Chapter 15 Flashcards
What is the purpose of period cost allocation?
To provide information for economic decisions.
How does cost allocation motivate managers and employees?
By aligning incentives with company goals.
Why allocate costs to justify reimbursement internally or externally?
To ensure transparency and fairness in cost-sharing.
How does cost allocation help measure compliant income and assets?
Ensures financial reports meet ASPE/IFRS standards.
What is the Cause and Effect criterion for cost allocation?
Allocate costs based on direct relationships with the cost object.
What is the Benefits Received criterion for cost allocation?
Allocate costs based on the benefits each cost object gets.
What does Fairness or Equity in cost allocation mean?
Costs should be distributed in a way that feels fair.
What is the Ability to Bear criterion for cost allocation?
Allocate costs based on the ability of the cost object to absorb them.
What’s a limitation of the Single-Rate Method?
It treats fixed costs as variable costs, which can mislead users.
How does the Dual-Rate Method improve cost allocation?
Separates fixed and variable costs for more accurate allocation.
What is a benefit of the Dual-Rate Method?
It helps departments estimate capacity usage accurately.
How does the Dual-Rate Method affect efficiency variance?
It gives a more accurate view by separately treating fixed and variable costs.
What is the Direct Method for allocating support costs?
Allocates support costs directly to operating departments
What is a limitation of the Direct Method?
It ignores services provided between support departments.
What is the Step-Down Method for allocating support costs?
Allocates support costs in a ranked, sequential order, partially recognizing mutual services.
How is the Step-Down Method ranked?
Based on percentage of service or dollar value provided.
What is a limitation of the Step-Down Method?
It doesn’t fully recognize all mutual cost transfers between support departments.
What is the Reciprocal Method for allocating support costs?
Fully recognizes mutual services between all support department
What makes the Reciprocal Method more complex?
It uses simultaneous equations or matrix algebra to allocate costs.
Why is the Reciprocal Method the most accurate?
It fully captures interdepartmental relationships and provides precise cost allocation.
Which method is the most accurate but complex?
The Reciprocal Method.
What is the benefit of the Reciprocal Method in cost allocation?
It shows the complete, reciprocated costs of support departments.
How does cost allocation affect common costs?
It helps allocate shared costs across multiple departments or products.
Why is understanding cost allocation important for contractual reimbursement?
It ensures fair and justified reimbursement terms.
How does the Reciprocal Method help identify cost differences?
It shows how actual costs differ from budgeted amounts.
Why choose the Step-Down Method over Direct or Reciprocal?
It balances simplicity with recognizing mutual services between support departments.
