Chapter 5 (WEEK 2)

Question 1

4 purposes for allocating indirect costs to objects

Answer 1

1. To provide info for managerial decisions
2. To motivate managers and employees
3. To justify costs or calculate reimbursements (voorschieten)
4. To measure income and assets for reporting to external parties

Question 2

Do cost allocations need to satisfy all purposes at once?

Answer 2

No, different costs are appropriate for different purposes, and the same combination of costs will not typically satisfy each purpose.

Question 3

What does the economic decision purpose in cost allocation involve from the value chain?

Answer 3

Including costs from all six functions of the value chain to help managers make better decisions.

Question 4

What are two important points about costing systems?

Answer 4

1.There are multiple cost objects in most costing systems.

2. An individual cost can be a direct cost for one cost object and an indirect cost for another.

Question 5

Can costs be reassigned in a costing system? (it means that costs, which have already been assigned to one part of the business (like a department or a product))

Answer 5

Yes, costs incurred in different parts of an organization can be assigned and reassigned when costing products, services, customers, or contracts.

Question 6

What are key choices in accumulating and allocating indirect costs? (3)

Answer 6

1. Which cost categories to include from headquarters and divisions.
2. How many cost pools to use.
3. Which allocation base to use.

Question 7

Which allocation base to use depends on? (3)

Answer 7

1. Purpose served
2. Criteria used to guide the cost allocation
3. Costs of implementing different allocation bases

Question 8

What is a homogeneous cost pool?

Answer 8

A cost pool where all the activities have the same or a similar cause-and-effect or benefits-received relationship between the cost allocator and the costs of the activity.

Question 9

Why are homogeneous cost pools useful?

Answer 9

They enable more accurate calculation of product, service, and customer costs.

Question 10

What is the consequence of using a homogeneous cost pool?

Answer 10

The cost allocations from a homogeneous pool are the same as if each activity’s costs were allocated separately, making the process simpler and more accurate.

Question 11

How does the degree of homogeneity affect the number of cost pools?

Answer 11

The more homogeneous the cost pool, the fewer cost pools are needed to explain how products use resources.

Question 12

What factors can lead managers to create multiple cost pools?

Answer 12

1. Views of line managers and personnel.
2. Changes in plant layout or general operations.
3. Changes in the diversity of products or how they use resources in the cost pool.

Question 13

What is the single-rate cost allocation method?

Answer 13

The single-rate method pools all costs into one cost pool and allocates them to cost objects using the same rate per unit of the allocation base, without distinguishing between fixed and variable costs.

Question 14

What is a benefit of using the single-rate method?

Answer 14

It is low-cost and simple to implement, avoiding the need for detailed analysis to classify costs as fixed or variable.

Question 15

What is a potential drawback of the single-rate method?

Answer 15

It may lead divisions to make decisions that benefit them individually but are not necessarily in the best interest of the entire organization.

Question 16

What is the dual-rate cost allocation method?

Answer 16

The dual-rate method divides the cost pool into two sub-pools, each with a different allocation rate or base, and allocates costs using different methods for fixed and variable costs.

Question 17

How does the dual-rate method allocate costs for fixed and variable costs?

Answer 17

Fixed costs are allocated based on budgeted usage, while variable costs are allocated based on actual usage.

Question 17

What is a benefit of using the dual-rate method?

Answer 17

It provides information on how fixed and variable costs behave differently, helping division managers make decisions that are beneficial for both their division and the organization as a whole.

Question 18

What are the two types of quantities used in cost allocation?

Answer 18

Budgeted quantities and actual quantities.

Question 18

What are the two types of rates used in cost allocation?

Answer 18

Budgeted rates and actual rates

Question 19

What is the difference between budgeted cost rates and actual cost rates?

Answer 19

1. Budgeted Rates: Predetermined rates set in advance based on expected costs. They help departments know what they will be charged ahead of time.
2. Actual Rates: Rates based on the real costs incurred. They reflect the actual expenses but can lead to uncertainty for departments since costs might vary.

Question 20

Why might an organization choose to use budgeted rates instead of actual rates?

Answer 20

Budgeted rates provide predictability and allow departments to plan their budgets more effectively. They avoid the uncertainties that come with fluctuating actual costs.

Question 21

What is the impact of using budgeted usage versus actual usage for allocating fixed costs?

Answer 21

1. Budgeted Usage: Uses planned or estimated usage levels to allocate costs, providing departments with predictable costs for planning. It aligns with long-term planning and infrastructure costs.
2. Actual Usage: Uses the actual amount of usage to allocate costs, which might fluctuate and can lead to variability in the cost allocation.

Question 22

How does using budgeted usage affect a manager’s behavior?

Answer 22

It allows managers to know their allocated costs in advance, aiding in both short-term and long-term planning.

Question 23

What is the difference between operating departments and support departments?

Answer 23

1. Operating Departments: Add value to products or services that customers can see and benefit from.
2. Support Departments: Provide services that help maintain other internal departments but do not directly add value to products or services.

Question 24

Why is allocating costs of support departments important?

Answer 24

Accurate allocation of support department costs leads to more precise costs for products, services, and customers.

Question 25

What is the direct allocation method for support department costs?

Answer 25

The direct allocation method assigns each support department’s costs directly to the operating departments without considering how support departments might use each other’s services.

Question 26

What is a benefit of the direct allocation method?

Answer 26

Its simplicity; it doesn’t require predicting how support departments use each other’s resources.

Question 27

What is the step-down allocation method?

Answer 27

This method allocates support department costs in a sequence. First, costs are allocated from the highest-ranked support department to other support departments and operating departments. Then, costs from the next ranked department are allocated, and so on, until all costs are distributed.

Question 28

How do you determine the sequence for the step-down allocation method?

Answer 28

1. Percentage Method: Rank support departments based on the percentage of their support provided to other support departments. The department providing the most support is ranked first.
2. Total Euros Method: Rank based on the total monetary value of services provided to other support departments.

Question 29

What is the reciprocal allocation method?

Answer 29

The reciprocal method fully recognizes the mutual services provided between support departments. Costs are allocated considering the interactions between all support departments, leading to a more complex but accurate allocation.

Question 30

How does the reciprocal allocation method differ from direct and step-down methods?

Answer 30

The reciprocal method considers the full range of services provided between support departments, while direct and step-down methods only partially address these interactions.

Question 31

What is the reciprocal allocation method?

Answer 31

The reciprocal allocation method fully accounts for the mutual services provided among all support departments, incorporating these interdepartmental relationships into the cost allocation.

Question 32

Why is the reciprocal allocation method more accurate than the direct and step-down methods?

Answer 32

It accounts for the services that support departments provide to each other, whereas the direct and step-down methods do not fully consider these reciprocal relationships.

Question 33

What is the first step in the reciprocal allocation method?

Answer 33

Express the support department costs and reciprocal relationships as linear equations. This involves calculating the complete reciprocated costs, which include both the actual costs and the costs of services received from other support departments.

Question 34

What are complete reciprocated costs in the reciprocal allocation method?

Answer 34

Complete reciprocated costs include the actual costs incurred by a support department plus a portion of the costs from other support departments that provide services to it. These costs are always higher than the actual costs alone.

Question 35

What is the second step in the reciprocal allocation method?

Answer 35

Solve the set of simultaneous equations to determine the complete reciprocated costs for each support department.

Question 36

What is the third step in the reciprocal allocation method?

Answer 36

Allocate the complete reciprocated costs of each support department to all departments (both support and operating departments) based on the usage proportions or the total units of service provided.

Question 37

artificial costs

Answer 37

artificial costs refer to the complete reciprocated costs of a support department. These are called “artificial” because they represent a broader view of costs than just the direct costs incurred by the support department.

Question 38

Common cost

Answer 38

cost of operating a facility, operation, activity or other cost object that is shared by two or more users.

Question 39

There are two methods for allocating this common cost: stand-alone method and the incremental method, explain stand-alone

Answer 39

Uses information pertaining to each cost object as a separate operating entity to determine the cost-allocation weighs.

Question 40

Explain an example of common cost

Answer 40

electricity bill for a factory because it benefits all departments in the factory.

Question 41

Explain why the stand-alone method is fair

Answer 41

because every department pays the part they would pay if they were the only ones using it.

Question 42

There are two methods for allocating this common cost: stand-alone method and the incremental method, explain INCREMENTAL COST ALLOCATION METHOD

Answer 42

ranks the individual cost objects and then uses this ranking to allocate costs among those cost objects.

Question 43

How do we call the first ranked cost object when we talk about INCREMENTAL COST ALLOCATION METHOD

Answer 43

primary party

Question 44

How do we call the second ranked cost object when we talk about INCREMENTAL COST ALLOCATION METHOD

Answer 44

incremental party

Question 45

Who pays usually the most?

Answer 45

The primary party typically gets the largest share of the costs, as it’s considered the most important user. This method can affect how much each department pays based on its rank and influence.

Question 46

Cost-allocation bases

Answer 46

are the methods used to assign costs to different products, departments, or activities.

Question 47

Labour-Paced Operations

Answer 47

In these settings, workers do most of the work. Machines support the workers but don’t do the main production tasks.

Question 48

What’s the allocation base when it comes to labour-paced operations

Answer 48

Direct manufacturing labour-hours or costs are used because the speed and cost of production depend heavily on the workers.

Question 49

Machine-paced operations

Answer 49

Machines do most of the production work, and workers mainly supervise and fix problems rather than operating the machines directly.

Question 50

What’s the allocation base when it comes to machine-paced operations

Answer 50

Machine-hours are used because the cost of production is more related to the machine usage than to the workers’ hours.

Question 51

If the chosen allocation base doesn’t accurately reflect how costs are incurred, it can lead to poor decisions (3)

Answer 51

1. Excessive Use of External Suppliers: managers might rely too much on outside suppliers for parts that are actually cheaper to make in-house, especially if labour costs are inaccurately high.
2. Misplaced Focus on Labour Costs: Managers might focus too much on controlling direct labour-hours while ignoring more expensive materials or machine costs, leading to inefficient cost management.
3. Incorrect Labour Classification: If workers are misclassified as indirect labour instead of direct labour, part of their costs might be incorrectly assigned to other products, distorting the true cost of each product.

Question 52

What is a cost driver?

Answer 52

a factor that causes a change in the total cost of a related cost object.

Question 53

Give an example of cost driver when it comes to a bakery

Answer 53

The number of cakes you bake in a day is a cost driver.he more cakes you bake, the more ingredients (flour, sugar, eggs) you use, and the more time you spend using the oven and other equipment.

Question 54

Why might a company use cost-allocation bases that are not cost drivers?

Answer 54

1. Improving the accuracy of individual product costs may be less important than other goals.
2. Information about cost-driver variables might not be reliably measured on an ongoing basis.
3. Accounting systems with many indirect-cost pools and allocation bases are more expensive to use than those with fewer cost pools and bases.

Question 55

What is one extreme approach to cost assignment?

Answer 55

An extreme approach is to fully assign every cost to each individual unit of a product or service.

Question 56

What is a cost hierarchy?

Answer 56

categorizes costs into different cost pools based on different classes of cost drivers or different degrees of difficulty in determining cause-and-effect relationships.

Question 57

What are the four levels of costs in a product-based cost hierarchy?

Answer 57

1. Unit-level costs.
2. Batch-level costs.
3. Product-sustaining costs.
4. Facility-sustaining costs.

Question 58

How do activity-based costing systems use the cost hierarchy?

Answer 58

Activity-based costing systems differentiate costs according to the four levels in the cost hierarchy: unit-level, batch-level, product-sustaining, and facility-sustaining costs.