Question

1 Using the appropriate rationale, which of the following scenarios represents the proper determination of the order in which management should sequence support department allocations under the sequential method of allocating support department costs to production departments?

a.A Purchasing support department that serves one production department should be allocated earlier than a Janitorial support department serving five production departments.

b.A Maintenance department with a less accurate cost driver should be allocated earlier than a Cafeteria support department with an extremely accurate cost driver.

c.A Janitorial support department with a cost of $500,000 should be allocated earlier than a Purchasing support department with a cost of $30,000.

d.A Janitorial support department with 50 employees should be allocated earlier than a Cafeteria support department with 25 employees.

2

Under the net realizable method of allocating joint costs, which of the following equations is used to compute the value of products not processed beyond the split-off point?

a.Net Realizable Value = Selling Price at Split-Off × Quantity

b.Net Realizable Value = (Final Selling Price × Quantity) – Additional Processing Costs

c.Net Realizable Value = Selling Price at Split-Off ÷ Quantity

d.Net Realizable Value = (Final Selling Price × Quantity) ÷ Additional Processing Costs

3

The net realizable method of allocating joint costs is most suitable for processes where

a.physical measures are the most accurate way to allocate joint costs

b.some products can be processed beyond the split-off point and sold for much higher prices

c.weighted physical measures are the most accurate way to allocate joint costs

d.market values are hard, if not impossible, to estimate

4

Which of the following explains why it is difficult to apply support department costs, such as janitorial services, to products?

a.It is difficult to measure the costs.

b.Support department activities are hard to define.

c.The costs cannot be quantified in the general ledger.

d.Appropriate cost drivers are difficult, if not impossible, to determine.

Answer 1

1) Under Sequential method of allocation, allocation generally starts with the service department that has incurred the greatest costs and the service department with the lowest costs is allocated last. Hence the correct answer would be:-

C. A Janitorial support department with a cost of $500,000 should be allocated earlier than a Purchasing support department with a cost of $30,000

2) Under the net realizable method of allocating joint costs, the Net realizable value of products not processed beyond the split-off point is calculated as follows:-

A. Net Realizable Value = Selling Price at Split-Off × Quantity

3) The net realizable method of allocating joint costs is most suitable for processes where one or more products cannot be sold at split off point. Hence, in this case the answer will be :-

B. some products can be processed beyond the split-off point and sold for much higher prices

4) It is difficult to apply support department costs such as Janitorial services to products due to difficulty in defining the appropriate cost drivers for allocating the costs. Hence the answer would be:-

D. Appropriate cost drivers are difficult, if not impossible, to determine.