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173 Chapter 13

Chapter 13 E 6. The method for allocating service department costs that requires the least
clerical work is:
FACTORY OVERHEAD: DEPARTMENTALIZATION A. use of square footage in each department
B. step method
C. allocation to other service departments only
D. simultaneous method
E. direct method

MULTIPLE CHOICE E 7. Rapid Falls Corp. has three producing departments, A, B, and C, with 50, 30, and
20 employees, respectively, in each department. Factory payroll costs other
than direct labor are accumulated in a Payroll Department account and are
Question Nos. 10, 11-14, and 26 are AICPA adapted. assigned to producing departments on the basis of number of employees. The
Question Nos. 15-28 and 23-25 are CIA adapted. total payroll in each department was: A, $300,000; B, $275,000; C, $325,000;
and Payroll, $50,000. Other costs accumulated in the Payroll Department
C 1. A department that would be classified as a producing department is: amounted to $200,000. The amount of Payroll Department costs chargeable to
A. Production Control Department C is:
B. Utilities A. $125,000
C. Finishing B. $100,000
D. Medical C. $40,000
E. Shipping D. $10,000
E. $50,000
B 2. A department that would be classified as a service department is:
A. Refining
B. Receiving SUPPORTING CALCULATION:
C. Mixing
D. Assembly $50,000 + $200,000
= $2,500 /employee _ 20 = $50,000
E. Finishing 50 + 30 + 20

A 3. In determining the right method for allocating equipment depreciation to

departments, the best recommendation is to:
A. use the cost of equipment in the department as a basis for allocation E 8. The following statement that best describes cost allocation is:
B. allocate on the basis of square footage used in a given department A. a company, as a general rule, should allocate indirect costs randomly or
C. charge the amounts to General Plant based on an "ability-to-bear" criterion
D. use algebraic techniques B. a company can affect total income the most strongly by using the algebraic
E. allocate on the basis of companywide rates method of allocating indirect costs
C. a company can maximize or minimize total company income by selecting
A 4. The most reasonable basis for allocating worker's compensation insurance is: different bases on which to allocate indirect costs
A. departmental payroll D. a company should select an allocation base to raise or lower reported
B. building depreciation income on given products
C. kilowatt-hours E. a company's total income will remain unchanged no matter how indirect
D. number of employees costs are allocated
E. materials used

E 5. A company is attempting to allocate the costs of electricity in various

departments. The variable portion of electricity expense is to be allocated using
kilowatt-hours. The information needed in order to allocate the fixed portion of
the current period's electricity expense is:
A. rated horsepower of equipment
B. number of machines in each department
C. estimated materials consumption
D. number of employees
E. square footage in each department

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Factory Overhead: Departmentalization 174 175 Chapter 13

$82,100 + $65,000 + $56,100

D 9. Carmichael Manufacturing Company has two production departments = $1.27 _ 88,000 = $111,760
88,000 + 72,000
(Fabrication and Assembly) and three service departments (General Factory
Administration, Factory Maintenance, and Factory Cafeteria). A summary of the
year's costs and other data for each department prior to allocation of service A 10. Carmichael Manufacturing Company has two production departments
department costs appears below. (Fabrication and Assembly) and three service departments (General Factory
Administration, Factory Maintenance, and Factory Cafeteria). A summary of the
General Factory ) year's costs and other data for each department prior to allocation of service
Fabrication Assembly Administration ) department costs appears below.
Labor costs................................. $1,950,000 $2,050,000 $90,000 )
Material costs............................. $3,130,000 $ 950,000 --- ) General Factory )
Overhead................................... $1,650,000 $1,850,000 $70,000 ) Fabrication Assembly Administration )
Direct labor hours...................... 562,500 437,500 31,000 ) Labor costs................................. $1,950,000 $2,050,000 $90,000 )
Number of employees................ 280 200 12 ) Material costs............................. $3,130,000 950,000 --- )
Square footage occupied........... 88,000 72,000 1,750 ) Overhead................................... $1,650,000 $1,850,000 $70,000 )
Direct labor hours...................... 562,500 437,500 31,000 )
( Factory Factory Number of employees................ 280 200 12 )
( Maintenance Cafeteria Square footage occupied........... 88,000 72,000 1,750 )
( $82,100 $87,000
( $65,000 $91,000 ( Factory Factory
( $56,100 $62,000 ( Maintenance Cafeteria
( 27,000 42,000 ( $82,100 $87,000
( 8 20 ( $65,000 $91,000
( 2,000 4,800 ( $56,100 $62,000
( 27,000 42,000
The costs of the General Factory Administration Department, Factory ( 8 20
Maintenance Department, and Factory Cafeteria are allocated on the basis of ( 2,000 4,800
direct labor hours, square footage occupied, and number of employees,
respectively. There are no manufacturing overhead variances. The costs of the General Factory Administration Department, Factory
Assuming that Carmichael elects to distribute service department costs Maintenance Department, and Factory Cafeteria are allocated on the basis of
under the direct method of cost allocation, the amount of Factory Maintenance direct labor hours, square footage occupied, and number of employees,
Department costs that would be allocated to the Fabrication Department is respectively.
(round all final calculations to the nearest dollar): The amount of General Factory Administration Department costs that would
A. $106,091 be allocated to the Assembly Department under the direct method is (round all
B. $91,440 final calculations to the nearest dollar):
C. $0 A. $70,000
D. $111,760 B. $90,000
E. none of the above C. $0
D. $63,636
E. none of the above
SUPPORTING CALCULATION:

SUPPORTING CALCULATION:

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Factory Overhead: Departmentalization 176 177 Chapter 13

$90,000 + $70,000 $87,000 + $91,000 + $62,000

= $.16 _ 437,500 = $70,000 = $480 / employee _ 8 = $3,840
562,500 + 437,500 280 + 200 + 12 + 8

B 11. Carmichael Manufacturing Company has two production departments B 12. Carmichael Manufacturing Company has two production departments
(Fabrication and Assembly) and three service departments (General Factory (Fabrication and Assembly) and three service departments (General Factory
Administration, Factory Maintenance, and Factory Cafeteria). A summary of the Administration, Factory Maintenance, and Factory Cafeteria). A summary of the
year's costs and other data for each department prior to allocation of service year's costs and other data for each department prior to allocation of service
department costs appears below. department costs appears below.

General Factory ) General Factory )

Fabrication Assembly Administration ) Fabrication Assembly Administration )
Labor costs................................. $1,950,000 $2,050,000 $90,000 ) Labor costs................................. $1,950,000 $2,050,000 $90,000 )
Material costs............................. $3,130,000 $950,000 --- ) Material costs............................. $3,130,000 $950,000 --- )
Overhead................................... $1,650,000 $1,850,000 $70,000 ) Overhead................................... $1,650,000 $1,850,000 $70,000 )
Direct labor hours...................... 562,500 437,500 31,000 ) Direct labor hours...................... 562,500 437,500 31,000 )
Number of employees................ 280 200 12 ) Number of employees................ 280 200 12 )
Square footage occupied........... 88,000 72,000 1,750 ) Square footage occupied........... 88,000 72,000 1,750 )

( Factory Factory ( Factory Factory

( Maintenance Cafeteria ( Maintenance Cafeteria
( $82,100 $87,000 ( $82,100 $87,000
( $65,000 $91,000 ( $65,000 $91,000
( $56,100 $62,000 ( $56,100 $62,000
( 27,000 42,000 ( 27,000 42,000
( 8 20 ( 8 20
( 2,000 4,800 ( 2,000 4,800

The costs of the General Factory Administration Department, Factory The costs of the General Factory Administration Department, Factory
Maintenance Department, and Factory Cafeteria are allocated on the basis of Maintenance Department, and Factory Cafeteria are allocated on the basis of
direct labor hours, square footage occupied, and number of employees, direct labor hours, square footage occupied, and number of employees,
respectively. respectively.
Assuming that Carmichael elects to distribute service department costs to How much of the Factory Maintenance Department costs would be allocated
other service departments using the step method of cost allocation and that the to the Factory Cafeteria under the step method, assuming that the order of
order of distribution is based on the dollar amount of costs originating in the distribution is based on the dollar amount of costs originating in the service
service departments, how much of the total Factory Cafeteria cost would be departments? (Round all final calculations to the nearest dollar.)
allocated to the Factory Maintenance Department? (Round all final calculations A. $148,910
to the nearest dollar.) B. $0
A. $96,000 C. $5,787
B. $3,840 D. $5,856
C. $6,124 E. none of the above
D. $0
E. none of the above
SUPPORTING CALCULATION:

SUPPORTING CALCULATION: Factory Cafeteria costs.......................................................................... $240,000

Factory Maintenance costs.................................................................... $203,300
 Factory Cafeteria already closed out.

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Factory Overhead: Departmentalization 178 179 Chapter 13

A 13. Acie Company has two service departments and three production departments, D 14. Acie Company has two service departments and three production departments,
each producing a separate product. For a number of years, Acie has allocated each producing a separate product. For a number of years, Acie has allocated
the costs of the service departments to the production departments on the basis the costs of the service departments to the production departments on the basis
of the annual sales dollars. In a recent audit report, the internal auditor stated of the annual sales dollars. In a recent audit report, the internal auditor stated
that the distribution of service department costs on the basis of annual sales that the distribution of service department costs on the basis of annual sales
dollars would lead to serious inequities. It was recommended that maintenance dollars would lead to serious inequities. It was recommended that maintenance
and engineering service hours be used as a better service cost allocation basis. and engineering service hours be used as a better service cost allocation basis.
For illustration purposes, the following information was appended to the audit For illustration purposes, the following information was appended to the audit
report: report:

Service Departments ) Service Departments )

Maintenance Engineering ) Maintenance Engineering )
Maintenance hours used...................... 400 ) Maintenance hours used...................... 400 )
Engineering hours used........................ 400 ) Engineering hours used........................ 400 )
Department direct costs....................... $12,000 $54,000 ) Department direct costs....................... $12,000 $54,000 )

( Production Departments ( Production Departments

( Department A Department B Department C ( Department A Department B Department C
( 800 200 200 ( 800 200 200
( 800 400 400 ( 800 400 400
( $80,000 $90,000 $50,000 ( $80,000 $90,000 $50,000

Using the simultaneous method, what would be the total Engineering Using the simultaneous method, what would be the total Maintenance
Department cost after allocation of interservice department costs, but before Department cost after allocation of interservice department costs, but before
allocation to the Maintenance and Production Departments? allocation to the Engineering and Production Departments?
A. $60,000 A. $72,000
B. $57,000 B. $12,000
C. $12,000 C. $60,000
D. $54,000 D. $24,000
E. none of the above E. none of the above

SUPPORTING CALCULATION: SUPPORTING CALCULATION:

Maintenance = $12,000 + .2E Maintenance = $12,000 + .2E

Engineering = $54,000 + .25M Engineering = $54,000 + .25M
E = $54,000 + .25($12,000 + .2E) M = $12,000 + .2E
E = $54,000 + $3,000 + .05E M = $12,000 + .2($54,000 + .25M)
.95E = $57,000 M = $12,000 + $10,800 + .05M
E = $60,000 .95M = $22,800
M = $24,000

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Factory Overhead: Departmentalization 180 181 Chapter 13

C 15. Acie Company has two service departments and three production departments, B 16. Acie Company has two service departments and three production departments,
each producing a separate product. For a number of years, Acie has allocated each producing a separate product. For a number of years, Acie has allocated
the costs of the service departments to the production departments on the basis the costs of the service departments to the production departments on the basis
of the annual sales dollars. In a recent audit report, the internal auditor stated of the annual sales dollars. In a recent audit report, the internal auditor stated
that the distribution of service department costs on the basis of annual sales that the distribution of service department costs on the basis of annual sales
dollars would lead to serious inequities. It was recommended that maintenance dollars would lead to serious inequities. It was recommended that maintenance
and engineering service hours be used as a better service cost allocation basis. and engineering service hours be used as a better service cost allocation basis.
For illustration purposes, the following information was appended to the audit For illustration purposes, the following information was appended to the audit
report: report:

Service Departments ) Service Departments )

Maintenance Engineering ) Maintenance Engineering )
Maintenance hours used...................... 400 ) Maintenance hours used...................... 400 )
Engineering hours used........................ 400 ) Engineering hours used........................ 400 )
Department direct costs....................... $12,000 $54,000 ) Department direct costs....................... $12,000 $54,000 )

( Production Departments ( Production Departments

( Department A Department B Department C ( Department A Department B Department C
( 800 200 200 ( 800 200 200
( 800 400 400 ( 800 400 400
( $80,000 $90,000 $50,000 ( $80,000 $90,000 $50,000

Using the step method of cost allocation, what amount of maintenance cost Using the step method of cost allocation, what amount of engineering cost would
would be allocated to Department A, assuming that the service departments are be allocated directly to Department A, assuming that the service departments
distributed in the order of total dollars of direct departmental costs? are distributed in the order of total dollars of direct departmental costs?
A. $0 A. $11,400
B. $25,500 B. $21,600
C. $15,200 C. $10,800
D. $3,187.50 D. $22,800
E. none of the above E. none of the above

SUPPORTING CALCULATION: SUPPORTING CALCULATION:

Maintenance = $12,000 + .2($54,000) = $22,800 800/2,000 x $54,000 = $21,600

Department A = 800/1,200 x $22,800 = $15,200
E 17. A factor to be considered in deciding the kinds of departments required for
establishing accurate departmental overhead rates with which to control costs
is:
A. location of operations, processes, and machinery
B. responsibilities for production and costs
C. number of departments or cost centers
D. similarity of operations, procedures, and machinery in each department
E. all of the above

E 18. Services available for the benefit of producing departments and other service
departments can be organized by:
A. establishing a separate service department for each function
B. combining several functions into one department
C. placing service costs in a department called "general factory cost pool"
D. none of the above
E. all of the above

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Factory Overhead: Departmentalization 182 183 Chapter 13

B 19. Entities that have practiced departmentalization for many years, by grouping SUPPORTING CALCULATION:
their activities into categories such as occupancy, sales promotion, purchasing,
and delivery are: 30,000
A. hospitals _ $100,000 = $75,000
40,000
B. retail stores
C. banks
D. insurance companies C 23. Serpent Corp. distributes service department overhead costs directly to
E. colleges producing departments without allocation to the other service department.
Information for the month of June is as follows:
A 20. An automotive company has three divisions. One division manufactures new
replacement parts for automobiles; another rebuilds engines; and the third does Service Departments
repair and overhaul work on a line of trucks. All three divisions use the services Maintenance Utilities
of a central payroll department. The best method of allocating the cost of the Overhead costs incurred...................................... $20,000 $10,000
payroll department to the various operating divisions is: Service provided to department:
A. total labor hours incurred in the divisions Maintenance.................................................. -- 10%
B. value of production in the divisions Utilities........................................................... 20% --
C. direct materials costs incurred in the divisions ProducingCA................................................... 40% 30%
D. machine hours used in the divisions ProducingCB................................................... 40% 60%
E. none of the above Totals.................................................................... 100% 100%

B 21. The Janitorial Department provides cleaning services to all departments of a The amount of Maintenance Department costs distributed to ProducingCA
large store. Management wishes to allocate the janitorial costs to the various Department for June was:
departments that benefit from the service. The most reasonable allocation base A. $8,000
for janitorial costs would be: B. $8,800
A. sales of each department C. $10,000
B. square footage of each department D. $11,000
C. number of employees in each department E. none of the above
D. total direct costs of each department before any allocations
E. none of the above
SUPPORTING CALCULATION:
C 22. A hospital has a $100,000 expected utility bill this year. The Janitorial,
Accounting, and Orderlies Departments are service functions to the Operating, 40%
Hospital Rooms, and Laboratories Departments. Floor space assigned to each _ $20,000 = $10,000
80%
department is:

Department............................................................................ Square Footage

Janitorial................................................................................. 1,000 D 24. Multiple overhead rates are most commonly used when:
Accounting............................................................................. 2,000 A. production consists of long runs of a single product
Orderlies................................................................................ 7,000 B. the company has more than one production department
Operating............................................................................... 4,000 C. manufacturing operations are labor intensive
Hospital Rooms...................................................................... 30,000 D. production consists of a diverse product line
Laboratories........................................................................... 6,000 E. none of the above
...................................................................................... 50,000
B 25. An example of a nonvolume-related overhead base would be:
How much of the $100,000 will eventually become the Hospital Rooms A. direct materials cost
Department total costs, assuming use of the direct method of allocation based B. number of setups
on square footage? C. machine hours
A. $60,000 D. direct labor dollars
B. $72,000 E. none of the above
C. $75,000
D. $80,000
E. none of the above

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Factory Overhead: Departmentalization 184 185 Chapter 13

C 26. An example of a department that would be a prime candidate for multiple PROBLEMS
overhead rates would be one whose overhead was primarily:
A. labor driven
B. machine related PROBLEM
C. caused by setups and production design changes
D. materials related 1.
E. none of the above Overhead Allocation and Rates. To determine an overhead application rate for its
Machining and Assembly Departments, the management of Knight Co. requested the
following overhead cost data for June:

Machining Assembly
Item Department Department Total
Number of employees........................................... 60 40 100
Square footage...................................................... 15,000 10,000 25,000
Monthly average wage per employee
(direct and indirect)......................................... $ 2,000 $2,500 --
Overhead directly chargeable to
department (excluding indirect labor)............. $90,000 $75,000 $165,000
Materials used....................................................... 60,000 90,000 150,000
Factory rent............................................................ ? ? 33,000
Other building costs............................................... ? ? 60,000
Payroll Department cost........................................ ? ? 18,000
Freight-in and other Receiving
Department costs............................................ ? ? 75,000

In each department, 80% of the employees are direct laborers. Overhead is charged to
production on the basis of direct labor dollars. The allocation basis for other data is as
follows: all building costs, square footage; Payroll Department cost, number of employees;
freight-in and other Receiving Department costs, materials used.

Required:

(1) Compute the total overhead chargeable to the Machining and Assembly
Departments.
(2) Compute the overhead application rate as a percentage of direct labor cost for each
department. (Round to the nearest whole percent.)

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