Chapter 11, Problem 22P

1.

To determine

Concept Introduction:

Total variable costs have a direct relationship with the activity base. It increases or decreases in approximate proportion to increase or decrease in the activity base respectively.

Total fixed costs do not change with the change in activity base provided that activities are performed within the relevant range. Fixed costs are period costs such as rent, interest on loans, and depreciation.

The cafeteria cost charges to the Auto division, and Truck division.

2.

To determine

Cost allocation: Cost allocation is a process of assigning or allocating costs to each and every unit or division using a predetermined rate. It helps to determine which division or unit of a company is responsible for which costs.

The total cost allocated to each division if the cafeteria cost is allocated based on the number of meals served.

3.

To determine

Cost allocation: Cost allocation is a process of assigning or allocating costs to each and every unit or division using a predetermined rate. It helps to determine which division or unit of a company is responsible for which costs.

The criticism of the allocation method used in Part (2).

4.

To determine

Fixed costs: Total fixed costs do not change with the change in activity base provided that activities are performed within the relevant range. Fixed costs are period costs such as rent, interest on loans, and depreciation. These costs have to be paid whether production occurs or not. That is why fixed costs remain the same at all levels of production.

The strategy taken by managers of operating departments to estimate peak-period requirement and the steps should be taken by the top management to neutralize such strategies.