Cost Allocation

Question 1

Indirect costs

Answer 1

Traced directly to the cost object

Question 2

Indirect costs

Answer 2

Can’t be traced directly e.g. Manufacturing OH

Question 3

Cost object

Answer 3

Anything for which a separate measurement is desired e.g. Product, service, customer

Question 4

Capitalised cost

Answer 4

On SoFP

Question 5

Expenses cost

Answer 5

On IS

Question 6

Product cost

Answer 6

Total cost of producing goods

Question 7

Period costs

Answer 7

Selling/admin costs

E.g. Advertising

Question 8

Past costs

Answer 8

Costs that have been incurred (capitalised or expensed) in the past e.g. Historical/sunk costs

Irrelevant to decision of carrying out project

Question 9

Future outlay costs

Answer 9

Future costs that will be incurred to achieve a particular objective

Question 10

Opportunity cost

Answer 10

Value in monetary terms of the next best opportunity forgone for a particular transaction

Relevant to project decisions

Question 11

Relevant costs

Answer 11

Future outlay + opportunity cost

Question 12

Job costing

Answer 12

Charge overheads to different jobs according to cost allocation e.g. DL hours, DL costs

Question 13

Direct allocation method

Answer 13

Service cost per unit x DL hours for each product dept

Question 14

Step down

Answer 14

Service depts also provide service to other depts

Question 15

ABC

Answer 15

Tries to prevent over/under costing different products that a business makes k

Since a business can make different products, specialised products might have higher costs and basic ones would cost less.

ABC allocates cost pools, grouping together indirect costs to diff cost objects

This way more costly items have a higher cost pool and can be incorporated into the cost object more accurately

Question 16

Uses of ABC

Answer 16

Pricing : Gives insight into cost structure
Product mix decision : costs absorbed by more complex products are usually better reflected
Cost reduction and process improvement: focuses on support activity costs and factors the drive these
Design decisions: allow to evaluate more accurately coastlines soft new designs

Question 17

Limitations of ABC

Answer 17

Liner cost assumption 
One cost pool per driver assumption
Assume costs are seperable
Miscasting can still occur e.g. When wrong cost driver is assigned 
Costly

Question 18

Variable costing

Answer 18

All fixed costs excluded from inventoriable costs

Fixed costs charged directly to IS as period costs

Question 19

Absorption (full) costing

Answer 19

All variable and fixed manufacturing costs and inventoriable costs

-downfall: encourages operational inefficiencies and stock build up