Fairfield Company Allocates Common Building Department Costs to Producing Departments

question 55

Multiple Choice

Fairfield Company allocates common Building Department costs to producing departments (P1 and P2) based on space occupied, and it allocates common Personnel Department costs based on the number of employees. Space occupancy and employee data are as follows: $$\begin{array} { l c c c c } & \text { Building } & \text { Personnel } & \text { Dept. P1 } & \text { Dept. P2 } \\\text { Space occupied } & 2,000 \mathrm { ft } & 10,000 \mathrm { ft } & 120,000 \mathrm { ft } & 70,000 \mathrm { ft } \\\text { Employees } & 6 & 10 & 80 & 50\end{array}$$ If Fairfield Company uses the direct allocation method, the ratio representing the portion of building costs allocated to Department P1 is

• A)190,000/202,000.
• B)2,000/120,000.
• C)120,000/202,000.
• D)120,000/190,000.

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Definitions:

Book Value

The net value of a company's assets minus its liabilities, or the net value recorded on the financial statements.

Statement of Cash Flows

An accounting statement illustrating how fluctuations in income and balance sheet accounts influence cash and cash equivalents.

Operating Activities

Business activities directly related to the production and delivery of goods and services, which are reflected in a company's cash flow.

Indirect Method

A way of preparing the cash flow statement where net income is adjusted for non-cash transactions, changes in working capital, and items of income or expense to determine net cash provided by operating activities.