ACYMAG1

Exercise Set #3
Term 2, AY2022-2023
Source: Hansen, D.R. and Mowen, M.M. (2015). Cornerstones of Cost Management, 3 rd edition. Mason,
OH: South Western Cengage Learning.

INSTRUCTIONS:
1. You have to write the answers to the requirements on clean pages of your columnar
notebook using a blue or black ballpen only.
2. Answer chronologically.
3. Properly label the exercise number, requirement number, and the amounts.
4. Include peso sign accordingly.
5. Unless necessary, do not include decimal points for amounts.
6. Rule and double-rule amounts as needed.
7. Solutions in good form are required for all problems, unless otherwise specified.
8. For proper correcting of errors and other formatting guidance, please observe the
“Accounting Do’s and Don’ts” uploaded in the course files section of AnimoSpace.
9. How to submit: Submit notebook to your professor during in-person exam schedules, unless
as otherwise instructed by your professor.

RUBRIC FOR ASSESSMENT:

CRITERIA EXEMPLARY SATISFACTORY DEVELOPING BEGINNING RATING
(97-100) (80-96) (70-79) (Below 70)
Completeness The student solves The student The student The student
[90%] all problems assigned solves all of the solves majority does not solve
and presents all problems but not all of the majority of the
solutions in good assigned. problems problems
accounting form. assigned. assigned.
Neatness and The student solves The student The student The student
Orderliness problems in an solves problems somewhat solves does not solve
[10%] orderly manner and in an orderly problems in an problems in an
labels all amounts manner. orderly manner. orderly
and solutions. manner.
TOTAL:

EXERCISE 1. Multiple Choice. Write the CAPITAL LETTER of the best answer.

1. A company uses charging rates to allocate service department costs to the using
departments. The accountant compiled the following information on one of the service
departments: Budgeted variable costs, ₱238,000; Budgeted fixed costs, ₱35,000; and
Budgeted labor hours, 14,000. If Department K plans to use 1,350 hours of the service
department’s service in the coming year, how much of the service department’s cost is
allocated to Department K?
A. ₱27,300
B. ₱26,325
C. ₱23,950
D. ₱3,375
2. Chester Company provided the information below on overhead for its three producing
departments. Overhead is applied on the basis of machine hours in Fabricating and direct
labor hours in Assembly and in Finishing.
Fabricating Assembly Finishing
Budgeted overhead ₱140,000 ₱64,000 ₱74,880
Budgeted machine hours 20,000 -- --
Budgeted direct labor hours 5,000 20,000 18,000

Job #13-198 had total prime cost of ₱6,700. The job took 40 machine hours in Fabricating,
100 direct labor hours in Assembly, and 20 direct labor hours in Finishing. What is the total
cost of Job #13-198?
A. ₱8,223.20
B. ₱7,383.20
C. ₱6,700.00
D. ₱1,523.20

3. Minor Co. has a job order cost system and applies overhead based on departmental rates.
Service Department 1 has total budgeted costs of ₱168,000 for next year. Service
Department 2 has total budgeted costs of ₱280,000 for next year. Minor allocates service
department costs solely to the producing departments.

Service Department 1 cost is allocated to producing departments on the basis of machine

hours. Service Department 2 cost is allocated to producing departments on the basis of
direct labor hours. Producing Department 1 has budgeted 8,000 machine hours and 12,000
direct labor hours. Producing Department 2 has budgeted 2,000 machine hours and 12,000
direct labor hours. What is the total cost allocation from the two service departments to
Producing Department 1?
A. ₱274,400
B. ₱173,600
C. ₱140,000
D. ₱134,400

4. Which of the following statements is CORRECT?

A. The direct method of service department cost allocation takes no account of service
department reciprocity.
B. If there is service department reciprocity, the best method to use is a single
charging rate.
C. A plantwide overhead rate is used to account for service department reciprocity.
D. The best method of service department cost allocation is the one that minimizes
total overhead costs.
EXERCISE 2. Classify each of the following departments in a factory that produces crème-filled
snack cakes as a producing department or a support department.
1. Personnel
2. Cafeteria
3. Inspection
4. Mixing
5. Engineering
6. Grounds
7. Purchasing
8. Packaging
9. General factory
10. Machine maintenance
11. Bookkeeping
12. Janitorial
13. Baking
14. Icing (frosts top of snack cakes and adds decorative squiggle)
15. Filling (injects crème mixture into baked snack cakes)

EXERCISE 3. Classify each of the following departments in a large metropolitan law firm as a
producing department or a support department.
1. Environmental law
2. Oil and gas law
3. Custodians
4. Word processing
5. Corporate law
6. Small business law
7. Personnel
8. Copying
9. Research
10. Tax planning
EXERCISE 4. Welcome Hotels is a chain of hotels serving business travelers. The chain has
grown from one hotel to five hotels. In 2022, the owner of the company decided to set up an
internal Accounting Department to centralize control of financial information. The accounting
office was opened in January 2022 by renting space adjacent to corporate headquarters. All
hotels have been supplied with personal computers and internet access to transfer information
to central accounting on a daily basis. The Accounting Department has budgeted fixed costs of
₱135,000 per year. Variable costs are budgeted at ₱20 per hour. In 2022, actual cost for the
Accounting Department was ₱223,000. Further information is as follows:
Actual Revenues Actual Hours of Accounting
2021 2022 2022
Hotel One ₱405,000 ₱420,000 1,475
Hotel Two 540,000 588,000 410
Hotel Three 432,000 364,000 620
Hotel Four 648,000 728,000 890
Hotel Five 675,000 700,000 450
Total ₱2,700,000 ₱2,800,000

1. Suppose the total actual costs of the Accounting Department are allocated on the basis
of 2022 sales revenue. How much will be allocated to each hotel?
2. Suppose that Welcome Hotels views 2021 sales figures as a proxy for budgeted capacity
of the hotels. Thus, fixed Accounting Department costs are allocated on the basis of
2021 sales, and variable costs are allocated according to 2022 usage multiplied by the
variable rate. How much Accounting Department cost will be allocated to each hotel?
3. Comment on the two allocation schemes. Which hotels would prefer the method in
Requirement 1? The method in Requirement 2? Explain.

EXERCISE 5. Duweynie Pottery, Inc., is divided into two operating divisions: Pottery and
Retail. The company allocates Power and General Factory department costs to each operating
division. Power costs are allocated on the basis of the number of machine hours and general
factory costs on the basis of square footage. No effort is made to separate fixed and variable
costs; however, only budgeted costs are allocated. Allocations for the coming year are based on
the following data:
Support Departments Operating Divisions
Power General Factory Pottery Retail
Overhead costs ₱150,000 ₱160,000 ₱98,000 ₱56,000
Machine hours 2,000 1,000 6,900 3,100
Square footage 2,000 1,700 4,000 6,000
Round all allocation ratios to four significant digits and all allocated amounts to nearest peso.

1. Allocate the support service costs using the direct method.

2. Allocate the support service costs using the sequential method. The support
departments are ranked in order of highest cost to lowest cost.
3. Allocate the support service costs using the reciprocal method.
EXERCISE 6. Valron Company has two support departments, Human Resources (HR) and
General Factory (GF), and two producing departments, Fabricating (F) and Assembly (A).
Support Departments Producing Departments
HR GF F A
Direct costs ₱160,000 ₱340,000 ₱114,600 ₱93,000
Normal activity:
Number of employees -- 60 80 170
Square footage 1,000 -- 5,700 13,300
Human Resources

The costs of the Human Resources Department are allocated on the basis of number of
employees, and the costs of General Factory are allocated on the basis of square footage.
Valron Company uses the direct method of support department cost allocation. The Fabricating
Department overhead rate is based on normal activity of 82,000 machine hours. The Assembly
Department overhead rate is based on normal activity of 160,000 direct labor hours. Job 316
required six machine hours in Fabricating and four direct labor hours in Assembly. Total direct
materials cost ₱120, and total direct labor cost was ₱80.

1. Calculate the overhead rate for Fabricating based on machine hours and overhead rate
for Assembly based on direct labor hours. Round overhead rates to the nearest cent.
2. Using the overhead rates calculated in Requirement 1, calculate the cost of Job 316.

EXERCISE 7. Corning Company has a decentralized organization with a divisional structure.

Two of these divisions are the Appliance Division and the Manufactured Housing Division. Each
divisional manager is evaluated on the basis of ROI. The Appliance Division produces a small
automatic dishwasher that the Manufactured Housing Division can use in one of its models.
Appliance can produce up to 20,000 of these dishwashers per year. The variable costs of
manufacturing the dishwashers are ₱98. The Manufactured Housing Division inserts the
dishwasher into the model house and then sells the manufactured house to outside customers
for ₱73,000 each. The division’s capacity is 4,000 units. The variable costs of manufactured
house (in addition to cost of the dishwasher itself) are ₱42,600.

1. Assume that all of the dishwashers produced can be sold to external customers for ₱320
each. The Manufactured Housing Division wants to buy 4,000 dishwashers per year.
What should the transfer price be?

2. Refer to Requirement 1. Assume ₱24 of avoidable distribution costs. (a) Identify the
maximum and minimum transfer prices. (b) Identify the actual transfer price, assuming
that negotiation splits the difference.

3. Refer to original data. Assume that the Appliance Division is operating at 75 percent
capacity. The Manufactured Housing Division is currently buying 4,000 dishwashers from
an outside supplier for ₱290 each. Assume that any joint benefit will be split evenly
between the two divisions. (a) What is the expected transfer price? (b) How much will
the profits of the firm increase under this arrangement? (c) How much will the profits of
the Appliance Division increase, assuming that it sells the extra 4,000 dishwashers
internally?
EXERCISE 8. Carreker, Inc., has a number of divisions, including the Alamosa Division,
producer of surgical blades, and the Tavaris Division, a manufacturer of medical instruments.
Alamosa Division produces a 2.6 cm steel blade that can be used by Tavaris Division in the
production of scalpels. The market price of the blade is ₱21. Cost information for the blade is:
Variable product cost, ₱9.70; and Fixed cost, ₱5.50. Tavaris needs 15,000 units of the 2.6 cm
blade per year. Alamosa Division is at full capacity (90,000 units of the blade).

1. (a) If Carreker, Inc., has a transfer pricing policy that requires transfer at market price,
what would the transfer price be? (b) Do you suppose that Alamosa and Tavaris
divisions would choose to transfer at that price?

2. Refer to original data. Suppose that Carreker, Inc., allows negotiated transfer pricing
and that Alamosa Division can avoid ₱1.75 of selling and distribution expense by selling
to Tavaris Division. (a) What is the minimum transfer price? (b) What is the maximum
transfer price? (c) Do you suppose that Alamosa and Tavaris divisions would choose to
transfer somewhere in the bargaining range?

3. Refer to original data. Suppose that Alamosa Division plans to produce and sell only
65,000 units of the 2.6 cm blade next year. (a) Which division sets the minimum
transfer price, and what is it? (b) Which division sets the maximum transfer price, and
what is it? (c) Do you suppose that Alamosa and Tavaris divisions would choose to
transfer somewhere in the bargaining range?

4. Refer to original data. (a) If Carreker, Inc., has a transfer pricing policy that requires
transfer at full product cost, what would the transfer price be? (b) Do you suppose that
Alamosa and Tavaris divisions would choose to transfer at that price?

5. Refer to original data. (a) If Carreker, Inc., has a transfer pricing policy that requires
transfer at full cost plus 25 percent, what would the transfer price be? (b) Do you
suppose that Alamosa and Tavaris divisions would choose to transfer at that price?

6. Refer to original data. (a) If Carreker, Inc., has a transfer pricing policy that requires
transfer at variable product cost plus a fixed fee of ₱2.00 per unit, what would the
transfer price be? (b) Do you suppose that Alamosa and Tavaris divisions would choose
to transfer at that price?

7. Refer to original data. Suppose that Alamosa Division plans to produce and sell only
65,000 units of the 2.6 cm blade next year. The Carreker, Inc., policy is that all transfers
be at full cost. (a) What is the bargaining range, inclusive of minimum and maximum
transfer price? (b) Do you suppose that Alamosa and Tavaris divisions would choose to
transfer?