Chapter 5 Reading Flashcards
what are the four purposes for allocating indirect costs?
- 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
can there be multiple cost objects in a costing system?
yes
homogeneous cost pool = ?
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
why is using homogeneous indirect-cost pools important?
it enables more accurate costs to be obtained
consequences of using a homogeneous cost pool?
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
the greater the degree of homogeneity…
the fewer cost pools required of the organisation
cause-and-effect criterion = ?
to be allocated to the same cost pool, costs must have the same cause-and-effect relationship regarding the cost object
line management = ?
managers directly responsible for attaining the objectives of the organisation within their particular line of work
what are 3 key issues that arise when allocating costs from 1 department to another?
- whether to use single-rate method or dual-rate method
- whether to use budgeted or actual rates
- whether to use budgeted or actual quantities
single rate cost-allocation method = ?
pools all costs in one cost pool and allocates them to cost objects using the same per unit rate of the single allocation base
dual rate cost-allocation method = ?
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
excess capacity = ?
the difference between the productive capacity available and the productive capacity required to meet consumer demand
what is a benefit of the dual-rate method?
it signals to division managers how variable and fixed costs behave differently
benefits of using budgeted rates?
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
what happens when an actual usage allocation base is used?
divisions will not know how much cost is allocated until the end of the budget period
benefits of using a budgeted allocation base?
helps with both long and short term planning as information is timely
common costs = ?
the cost of operating a facility, operation or activity
what are the two methods for allocating common costs?
stand-alone cost-allocation method
incremental cost-allocation method
stand-alone cost-allocation method = ?
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
incremental cost-allocation method?
cost-allocation method requiring that one user be viewed as the primary party and the second user viewed as the incremental party
what is the primary party when using the incremental cost-allocation method?
the first ranked cost object
what is the incremental party when using the incremental cost-allocation method?
the second-ranked cost object
what will happen in the incremental cost-allocation method if there are more than two parties?
the non primary parties will need to be ranked
how to allocate costs using the stand-alone cost-allocation method?
divide the two users by the sum of the two users and multiply it by the common cost object
how to allocate costs using the incremental cost-allocation method?
allocate the primary cost and the incremental cost makes up the balance
labour-paced operations = ?
worker productivity determines the speed of production
machine-paced operations = ?
machines conduct most/all phases of production
what are the consequenes of inappropriate allocation bases?
- 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
when a cause-and-effect criterion is used, what are the chosen allocation bases?
the cost drivers
because a change in cost driver level causes a change in the total cost of the cost object
reasons for using cost allocation bases that aren’t cost drivers?
- improving accuracy of individual product costs may not be overly important to some companies
- information about cost-driver variables may not be reliably measured on an ongoing basis
- accounting systems with too many indirect cost-pools are more expensive to maintain
cost hierarchy system = ?
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
what are the four levels of costs in the product-based hierarchy?
- output unit-level costs
- batch-level costs
- product-sustaining costs
- facility-sustaining costs
cost object = ?
anything for which a separate measurement of costs is desired
costing systems in organisations have multiple cost objects (departments, products, services and customers)
the four purposes of cost allocation…
- 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
cost pool = ?
a grouping of individual cost items
two key decisions relating to indirect-cost pools?
- the number of indirect cost pools
- the allowability of individual cost items to be included in the cost pools
single rate cost allocation method?
pools all costs in one cost pool and allocates them to cost objects using the same rate per unit of the single allocation base
dual rate cost allocation method?
costs are grouped in two separate cost pools
each of which has a different allocation rate and may have a different allocation base
what is the issue with using actual rates when making cost allocations?
managers are faced with uncertainty during the period and need to wait till the end of the period to know the cost allocation rates
three main methods of allocating support department costs to operating departments?
direct
step-down
reciprocal
what are the two main departments in an organisation?
- operating department
- support departments
production department = ?
a department that adds value to a product or service that is observable by a customer
AKA operating department
support department = ?
a department that provides the services that maintain other internal departments
AKA service department
direct allocation method = ?
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
benefit of the direct method of cost allocation?
simplicity
no need to predict the usage of support department resources by other support departments
step-down allocation method = ?
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
reciprocal allocation method = ?
allocates cost by explicitly including the mutual services provided among all support departments
common costs = ?
the costs of operating a facility, operation or activity area that are shared by two or more users
