Question

For companies in which full allocation is not followed, which of the following is true of corporate sustaining costs?

		A) allocated to divisions using cause-and-effect relationship
		B) allocated to customers using cause-and-effect relationship
		C) added to aggregate operating incomes of the divisions
		D) subtracted as a lump-sum amount after aggregating operating incomes of the divisions

In 2016, Smart Office Systems Inc. (SOSI) used 25,840 pounds of plastic (direct materials) to produce 8000 units as opposed to 2017 when SOSI produced 8500 units using 27,840 pounds of plastic. The type of plastic SOSI uses cost $5 per pound in 2016 and rose to $5.25 per pound in 2017. In comparing results for these two years, what would be the cost effect of growth for the plastic material?

		A) $8075 F
		B) $8479 U
		C) $8075 U
		D) $10,000 U

Answer 1

​​​​1)

- The correct option is D.

- Corporate sustaining costs are fixed cost for a company that can't be traced to individual customers and they should be allocated in order to determine the selling price which covers all the costs.

- In the case in which full allocation is not followed by the company, corporate sustaining costs are subtracted as a lump sum amount after aggregating operating incomes of all divisions.

2)

- The correct option is C.

- Cost effect of growth

= P/Y materials used×(units produced in C/Y ÷ units produced in P/Y)- C/Y materials used ] × P/Y cost per material used

​​​​​​ = [ 25840 pounds × (8500÷8000) - 25840 ]× $5

= (27455-25840)×$5

= 1615 × $5

= $8075 U

- Therefore, the cost effect growth of plastic material is $8075 U.