Chapter 12- Managing and allocation support service costs

Question 1

Cost allocation

Answer 1

The process of assigning indirect costs to cost objects

Question 2

Indirect costs

Answer 2

Common costs of shared facilities or services

Question 3

Examples of cost objects:

Answer 3

• departments benefiting from services
• time periods when services were provided

Question 4

Product departments

Answer 4

Carry out the goals of an organization by providing goods and services directly to the customer

Question 5

Support service departments

Answer 5

Provide support that facilitates the activities of production departments

Question 6

Reasons for allocating service costs

Answer 6

Required reporting
- tax regulations
- external financial reporting

Cost-based contracts
- government
- foundation
- private industry

Influencing behavior:
- incentive to control the use of support services

To simulate an external market for internal services

Question 7

Cost allocation process- steps

Answer 7

1. Identify the costs to be allocated to internal customers
2. Choose the appropriate allocation base(s) and rate(s)
3. Select and use the cost-allocation method
4. Determine if the cost allocations achieve the desired results- if not, begin the process again

Question 8

Cost pools

Answer 8

Budgeted or actual spending amounts for distinct sets of resources

• multiple cost pools facilitate managing the different types of support services and should allow more accurate cost allocations to internal customers

Question 9

The direct method

Answer 9

Cost of services between service departments are ignored and ALL COSTS are allocated directly to the production departments

Question 10

The step method

Answer 10

Service department costs are allocated to other service departments and to production departments, usually starting with the service department that provides the greater amount of service to other departments

• once a service departments costs are allocated, other service department costs are not allocated back to it

Question 11

Consequences of alternative cost allocations

Answer 11

Direct method: does not consider interactions among service departments

Step method: Considers some interactions among service departments

Question 12

Cost allocation effects

Answer 12

If support-service departments provide significant services to each other, the amounts of costs allocated to production departments probably differ significantly under each method.

Significant differences can affect:
- performance evaluations
- decision making
- contracts

Question 13

Reciprocal method

Answer 13

• appropriate to use when service departments provide services to each other
• allows simultaneous allocations of costs between service departments
• uses matrix algebra to solve the equations