chapter 3 cost center accounting

Question 1

task of cost center accounting

Answer 1

allocation of overhead costs

Question 2

4 requirements when defining a cost center

Answer 2

1. homogeneity of cost drivers
2. matching cost center and the assignment of responsibility (energy center to electricity procurement)
3. completeness and clarity (make it clear)
4. cost benefit criterion ( benefits of center have to outweigh costs)

Question 3

2 categorisation methods when defining cost centers

Answer 3

1. define by fuction of department (admin, energy etc.)
2. define by how costs are allocated ( indirect cost centers ( energy, maintenance ) direct cost centers ( material, manufacturng etc. ))

Question 4

3 steps of cost center accounting

Answer 4

1. primary cost allocation (allocate to indirect or direct cost center)
2. interdepartmental cost allocation (allocate indirect costs from indirect cost centers to direct cost centers)
3. allocation of overhead costs (allocate all final costs that are now in direct cost centers to cost objects

Question 5

in the cost allocation sheet there are primary overhead cists with cost types what step does that refer to ?

Answer 5

first step allocate direct and overhead costs to cost centers

Question 6

what does secondary overhead costs refer to ?

Answer 6

second step, interdepartmental cost allocation

Question 7

tasks of primary cost allocation

Answer 7

allocate costs ACCURATELY to cost centers where the respective costs happened

Question 8

why are there direct cost centers which exist because overhead costs need to be allocated ?

Answer 8

direct cost centers stem from overhead material costs (lubricants, paints)

Question 9

an example of a direct cost center cost

Answer 9

salary of the head of material warehouse

Question 10

can allocation of service department costs be synonymous with interdepartment cost allocation?

Answer 10

yes

Question 11

2 types of cost center ALLOCATION method

Answer 11

direct and step ladder

Question 12

3 types of cost center COMPENSATION method

Answer 12

credits /debits, (predefined TP, end up with levy) reciprocal iterations, reciprocal equatiosn

Question 13

which is simpler, the allocation methods or compensation methods

Answer 13

allocation bc they just shove it all to direct centers

Question 14

assign : pragmatic approach, heuristic approach (sufficient but not perfect) and mathematic (correct) approach to the three compensation methods

Answer 14

credit/debit pragmatic,
iterations heuristic,
equations mathematical

Question 15

do TP be recalculated periodically for reciprocal method based in equations?

Answer 15

yes

Question 16

equation for reciprocal method based on equations

Answer 16

total services x TP = primary cost + (services you use from others x their TP (cost of using other serices))

Question 17

concept of reciprocal method on equations

Answer 17

find TP by solving system of equations

Question 18

what three methods all do all internal internal exchanges of services (so direct and indirect)

Answer 18

all compensation methods

Question 19

equation for interation method

Answer 19

sum of costs experienced by cost center divided by the services to all others ( thats why you minus your own consumption)

so sum of costs experiences by cost center include the primary costs (and in the next iteration only) the costs the first iteration has imposed on you

Question 20

credits and debits method

Answer 20

TP already exist, accuracy based on how well TP are. then have a levy at the end.

Question 21

when is step ladder exact?

Answer 21

when exchange of services go only in one direction

Question 22

do TP have to be recalculated periodically for step ladder?

Answer 22

yes

Question 23

what happens once you have found the TP of energy in step ladder?

Answer 23

once you have done energy, energy doest exist anymore so all the services energy used up have to be subtracted

Question 24

how does step ladder relate to iterations method?

Answer 24

iterations spread it everywhere, step ladder spreads it only to the right, and then the center ceases to exist

so same equation: total costs (primary and costs you were given by previous center spreading its cost) / services you gave to others (minus your own obviously and minus cost centers that dont exist anymore)

Question 25

direct method, how does it relate to exchanges of services betnwee indirect cost centers

Answer 25

no consideration at all, you find TP by doing primary cost / services given ONLY to direct cost centers

completely skip over indirect cost centers services given

Question 26

recording effort if you use direct method

Answer 26

only recost intenal exchanges of services in direct cost centers, dont record indirect cost centers.

Question 27

so all TP have to be recalulcuated periodically in all methods except ?

Answer 27

methods od credits and debits (bc they are predefined)

also iterations we dont really need T bc we just shove them around

Question 28

2 only things you need for direct method

Answer 28

primary overhead costs of indirect cost centers, and services used in direct cost centers

Question 29

when is direct method exact?

Answer 29

if no exchange of services exist in indirect cost centers

Question 30

when do you find overhead rates for costing )

Answer 30

after you allocated overhead costs from indirect to direct cost centers

Question 31

how do we find overhead rates

Answer 31

by choosing correct allocation base (normally a direct cost)

Question 32

easy explanation of getting overhead rate (meaning how much

Answer 32

take final overhead for each direct cost center, choose a good allocation base (mostly a direct cost) then find how much overhead is in percentage to direct cost.

Question 33

why do we need overhead rates ?

Answer 33

if we have a percentage of how much overhead is in comparison to real direct material costs, then for individual product costing, we can add overhead amount that is fair

so 15 materail cost, and 10% is usuallly overhead rate for material, then we add 1.5 $ for the overhead amount added.