Question : 29) The Pitt Corporation has been outsourcing data processing in : 1216995

29) The Pitt Corporation has been outsourcing data processing in the belief that such outsourcing would reduce costs and increase corporate profitability. In spite of this, there has been no meaningful increase in corporate profitability.

Previously, Pitt used a single-rate method to allocate data processing costs. A per unit cost for data processing was computed and compared to the price of the outside supplier. The price of the outside supplier was lower, so the outside bid was accepted.

Required:

Formulate a possible reason why Pitt’s profitability has not shown improvement in terms of the cost allocation method used.

30) Van Meter Fig Company has substantial fluctuations in its production costs because of the seasonality of figs.

Would you recommend an actual or budgeted allocation base? Why? Would you recommend calculating monthly, seasonal, or annual allocation rates? Why?

Objective 15.2

1) When budgeted cost-allocations rates are used:

A) variations in actual usage by one division affect the costs allocated to other divisions

B) the manager of the supplier division bears the risk of unfavorable cost variances

C) user divisions pay for costs that exceed budgeted amounts

D) user divisions pay for inefficiencies of the supplier department

2) When actual cost-allocations rates are used:

A) user divisions pay for costs that exceed budgeted amounts

B) managers of the supplier division are motivated to improve efficiency

C) user divisions do not know allocated amounts until the end of the accounting period

D) managers of the user divisions may be tempted to underestimate planned usage

3) Under the dual-rate cost-allocation method, when fixed costs are allocated based on actual usage then:

A) user-division managers are motivated to make accurate long-run usage forecasts

B) user-division managers can better plan for the short-run and for the long-run

C) the costs of unused capacity are highlighted

D) variations in one division’s usage affect another division’s allocation

4) The costs of unused capacity are highlighted when:

A) actual usage based allocations are used

B) budgeted usage allocations are used

C) practical capacity-based allocations are used

D) the dual-rate cost-allocation method allocates fixed costs based on actual usage

5) To discourage unnecessary use of a support department, management might:

A) not allocate any support department costs to user departments

B) allocate support department costs based upon user department usage

C) allocate a fixed amount of support department costs to each department regardless of use

D) issue memos on useful services provided by the support department

6) The biggest advantage of using practical capacity to allocate costs is that it:

A) is a value that is readily available

B) never causes over or under-allocated overhead

C) burdens the user divisions with the costs of unused capacity

D) focuses management’s attention on unused capacity