Job/Product Costing

Question 1

Purpose of cost allocation

Answer 1

• Provide information for economic decisions.
• Motivate managers and other employees
• Justify costs or compute reimbursements.
• Measure income and assets.

Question 2

Normal Costing

Answer 2

Allocated indirect costs based on the budgeted indirect cost rates times the actual quantities of the cost allocation base.

Question 3

Actual Costing

Answer 3

Allocates indirect costs based on the actual indirect cost rates times the actual quantities of the cost allocation base.

Question 4

Criteria for cost allocation

Answer 4

• Cause and effect: direct relationship (preferred)
• Benefits received
• Fairness/ equity
• Ability to bear

Question 5

Assessing alternative CABs

Answer 5

Check: use linear regression to check which potential CAB is related best to the OH.
1. Economic plausibility
2. Check for linearity
3. Goodness of fit
4. Significance of the independent variable.

Question 6

Over allocated OH/ overcasting

Answer 6

Allocated OH > actual OH

Question 7

Under allocated OH/ under costing

Answer 7

Allocated OH < actual OH

Question 8

Plant wide rate

Answer 8

Single rate for the whole plant/factory. Assumes all products make similar resources.

Question 9

Departmental rate

Answer 9

Use different CAB for each department. Assumes that products go through departments in different ways.

Question 10

Why might normal costing be preferred over actual costing?

Answer 10

Normal costing provides consistent overhead allocation using budgeted rate.