Question : 7) The practical capacity method of allocating costs is: A) : 1216996

7) The practical capacity method of allocating costs is:

A) based on the budgeted capacity demanded.

B) based on actual capacity used.

C) based on the practical capacity supplied.

D) based on the using departments negotiating the charges they will accept.

8) When budgeted cost-allocation rates are used, user-division managers face uncertainty about the allocation rates for that budget period.

9) When actual cost-allocation rates are used, managers of the supplier division are motivated to improve efficiency.

10) When budgeted cost-allocation rates are used, variations in actual usage by one division affect the costs allocated to other divisions.

11) The only choices that a firm has for support department cost allocation rates are to use either a budgeted rate or an actual rate.

12) The most common method to allocate support department costs is to employ actual rates based on the costs realized during the period.

13) Blaster Drive-In is a fast-food restaurant that sells 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:

BurgersHot Dogs

Sales for January4,0002,400

Sales for February6,4002,400

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.

14) Marvelous Motors is a small motor supply outlet that sells motors to companies that make various small motorized appliances. The fixed operating costs of the company are $300,000 per year. The controlling shareholder, interested in product profitability and pricing, wants all costs allocated to the motors and wants to review the company status on a quarterly basis. The shareholder is trying to determine whether the costs should be allocated each quarter based on the 25% of the annual fixed operating costs ($75,000) or by using an annual forecast budget to allocate the costs. The following information is provided for the operations of the company:

ForecastActual

Sales for First Quarter5,0004,850

Sales for Second Quarter              8,0007,900

Sales for Third Quarter8,0008,125

Sales for Fourth Quarter3,0003,125

Required:

a.What amount of fixed operating costs are assigned to each motor by quarter when actual sales are used as the allocation base and $75,000 is allocated?

b.How much fixed cost is recovered each quarter under requirement a.?

c.What amount of fixed operating costs are assigned to each motor by quarter when forecast sales are used as the allocation base and the rate is calculated annually as part of the budgetary process?

d.How much fixed cost is recovered each quarter under requirement c.?

e.Which method seems more appropriate in this case? Explain.

15) Jonathan has managed a downtown store in a major metropolitan city for several years. The firm has ten stores in varying locations. In the past, senior management noticed Jonathan’s work and he has received very good annual evaluations for his management of the store.

This year his store has generated steady growth in sales, but earnings have been deteriorating. After examining the monthly performance report generated by the company budgeting department, he noticed that increasing fixed costs is causing the decrease in earnings.

Administrative corporate costs, primarily fixed costs, are allocated to individual stores each month based on actual sales for that month. Two of these stores are currently growing at a rapid pace, while four other stores are having operating difficulties.

Required:

From the information presented, what do you think is the cause of Jonathan’s reported decrease in earnings? How can this be corrected?