Question

Kizzle’s Crepes Co. produces world famous crepes. The company’s crepes are produced via its Mixing and Cooking activities, which both rely on the Janitorial and Maintenance activities. Kizzle’s management knows the most practical driver of Janitorial costs is square feet, but is uncertain whether to allocate Maintenance costs based on asset value of production equipment, number of service calls, or machine hours. Kizzle’s management estimates that the Cooking and Mixing activities each require about twice as much space as the Maintenance activity.

1. Identify the base for choosing the cost driver.

a. The company needs to choose a driver that can be measured practically.

b. The company needs to choose the driver that matches the department activity.

c. The company needs to choose the driver that matches the support department function.

d. All the above.

d

Identify the driver which cannot be used as cost driver for maintenance cost.

a. Square feet.

b. Number of service calls.

c. Machine hours.

d. Asset value of equipment.

a

2. Assume that Kizzle’s management allocates Maintenance costs based on the number of service calls. Further assume that in a given period, the Janitorial, Mixing, and Cooking activities incur 16, 40, and 24 service calls, respectively, and that the Janitorial and Maintenance costs of that period are $3,000 and $4,200, respectively. Determine the total costs allocated from each support activity to the other three activities using the reciprocal services method.

Maintenance cost allocation:

Janitorial:		$
Mixing:		$
Cooking:		$

Janitorial cost allocation:

Maintenance:		$
Mixing:		$
Cooking:		$

3. The company is considering changing from the reciprocal service method to a simpler method. Why should the company continue with the reciprocal service method?

a. It is complex, but more accurate.

b. It can be practiced if the company has sufficient resources and capacity.

c. The simpler cost allocation methods are less accurate.

d. All the above.

Answer 1

1. Answer:- d

Reason:- All of the above should be kept in mind while choosing a cost driver

2. Answer:- a

Reason:- Square feet is not directly correlated with maintenance cost.

Total Maintenance cost (A) = Maintenance department cost + cost allocated from janitorial dept

Total Janotorial cost (B) = Janitorial cost + cost allocated from maintenance department

Total Maintenance cost = $4,200 + [1/5 x (Janitorial cost + cost allocated from maintenance department)]

A = $4,200 + [1/5 x ($3,000 + 16/80 x A)]

A = $4,200 + [0.2 x ($3,000 + 0.2A)]

A = $4,200 + 600 + 0.04A

0.96A = $4,800

A = $5,000

B = $3,000 + 0.2 x 5,000 = $4,000

Maintenance cost allocation:

Janitorial = 16/80 x $5,000 = $1,000

Mixing = 40/80 x $5,000 = $2,500

Cooking = 24/80 x $5,000 = $1,500

Janitorial cost allocation

Maintenance = $4,000 x 1/5 = $800

Mixing = $4,000 x 2/5 = $1,600

Cooking = $4,000 x 2/5 = $1,600

3.Answer:-d. all of the above

Reason:- Because mutual allocation of departments will make allocation more accurate.