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Cost allocation, master budgeting, capital decisions

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1. Why is cost allocation imprecise?? Pick one of the different methods we can use, describe it and the pluses and minuses of that method?

2. The master budget contains three types of budgets. What do you think is the cornerstone (or most critical element) of the master budget? Discuss why?

3. Fundamental to the decision-making process is the ability to determine whether a cost is relevant to the decision. Tactical decision making consists of choosing among alternatives with an immediate or limited end in view. It should be noted, however, that short-term decisions can lead to long-term consequences. Tactical decision making consists of choosing among alternatives with an immediate or limited end in view. Tactical decisions can be short term or small scale in nature but must be made so that larger strategic objectives are served. Identify the primary qualities of revenues and costs that are relevant for decision making.

4. There are four primary methods of examining capital decisions - two are discounting methods and two are not. Please pick one of them, explain the method and the pros and cons. Remember; include a discussion on the difference between discounting and non-discounting methods.

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Solution Preview

1. Cost Allocation Method pros and cons: Direct Method

I personally like the direct method for allocating costs from service departments to operating departments.
Pro: It is simple and easy to compute and explain.
Pro: It assigns costs to producing departments based on their use of resources.
Con: It ignores how service departments use indirect resources and thus may lead to overuse by service departments (it seems free to them)

2. Critical element for master budget

The critical element for the master budget is the sales forecast. That is because nearly all of the variable costs are based on the level of activity and the products needed to make the sales forecast. For instance, if the sales forecast indicates that you expect 100,000 units to sell, you need to produce enough or purchase enough to have 100,000 on hand, a store that can handle that level of merchandise, enough cashiers to check out that many ...

Solution Summary

Your discussion is 553 words and two references and discusses two pros one con of the direct method, the critical budget for master budgets, how to discern the relevant sales and costs for a decision, the two discounted methods and the two undiscounted methods, and three pros and three cons of internal rate of return (IRR).

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Accounting multiple choice

31) _____ budgeting is when budgets are formulated with the active participation of all affected employees

A. Financial

B. Team

C. Participative

D. Shared

32) A sales forecast is _____.

A. a prediction of sales under a given set of conditions

B. the result of decisions to create conditions

C. the same as a sales budget that will generate a desired level of sales

D. all of these answers are correct

33) _____ models are mathematical models of the master budget that can react to any set of assumption about sales, costs, and product mix.

A. Budgeting analysis

B. Financial planning

C. Accounting

D. Futuring

34) A _____ gives the expected sales under a given set of conditions.

A. sales prediction

B. sales budget

C. budget forecast

D. sales forecast

35) The master budget includes forecasts for all of the following except _____.

A. sales

B. number of employees

C. balance sheets

D. cash disbursements

36) Important factors considered by sales forecasters include all of the following except _____.

A. past patterns of sales

B. marketing research studies

C. competitors' activities

D. the desired level of sales

37) _____ probably would not be used as a measure of activity in a flexible budget.

A. Sales volume

B. Number of direct labor hours worked

C. Number of machine hours used

D. Number of hours worked by salespeople

38) _____ are components of a master budget.

A. A strategic plan and an operating budget

B. An operating budget and a financial budget

C. A continuous budget and a static budget

D. A cash budget and an activity budget

39) Which of the following statements is false?

A. Flexible budgets help provide a basis for management by exception.

B. Flexible budgets are not based on the same revenue and cost behavior assumptions as the static budget.
C. Flexible budgets are prepared for a range of activity.

D. Flexible budgets are automatically matched to changes in activity levels

40) Cost allocation base refers to the _____.

A. cost driver

B. total allocated costs

C. cost objectives

D. total costs to be allocated

41) The use of budgeted service department cost rates protects using departments from _____.

A. service department efficiencies

B. service outages

C. all of these answers are correct

D. price fluctuations

42) Costs are allocated for all the following purposes except to _____.

A. predict the economic effects of planning and control decisions
B. determine inventory levels

C. compute income and asset valuation

D. obtain reimbursement

43) Kevin Company has two service departments, Maintenance and Personnel, as well as two production departments, Mixing and Finishing. Maintenance costs are allocated based on square footage while personnel costs are allocated based on number of employees. The following information has been gathered for the current year:
Maintenance Personnel Mixing Finishing
Direct dept. costs $126,000 $84,000 $105,000 $175,000
Square footage 800 400 1,600 1,200
Number of employees 8 12 24 32

If the step-down method of allocating costs is used and the Personnel Department is allocated first, then the amount of overhead that would be allocated from Personnel to Finishing is _____.

A. $42,000

B. $31,500

C. $105,000

D. $72,000

44) Serena Company has two service departments, Maintenance and Personnel, as well as two production departments, Mixing and Finishing. Maintenance costs are allocated based on square footage while personnel costs are allocated based on number of employees. The following information has been gathered for the current year:
Maintenance Personnel Mixing Finishing
Direct dept. costs $126,000 $84,000 $105,000 $175,000
Square footage 800 400 1,600 1,200
Number of employees 8 12 24 32

If the step-down method is used to allocate costs and the Maintenance Department is allocated first, then the amount of overhead that would be allocated from Maintenance to Finishing is _____.

A. $42,750

B. $57,000

C. $47,250

D. $31,500

45) Murphy Company has two service departments, Maintenance and Personnel, as well as two production departments, Mixing and Finishing. Maintenance costs are allocated based on square footage while personnel costs are allocated based on number of employees. The following information has been gathered for the current year:
Maintenance Personnel Mixing Finishing
Direct dept. costs $126,000 $84,000 $105,000 $175,000
Square footage 800 400 1,600 1,200
Number of employees 8 12 24 32

If the step-down method of allocating costs is used and the Personnel Department is allocated first, then the amount of overhead that would be allocated from Personnel to Mixing is _____.

A. $31,500

B. $63,000

C. $78,000

D. $58,500

46) factory overhead appears on the absorption-costing income statement as_____.

A. a fixed expense

B. a production volume variance

C. part of cost of goods sold and as a production volume variance
D. part of cost of goods sold

47) _____ is (are) used for external reporting.

A. Absorption costing

B. Absorption costing and variable costing
C. Direct costing

D. Variable costing

48) _____ is another term for variable costing.

A. Full costing

B. Absorption costing
C. Traditional costing

D. Direct costing

49) _____ is the first step in designing a management control system.

A. Evaluating management's performance

B. Distinguishing between profit centers and cost centers
C. Preparing financial statements

D. Establishing organizational goals

50) Identify which of the following is not a characteristic of a management control system.

A. A management control system aids and coordinates the process of making decisions.

B. A management control system coordinates forecasting sales and cost driver activities, budgeting, and measuring and evaluating performance.
C. A management control system motivates individuals throughout the organization to act in concert.
D. A management control system encourages short term profitability.

51) _____ is the logical integration of management accounting tools to gather and report data and to evaluate performance.

A. An internal control system

B. A management control system
C. A financial reporting system

D. A quality control system

52) The following information is available for the Peter Company:

Sales $500,000
Invested Capital 312,500
ROI 10%

The return on sales is _____.

A. 10.000%

B. none of these answers is correct
C. 1.000%

D. 6.250%

53) The following information is available for the Peter Company:

Sales $150,000
Invested Capital 156,250
ROI 10%

The return on sales is _____.

A. 10.00%

B. 10.42%

C. 62.50%

D. none of these answers is correct

54) _____ is a measure of income or profit divided by the investment required to obtain that income or profit.

A. Return on sales

B. Capital turnover

C. Return on investment

D. Residual income

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