Tenet Engineering, Inc -
If All Common Costs Are Allocated Using Operating Profit

question 144

Multiple Choice

Tenet Engineering, Inc. operates two user divisions as separate cost objects. To determine the costs of each division, the company allocates common costs to the divisions. During the past month, the following common costs were incurred:
Computer services (85% fixed) $ 260,000
Building occupancy 600,000
Personnel costs 110,000
Total common costs $ 970,000
The following information is available concerning various activity measures and service usages by each of the divisions:
$\begin{array}{lrr}\text { Area occupied (square feet) } & 20,000 & 40,000 \\\text { Payroll } & \$ 380,000 & \$ 180,000 \\\text { Computer time (hours) } & 200 & 220 \\\text { Computer storage (megabytes) } & 4,050 & -0- \\\text { Equipment value } & \$ 200,000 & \$ 250,000 \\\text { Operating profit (pre-allocations) } & \$ 555,000 & \$ 495,000\end{array}$
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If all common costs are allocated using operating profit as the allocation basis, what is the total cost allocated to Division B (rounded to the nearest whole dollar) ?

• A) $457,286.
• B) $512,714.
• C) $555,000.
• D) $1,087,576.

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Definitions:

Nonparticipating Preferred Stock

A type of preferred stock that does not entitle the shareholder to share in the company’s extra earnings beyond the fixed dividend payment.

Cumulative

Referring to a total that increases over time by adding successive amounts.

Callable

a feature of a financial security that allows the issuer to repurchase or redeem the security before its maturity date.

Stock Dividend

A dividend payment made to shareholders in the form of additional shares, rather than cash.