Chapter 5 Reading

Question 1

what are the four purposes for allocating indirect costs?

Answer 1

• to provide information for managerial decisions
• to motivate managers and employees
• to justify costs or calculate reimbursement
• to measure income and assets for reporting to external parties

Question 2

can there be multiple cost objects in a costing system?

Answer 2

yes

Question 3

homogeneous cost pool = ?

Answer 3

a cost pool in which all the activities whose costs are included in the pool have similar relationships between the cost allocator and the costs of the activity

Question 4

why is using homogeneous indirect-cost pools important?

Answer 4

it enables more accurate costs to be obtained

Question 5

consequences of using a homogeneous cost pool?

Answer 5

cost allocations using that pool will be the same as would be made if costs of each individual activity in the pool were allocated separately

it doesn’t group costs together

Question 6

the greater the degree of homogeneity…

Answer 6

the fewer cost pools required of the organisation

Question 7

cause-and-effect criterion = ?

Answer 7

to be allocated to the same cost pool, costs must have the same cause-and-effect relationship regarding the cost object

Question 8

line management = ?

Answer 8

managers directly responsible for attaining the objectives of the organisation within their particular line of work

Question 9

what are 3 key issues that arise when allocating costs from 1 department to another?

Answer 9

• whether to use single-rate method or dual-rate method
• whether to use budgeted or actual rates
• whether to use budgeted or actual quantities

Question 10

single rate cost-allocation method = ?

Answer 10

pools all costs in one cost pool and allocates them to cost objects using the same per unit rate of the single allocation base

Question 11

dual rate cost-allocation method = ?

Answer 11

classifies costs in one cost pool into two subpools (variable and fixed-cost subpool)

each subpool has a different allocation rate or a different allocation base

Question 12

excess capacity = ?

Answer 12

the difference between the productive capacity available and the productive capacity required to meet consumer demand

Question 13

what is a benefit of the dual-rate method?

Answer 13

it signals to division managers how variable and fixed costs behave differently

Question 14

benefits of using budgeted rates?

Answer 14

don’t need to wait till the end of the period to allocate costs

helps motivate the manager of the support department to improve efficiency

Question 15

what happens when an actual usage allocation base is used?

Answer 15

divisions will not know how much cost is allocated until the end of the budget period

Question 16

benefits of using a budgeted allocation base?

Answer 16

helps with both long and short term planning as information is timely

Question 17

common costs = ?

Answer 17

the cost of operating a facility, operation or activity

Question 18

what are the two methods for allocating common costs?

Answer 18

stand-alone cost-allocation method

incremental cost-allocation method

Question 19

stand-alone cost-allocation method = ?

Answer 19

cost-allocation method that allocates the common cost on the basis of each user’s percentage of the total of the individual stand-alone costs

Question 20

incremental cost-allocation method?

Answer 20

cost-allocation method requiring that one user be viewed as the primary party and the second user viewed as the incremental party

Question 21

what is the primary party when using the incremental cost-allocation method?

Answer 21

the first ranked cost object

Question 22

what is the incremental party when using the incremental cost-allocation method?

Answer 22

the second-ranked cost object

Question 23

what will happen in the incremental cost-allocation method if there are more than two parties?

Answer 23

the non primary parties will need to be ranked

Question 24

how to allocate costs using the stand-alone cost-allocation method?

Answer 24

divide the two users by the sum of the two users and multiply it by the common cost object

Question 25

how to allocate costs using the incremental cost-allocation method?

Answer 25

allocate the primary cost and the incremental cost makes up the balance

Question 26

labour-paced operations = ?

Answer 26

worker productivity determines the speed of production

Question 27

machine-paced operations = ?

Answer 27

machines conduct most/all phases of production

Question 28

what are the consequenes of inappropriate allocation bases?

Answer 28

• managers may make excessive use of external suppliers suppliers for parts that have high direct manufacturing labour content
• managers may pay excessive attention to controlling labour hours instead of focusing on the more costly categories (e.g., materials, machine hours)
• managers may identify shop-floor personnel as indirect labour opposed to direct
  labour
• products may be under or over-costed

Question 29

when a cause-and-effect criterion is used, what are the chosen allocation bases?

Answer 29

the cost drivers

because a change in cost driver level causes a change in the total cost of the cost object

Question 30

reasons for using cost allocation bases that aren’t cost drivers?

Answer 30

1. improving accuracy of individual product costs may not be overly important to some companies
2. information about cost-driver variables may not be reliably measured on an ongoing basis
3. accounting systems with too many indirect cost-pools are more expensive to maintain

Question 31

cost hierarchy system = ?

Answer 31

a categorisation of costs into different cost pools on the basis of either different classes of cost drivers or different degrees of difficulty in determining cause-and-effect relationships

Question 32

what are the four levels of costs in the product-based hierarchy?

Answer 32

1. output unit-level costs
2. batch-level costs
3. product-sustaining costs
4. facility-sustaining costs

Question 33

cost object = ?

Answer 33

anything for which a separate measurement of costs is desired

costing systems in organisations have multiple cost objects (departments, products, services and customers)

Question 34

the four purposes of cost allocation…

Answer 34

• to motivate managers & employees
• to provide information for economic decisions
• to justify costs or calculate reimbursement
• to measure income and assets for meeting external regulatory/legal obligations

Question 35

cost pool = ?

Answer 35

a grouping of individual cost items

Question 36

two key decisions relating to indirect-cost pools?

Answer 36

• the number of indirect cost pools
• the allowability of individual cost items to be included in the cost pools

Question 37

single rate cost allocation method?

Answer 37

pools all costs in one cost pool and allocates them to cost objects using the same rate per unit of the single allocation base

Question 38

dual rate cost allocation method?

Answer 38

costs are grouped in two separate cost pools

each of which has a different allocation rate and may have a different allocation base

Question 39

what is the issue with using actual rates when making cost allocations?

Answer 39

managers are faced with uncertainty during the period and need to wait till the end of the period to know the cost allocation rates

Question 40

three main methods of allocating support department costs to operating departments?

Answer 40

direct
step-down
reciprocal

Question 41

what are the two main departments in an organisation?

Answer 41

• operating department
• support departments

Question 42

production department = ?

Answer 42

a department that adds value to a product or service that is observable by a customer

AKA operating department

Question 43

support department = ?

Answer 43

a department that provides the services that maintain other internal departments

AKA service department

Question 44

direct allocation method = ?

Answer 44

most commonly used method of allocating support department costs

ignores any service rendered by one support department to another

allocates each support department’s total costs directly to the operating departments

Question 45

benefit of the direct method of cost allocation?

Answer 45

simplicity

no need to predict the usage of support department resources by other support departments

Question 46

step-down allocation method = ?

Answer 46

allocation method that allows for partial recognition of the services rendered by support departments to other support departments

requires the support departments to be ranked in order

Question 47

reciprocal allocation method = ?

Answer 47

allocates cost by explicitly including the mutual services provided among all support departments

Question 48

common costs = ?

Answer 48

the costs of operating a facility, operation or activity area that are shared by two or more users