits as described above unethical? Why or why not? Who is to blame, if
anyone?

Since the actions contemplated by the controller are not in the best interests of the company, these
actions are probably not ethical, and are in conflict with the ethical standard of integrity. The situation
displays both conflict of interests and an attempt to subvert the firm's performance incentive system.
Both the incentive system and the controller are to blame in this case. While it is not reasonable to
expect that the firm can design a bias-free incentive system, it appears that the firm has not done an
acceptable job of developing a system that will reward performance based upon the firm's critical
success factors, instead of short-term profits only. Improvements in the incentive scheme are possible
and necessary. On the other hand, the controller cannot be excused for taking advantage of the
opportunity to manipulate profits. The standards are clear on the required professional behavior in this
case, and the controller has ignored them for self-serving purposes.

Blooms: Remember
Gradable: manual

160. How does the separation of duties help prevent financial fraud?

Separation of duties helps prevent financial fraud because it limits the opportunity to commit the fraud.
When a separation of duties exists, two or more individuals must engage in collusion to commit fraud.
While collusion can and does occur, it increases the risk that someone will "blow the whistle" on the
fraud. The increased risk of revealing fraud makes it less likely that fraud will occur. Thus, one manager
might have the decision authority to authorize purchases and another manager has the decision authority
to issue the payment.

Blooms: Remember
Gradable: manual
12-217

12-218
12-219
161. The fixed costs of operating the maintenance facility of Indian River Hospital are $4,500,000 annually.
Variable costs are incurred at the rate of $30 per maintenance-hour. The facility averages 40,000
maintenance-hours a year. Budgeted and actual hours per user for 20X3 are as follows:
Budgeted Actual

hours hours
Building and grounds 10,000 12,000
Operating and emergency 8,000 8,000
Patient care 21,000 22,000
Administration 1,000 1,200
Total 40,000 43,200
Assume that budgeted maintenance-hours are used to calculate the allocation rates.
Required:
a. If a single-rate cost-allocation method is used, what amount of maintenance cost will be budgeted for
each department?
b. If a single-rate cost-allocation method is used, what amount of maintenance cost will be allocated to
each department based on actual usage? Based on budgeted usage?
c. If a dual-rate cost-allocation method is used, what amount of maintenance cost will be budgeted for
each department?
d. If a dual-rate cost-allocation method is used, what amount of maintenance cost will be allocated to
each department based on actual usage? Based on budgeted usage for fixed operating costs and actual
usage for variable operating costs?

a. Total costs + $4,500,000 + ($30 × 40,000) = $5,700,000

Single rate = $5,700,000/40,000 mh = $142.50 per maintenance-hour
Single-rate budgeted amounts:
Building and grounds $142.50 × 10,000 = $1,425,000
Operating and emergency $142.50 × 8,000 = $1,140,000
Patient care $142.50 × 21,000 = $2,992,500
Administration $142.50 × 1,000 = $142,500
b. Total costs + $4,500,000 + ($30 × 40,000) = $5,700,000

Single rate = $5,700,000/40,000 mh = $142.50 per maintenance-hour
Single-rate allocated amounts:
Building and grounds $142.50 × 12,000 = $1,710,000
Operating and emergency $142.50 × 8,000 = $1,140,000
Patient care $142.50 × 22,000 = $3,135,000
Administration $142.50 × 1,200 = $171,000
c. Dual-rate budgeted amounts:
12-220
Building and grounds:
Fixed ($4,500,000 × 10/40) $1,125,000
Variable ($30 × 10,000) 300,000
Total $1,425,000
Operating and emergency:
Fixed ($4,500,000 × 8/40) $900,000
Variable ($30 × 8,000) 240,000
Total $1,140,000
Patient care:
Fixed ($4,500,000 × 21/40) $2,362,500
Variable ($30 × 21,000) 630,000
Total $2,992,500
Administration:
Fixed ($4,500,000 × 1/40) $112,500
Variable ($30 × 1,000) 30,000
Total $142,500
d. Dual-rate allocated amounts:
Building and grounds:

Fixed ($4,500,000 × 10/40) $1,125,000
Variable ($30 × 12,000) 360,000
Total $1,485,000
Operating and emergency:
Fixed ($4,500,000 × 8/40) $900,000
Variable ($30 × 8,000) 240,000
Total $1,140,000
Patient care:
Fixed ($4,500,000 × 21/40) $2,362,500
Variable ($30 × 22,000) 660,000
Total $3,022,500
Administration:
Fixed ($4,500,000 × 1/40) $112,500
Variable ($30 × 1,200) 36,000
Total $148,500
12-221

Blooms: Apply
Difficulty: 3 Hard
Gradable: manual

12-222
12-223
162. The Michael Vamosi Corporation operates one central plant that has two divisions, the Lamp Division
and the Flashlight Division. The following data apply to the coming budget year:
Budgeted costs of the operating

the plant
for 10,000 to 20,000 hours:
$240,000
year
Variable operating costs $10 per hour
hours per
Practical capacity 20,000
year
Budgeted long-run

usage per year:
Lamp Division 9,600
months = year
Flashlight Division 5,400
months = year
Assume that practical capacity is used to calculate the allocation rates. Further assume that actual usage
of the Lamp Division was 700 hours and the Flashlight Division was 400 hours for the month of June.
Required:
a. If a single-rate cost-allocation method is used, what amount of operating costs will be budgeted for
the Lamp Division each month? For the Flashlight Division each month?
b. For the month of June, if a single-rate cost-allocation method is used, what amount of cost will be
allocated to the Lamp Division? To the Flashlight Division? Assume actual usage is used to allocate
operating costs.
c. If a dual-rate cost-allocation method is used, what amount of operating costs will be budgeted for the
d. For the month of June, if a dual-rate cost-allocation method is used, what amount of cost will be
allocated to the Lamp Division? To the Flashlight Division? Assume budgeted usage is used to allocate
fixed operating costs and actual usage is used to allocate variable operating costs.

a.
Fixed costs $240,000/20,000 practical capacity hours =

$12/hour
Single-rate cost-allocation = $12 + $10 = $22 per hour
12-224
800 × $22/hour
Lamp Division $17,600 per month
=
Flashlight 450 × $22/hour
$9,900 per month
Division =
b.
700 × $22/hour
Lamp Division $15,400 per month
=
Flashlight 400 × $22/hour
$8,800 per month
Division =
c.
Fixed costs $240,000/20,000 practical capacity hours =

$12/hour
Budgeted costs - Lamp Division
(800 × $12/hour) + (800 ×
$17,600 per month
$10/hour) =
Budgeted costs - Flashlight

Division
(450 × $12/hour) + (450 ×
$9,900 per month
$10/hour) =
d.
Allocated costs for June - Lamp

Division
(800 × $12/hour) + (700 × per
$16,600
$10/hour) = month
Allocated costs for June - Flashlight

Division
(450 × $12/hour) + (400 × per
$9,400
$10/hour) = month

Blooms: Apply
Difficulty: 1 Easy
Gradable: manual

12-225

Fundamentals of Management Control Systems: True / False Questions

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Fundamentals of Management Control Systems: True / False Questions

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Chapter 12

Fundamentals of Management Control Systems

True / False Questions

Multiple Choice Questions

A. The relationship between a superior and a subordinate.

A. A stockbroker in an investment arrangement.

A. Better use of local knowledge.

A. The U.S. military is a good example of an organization that is highly decentralized.

A. More effective solutions to operational problems.

A. Decentralization increases the complexity of problems.

A. Delegated decision authority.

A. only for costs.

A. only for costs.

A. only for costs.

A. only for costs.

A. standard cost center

A. standard cost center

Profit Center Investment Center

Revenue Center Cost Center

Profit Center Investment Center

Profit Center Cost Center

I. A profit center has control over both cost and revenue.

A. County fire department

A. The correct allocation of controllable variable costs.

A. Contribution Margin of $175,000.

A. all items over which they have decision-making authority.

A. compare managers to other comparable managers.

A. direct materials and direct labor only.

A. top management reports are more detailed.

A. separated into their fixed and variable components.

Available capacity 6,000,000 pages

Available capacity 6,000,000 pages

Available capacity 6,000,000 pages

Available capacity 6,000,000 pages

Available capacity 6,000,000 pages

Available capacity 6,000,000 pages

Available capacity 8,000,000 pages

Available capacity 8,000,000 pages

Available capacity 8,000,000 pages

Available capacity 8,000,000 pages

Available capacity 8,000,000 pages

Available capacity 8,000,000 pages

Available capacity 8,000,000 pages

Available capacity 8,000,000 pages

Available capacity 8,000,000 pages

A. The cost of using a shared resource.

A. can bear the cost.

A. actual total cost.

A. service and not-for-profit industries.

A. Motivate managers to exert a high-level of effort.

A. use investment centers to evaluate top managers.

A. Rotating personnel among tasks.

A. using contingent compensation plans.

Division Time Usage Number of Reservations

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Budgeted usage: Pages Documents

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Budgeted usage: Contracts Pages Reviewed

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