Diller Corporation

Diller Corporation has three production departments A, B, and C. Diller Corporation also has two
service departments, Administration and Personnel. Administration costs are allocated based on value
of assets employed, and Personnel costs are allocated based on number of employees. Assume that
Administration provides more service to the other departments than does the Personnel Department.

Dept. Direct Costs Employees Asset Value

Admin. $900,000  25 $450,000 
Personnel 350,000 10 600,000
A 700,000 15 300,000
B 200,000  5 150,000
C 250,000 10 800,000

72. Refer to Diller Corporation. Using the direct method, what amount of Administration costs is
allocated to A (round to the nearest dollar)?
a. $216,000
b. $150,000
c. $288,000
d. $54,000
ANS: A
$900,000 * (300,000/1,250,000) = $216,000

73. Refer to Diller Corporation. Using the direct method, what amount of Personnel costs is
allocated to B (round to the nearest dollar)?
a. $50,000
b. $43,750
c. $26,923
d. $58,333
ANS: D
$350,000 * (5/30) = $58,333

DIF: Moderate OBJ: 13-4

74. Refer to Diller Corporation. Using the direct method, what amount of Administration costs is
allocated to C (round to the nearest dollar)?
a. $576,000
b. $ 54,000
c. $108,000
d. $150,000
ANS: A
$900,000 * $(800,000/1,250,000) = $576,000

75. Refer to Diller Corporation. Using the step method, what amount of Administration costs is allocated
to Personnel (round to the nearest dollar)?
a. $72,973
b. $291,892
c. $145,946
d. $389,189
 ANS: B
$900,000 * $(600,000/1,850,000) = $291,282

76. Refer to Diller Corporation. Using the step method, what amount of Administration costs is allocated
to A (round to the nearest dollar)?
a. $72,973
b. $291,892
c. $145,946
d. $389,189
ANS: C
$900,000 * $(300,000/1,850,000) = $145,946

77.Refer to Diller Corporation. Using the step method, what amount of Administration costs is allocated to B
(round to the nearest dollar)?
a. $72,973
b. $291,892
c. $145,946
d. $389,189
ANS: A
$900,000 * $(150,000/1,850,000) = $72,973

78. Refer to Diller Corporation. Using the step method, what amount of Administration costs is allocated
to C (round to the nearest dollar)?
a. $389,189
b. $145,946
c. $291,892
d. $72,973
ANS: A
$900,000 * $(800,000/1,850,000) = $389,189

79. Refer to Diller Corporation. Assume that Administration costs have been allocated and the balance in
Personnel is $860,000. What amount is allocated to A (round to the nearest dollar)?
a. $213,964
b. $106,982
c. $430,000
d. $0
ANS: C
$860,000 * (15/30) = $430,000

80. Refer to Diller Corporation. Assume that Administration costs have been allocated and the balance in
Personnel is $860,000. What amount is allocated to B (round to the nearest dollar)?
a. $213,964
b. $430,000
c. $106,982
d. $143,333
 ANS: D
$860,000 * (5/30) = $143,333

DIF: Moderate OBJ: 13-4

81. Refer to Diller Corporation. Assume that Administration costs have been allocated and the
balance in Personnel is $860,000. What amount is allocated to C (round to the nearest dollar)?
a. $213,964
b. $430,000
c. $286,667
d. $143,333
ANS: C
$860,000 * (10/30) = $286,667

Albert Corporation has two service departments: Data Processing and Administration/Personnel. The
company also has three divisions: X, Y, and Z. Data Processing costs are allocated based on hours of
use and Administration/Personnel costs are allocated based on number of employees.

Department Direct costs Employees Hours of use

Administration/Personnel $400,000  10 3,300
Data Processing 850,000  5 1,100
X 450,000 30 1,800
Y 300,000 15 2,200
Z 550,000 25 4,500

Assume that Data Processing provides more service than Administration/Personnel.

82. Refer to Albert Corporation. Using the direct method, what amount of Data Processing costs is
allocated to X (round to the nearest dollar)?
a. $180,000
b. $129,661
c. $0
d. $84,706
ANS: A

$850,000 * (1,800/8,500) = $180,000

83. Refer to Albert Corporation. Using the direct method, what amount of Data Processing costs is
allocated to Y (round to the nearest dollar)?
a. $158,475
b. $0
c. $220,000
d. $103,529
ANS: C
$850,000 * (2,200/8,500) = $220,000

84. Refer to Albert Corporation. Using the direct method, what amount of Data Processing costs is
allocated to Z (round to the nearest dollar)?
a. $211,765
b. $0
 c. $152,542
d. $450,000
ANS: D
$850,000 * (4,500/8,500) = $450,000

85. Refer to Albert Corporation. Assume that Data Processing costs have been allocated and the balance
in Administration is $600,000. Using the step method, what amount is allocated to X?
a. $257,143
b. $112,500
c. $200,000
d. $187,500
ANS: A

$600,000 * 30/70 = $257,143

86. Refer to Albert Corporation. Assume that Data Processing costs have been allocated and the balance
in Administration is $600,000. Using the step method, what amount is allocated to Y?
a. $225,000
b. $128,571
c. $187,500
d. $200,000
ANS: B
$600,000 * 15/70 = $128,571

87. Refer to Albert Corporation. Assume that Data Processing costs have been allocated and the balance
in Administration is $600,000. Using the step method, what amount is allocated to Z?
a. $200,000
b. $112,500
c. $214,286
d. $225,000
ANS: C
$600,000 * 25/70 = $214,286

Baretta Corporation

Baretta Corporation has two service departments: Data Processing and Personnel. Data Processing
provides more service than does Personnel. Baretta Corporation also has two production departments:
A and B. Data Processing costs are allocated on the basis of assets used while Personnel costs are
allocated based on the number of employees.

Department Direct costs Employees Assets used

Data Processing $1,000,000  15 $700,000 
Personnel   300,000  8 230,000
A   500,000 12 125,000
B   330,000 20 220,000

88. Refer to Baretta Corporation. Using the direct method, what amount of Data Processing costs is
allocated to A (round to the nearest dollar)?
 a. $362,319
b. $637,681
c. $253,623
d. $446,377
ANS: A
$1,000,000 * $(125,000/345,000) = $362,319

DIF: Moderate OBJ: 13-4

89. Refer to Baretta Corporation. Using the direct method, what amount of Personnel costs is allocated to
B (round to the nearest dollar)?
a. $123,750
b. $206,250
c. $112,500
d. $187,500
ANS: D

$300,000 * 20/32 = $187,500

DIF: Moderate OBJ: 13-4

Grant Corporation

Grant Corporation distributes its service department overhead costs directly to producing departments
without allocation to the other service departments. Information for January is presented here.

Maintenance Utilities
Overhead costs incurred $18,700 $9,000
Service provided to:
Maintenance Dept. 10%
Utilities Dept. 20%
Producing Dept. A 40% 30%
Producing Dept. B 40% 60%

90. Refer to Grant Corporation. The amount of Utilities Department costs distributed to Dept. B
for January should be (rounded to the nearest dollar)
a. $3,600.
b. $4,500.
c. $5,400.
d. $6,000.
ANS: D

Departments A and B have a 2:1 ratio of overhead sharing. This translates to 2/3 of the
expenses being allocated to Department B, $9,000 * 2/3 = $6,000.

DIF: Moderate OBJ: 13-4

91. Refer to Grant Corporation. Assume instead Grant Corporation distributes the service department's
overhead costs based on the step method. Maintenance provides more service than does Utilities.
Which of the following is true?
a. Allocate maintenance expense to Departments A and B.
b. Allocate maintenance expense to Departments A and B and the Utilities Department.
 c. Allocate utilities expense to the Maintenance Department and Departments A and B.
d. None of the above.
ANS: B DIF: Moderate OBJ: 13-4

92. Refer to Grant Corporation. Using the step method, how much of Grant Corporation’s Utilities
Department cost is allocated between Departments A and B?
a. $9,900
b. $10,800
c. $12,740
d. $27,700
ANS: C
Maintenance is allocated first, and 20% is added to the original utilities cost.
$9,000 + ($18,700 * .20) = $(9,000 + 3,740) = $12,740.

93. Refer to Grant Corporation. Assume that Grant Corporation distributes service department overhead
costs based on the algebraic method. What would be the formula to determine the total maintenance
costs?
a. M = $18,700 + .10U
b. M = $9,000 + .20U
c. M = $18,700 + .30U + .40A + .40B
d. M = $27,700 + .40A + .40B
ANS: A DIF: Moderate OBJ: 13-4

PROBLEM

Sulphur Steel Corporation

The Wire Products Division of Sulphur Steel Corporation produces "bales" of steel wire that are used
in various commercial applications. The bales sell for an average of $20 each and The Wire Products
Division has the capacity to produce 10,000 bales per month. The Consumer Products Division of
Sulphur Steel Corporation uses approximately 2,000 bales of steel wire each month in its production
of various appliances. The operating information for the Wire Products Division at its present level of
operations (8,000 bales per month) follows:

Sales (all external) $160,000

Variable costs per bale:
Production $5
Selling 2
G&A 3
Fixed costs per bale (based on a 10,000 unit capacity):
Production $2
Selling 3
G&A 4

The Consumer Products Division currently pays $15 per bale for wire obtained from its external
supplier.

5. Refer to Sulphur Steel Corporation. If 2,000 bales are transferred in one month to the Consumer
Products Division at $10 per bale, what would be the profit/loss of the Wire Products Division?
 ANS:
The $10 per unit would equal the Division's variable costs ($5 + 2 + 3 = $10), so the contribution
margin per unit is zero. Thus, only the 8,000 units of external sales would generate a contribution
margin of $80,000 (8,000  $10) to cover fixed costs of $90,000 (10,000  $9). So the Division would
show a $10,000 loss.

6. Refer to Sulphur Steel Corporation. For the Wire Products Division to operate at break-even level,
what would it need to charge for the production and transfer of 2,000 bales to the Consumer Products
Division? Assume all variable costs indicated will be incurred by the Wire Products Division.

ANS:
Total fixed costs to Wire are:
Production $2  10,000 = $20,000 
Selling $3  10,000 = 30,000 
G&A $4  10,000 =  40,000 
Total $90,000 

Less: Contrib.Margin on Regular Business

[$20 - (5 + 2 + 3)]  8,000 (80,000)
Unrecovered Fixed Costs $10,000 

which must be covered by CM of inside sales =

Trans.Price  Vol. = SP - [(5 + 2 + 3)  2,000]
SP = $15

7. Refer to Sulphur Steel Corporation. If Wire Products Division transferred 2,000 wire bales to the
Consumer Products Division at 200 percent of full absorption cost, what would be the transfer price?

ANS:

Full absorption cost: Variable Production Cost = $ 5

Fixed Production Cost =   2
Total full absorption cost $ 7
Doubled x 2
Transfer price $14

8. Refer to Sulphur Steel Corporation. If the Consumer Products Division agrees to pay the Wire
Products Division $16 for 2,000 bales this month, what would be Consumer's change in total profits?

ANS:

Proposed transfer price per unit $16

Consumer's current market purchase price per unit  15
Increase in cost per unit of wire to Consumer's $ 1
Times units purchased x 2,000
Decrease in profit due to increased costs $2,000

9. Refer to Sulphur Steel Corporation. Assuming, for this question only, that the Wire Products Division
would not incur any variable G&A costs on internal sales, what is the minimum price that it would
consider accepting for sales of bales to the Consumer Products Division?
 ANS:
Wire Division must cover its out of pocket costs or the relevant variable costs; the fixed costs are
irrelevant since they will be incurred regardless of this extra inside business. Thus, the total cost to be
covered is $7 (production, $5; selling, $2).

Floor Products Corporation

The Carpet Division of Floor Products Corporation manufactures a single grade of residential grade
carpeting. The division has the capacity to produce 500,000 square yards of carpet each year. Its
current costs and revenues are shown here:

Sales (400,000 square yards) $2,000,000

Variable costs per square yard:
Production $2.00
SG&A 1.00
Fixed costs per square yard (based on 500,000 yard capacity)
Production $0.50
SG&A 1.00

The Housing Division currently purchases 40,000 yards of carpeting (of the grade produced by the
Carpet Division) each year at a cost of $6.50 per square yard from an outside vendor.

10. Refer to Floor Products Corporation. If the autonomous Housing and Carpet Divisions enter
negotiations on the internal transfer of 40,000 square yards of carpeting, what is the maximum price
that will be considered?

ANS:
The maximum price or ceiling is the current purchase price of the buying division or $6.50 per yard.

11. Refer to Floor Products Corporation. If the autonomous Housing and Carpet Divisions enter
negotiations on the internal transfer of 40,000 square yards of carpeting, what is the Carpet Division's
minimum price?

ANS:
The minimum price acceptable to Carpet is its incremental cost of $3 ($2 + $1) per square yard.

12. Refer to Floor Products Corporation. If the Housing and Carpet Divisions agree on the internal
transfer of 40,000 square yards of carpet at a price of $4.50 per square yard, how will the profits of the
Housing Division be affected?

ANS:

Current external purchase price $6.50

Proposed transfer price  4.50
Reduction in purchase price per yard $2.00
Times yards acquired x 40,000
Increase in profits $80,000
13. Refer to Floor Products Corporation. If the Housing and Carpet Divisions agree on the internal
transfer of 40,000 square yards of carpet at a price of $4.00 per square yard, how will overall
corporate profits be affected?

ANS:

Current outside purchase price per square yard $6.50

Carpet's variable cost per square yard  3.00
Savings per square yard to Housing Division
& corporate $3.50
Times number square yards bought x 40,000
Savings to corporate and increase in profits $140,000

14. Refer to Floor Products Corporation. Assume, for this question only, that the Carpet Division is
producing and selling 500,000 square yards of carpet to external buyers at a price of $5 per square
yard. What would be the effect on overall corporate profits if Carpet Division reduces external sales
of carpet by 40,000 square yards and transfers the 40,000 square yards of carpet to the Housing
Division?

ANS:
Since Carpet is operating at full capacity, it would lose the contribution margin on the 40,000 square
yards. However, the Housing Division would not have to buy externally. Thus,

Lost CM ($2  40,000 yd) = $(80,000)

Gained CM ($3.50  40,000 yd) =  140,000 
Net increase in corporate profits $ 60,000 

Kingwood Corporation

Kingwood Corporation is comprised of two divisions: X and Y. X currently produces and sells a gear
assembly used by the automotive industry in electric window assemblies. X is currently selling all of
the units it can produce (25,000 per year) to external customers for $25 per unit. At this level of
activity, X's per unit costs are:

Variable:
Production $7
SG&A 2
Fixed:
Production 6
SG&A 5

Y Division wants to purchase 5,000 gear assemblies per year from X Division. Y Division currently
purchases these units from an outside vendor at $22 each.

15. Refer to Kingwood Corporation. What is the minimum price per unit that X Division could accept
from Y Division for 5,000 units of the gear assembly and be no worse off than currently?

ANS:
X Division is operating and selling outside at full capacity so minimum price is equal to the variable
cost to make and sell plus the lost contribution margin from outside sales:
 VC: Production $7
SGA  2 $ 9
Contribution margin  16
Selling price $25

16. Refer to Kingwood Corporation. What will be the effect on overall corporate profits if the two
divisions agree to an internal transfer of 5,000 units?

ANS:
Corporate profits will decrease by forcing the transfer.

CM per units earned by X is from external sales $25 - [$7 + $2] $16 
Times units to be sold x 5,000 
Decrease in CM to X and XY Corp. $80,000 
Net savings to buy internally
rather than externally [$22 - $9] $13 
Times units to be purchased x 5,000 
Savings by buying internally $ 65,000 
Net effect on XY Corp. profits $(15,000)

Acadian Savings and Loan has three departments that generate revenue: loans, checking accounts, and
savings accounts. Acadian Savings and Loan has two service departments: Administration/Personnel
and Maintenance. The service departments provide service in the order of their listing. The following
information is available for direct costs. Administration/ Personnel costs are best allocated based on
number of employees while Maintenance costs are best allocated based on square footage occupied.

Department Direct costs Employees Footage

Admin./Pers. $530,000  10 30,000
Maintenance 450,000  8 16,500
Loans 900,000 15 45,000
Checking 600,000  6 10,000
Savings 240,500  5 42,000

17. Refer to Acadian Savings and Loan. Using the direct method, compute the amount allocated to each
department from Administration/Personnel.

ANS:

Loans 15/26  $530,000 = $305,769

Checking 6/26  530,000 = 122,308
Savings 5/26  530,000 = 101,923

18. Refer to Acadian Savings and Loan. Using the step method, compute the amount allocated to each
department from Maintenance.

ANS:
To allocate Admin./Pers. to Maintenance
8/34  $530,000 = $124,706(rounded)

Then, Maintenance balance is $450,000 + $124,706 = $574,706

 Then, allocate Maintenance :

Loans 45/97  $574,706 = $266,616

Checking 10/97  574,706 = 59,248
Savings 42/97  574,706 = 248,842

19. Welsh Medical Clinic has two service departments: Building Operations and Utilities, and three
operating departments: Rehabilitation, Preventative Medicine, and Geriatrics. Welsh Medical Clinic
allocates the cost of Building Services on the basis of square footage and Utilities on the basis of
patient days. Fixed and variable costs are not separated.

Budgeted operating data for the previous year are presented below:

Service Departments Operating Departments

Building Preventative
Operation Utilities Rehabilitatio Medicine Geriatrics
s n
Budgeted costs
before allocation $20,000 $10,000 $90,000 $60,000 $100,000
Square Footage 1,000 4,000 6,000 18,000 12,000
Patient Days - - 5,500 7,700 8,800

ANS:
a. Direct Method:

Service Departments Operating Departments

Building Preventative
Operations Utilities Rehabilitation Medicine Geriatrics
Budgeted costs before
allocation $20,000 $10,000 $90,000 $60,000 $100,000
Allocation of Building
Operations
(20,000)
Rehabilitation:
(6,000/36,000) * $20,000
3,333
Prev. Medicine:
(18,000/36,000) *
$20,000 10,000
Geriatrics:
(12,000/36,000) *
$20,000 6,667
Allocation of Utilities: (10,000)
Rehabilitation:
(5,500/22,000) * $10,000
2,500
Prev. Medicine:
(7,700/22,000) *
$10,000 3,500
Geriatrics:
(8,800/22,000) *
$10,000 4,000
Costs after allocation -0- -0- $95,833 $73,500 $110,667
======== ======== ======= ======== =======
b. Step Method:

Service Departments Operating Departments

Building Preventative
Operations Utilities Rehabilitation Medicine Geriatrics
Budgeted costs before
allocation $20,000 $10,000 $90,000 $60,000 $100,000
Allocation of Building
Operations
(20,000)
Energy:
(4,000/40,000) *
$20,000 2,000
Rehabilitation:
(6,000/40,000) *
$20,000 3,000
Prev. Medicine:
(18,000/40,000) *
$20,000 9,000
Geriatrics:
(12,000/40,000) *
$20,000 6,000
Allocation of Utilities: (12,000)
Rehabilitation:
(5,500/22,000) *
$12,000 3,000
Prev. Medicine:
(7,700/22,000) *
$12,000 4,200
Geriatrics:
(8,800/22,000) *
$12,000 4,800
Costs after allocation -0- -0- $96,000 $73,200 $110,800
======== ======== ======= ======== =======