Lecture 5

Question 1

how does a costing system work?

Answer 1

a cost assignment includes direct & indirect costs

these costs are assigned to a cost object (via tracing or allocation)

Question 2

how are indirect costs allocated to a cost object?

Answer 2

an indirect cost pool is allocated via a cost-allocation base

e.g., audit support is an indirect cost pool which is allocated to indirect costs with labour hours as the allocation base

Question 3

single rate cost allocation method?

Answer 3

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

(no distinction between fixed and variable costs)

Question 4

dual rate allocation method?

Answer 4

classified costs in one cost pool into two sub-pools (variable and fixed cost sub-pools)

each sub-pool has a different allocation rate or a different allocation base

Question 5

budgeted rates benefits?

Answer 5

lets user departments know the cost rates in advance

helps motivate manager to improve efficiency

Question 6

two categories of departments?

Answer 6

support departments
operating departments

Question 7

operating department = ?

Answer 7

adds tangible value to customers

Question 8

support department = ?

Answer 8

provides services that maintain operations in the oganisation

Question 9

what are the three support department cost-allocation methods?

Answer 9

direct allocation method
step-down allocation method
reciprocal allocation method

Question 10

direct allocation method for support department costs?

Answer 10

no interaction between support departments are acknowledged

only assume support departments provide service to operating departments

Question 11

step down allocation method for support department costs?

Answer 11

ranks departments and acknowledges support from one support department to another

but doesn’t acknowledge the support going both ways, only one way

Question 12

reciprocal allocation method for support department costs?

Answer 12

takes into account the reciprocal interaction between support departments?

Question 13

how are reciprocal allocation method costs calculated?

Answer 13

simultaneous equations

Question 14

simultaneous equations for reciprocal allocation method?

Answer 14

e.g., plant maintenance support department has £600,000 in costs + 200 hours of support from the IT support department

plant maintenance department also provides 1,600 hours of support to IT support department

plant maintenance department also has 800 hours of work in total

(600,000 200 IT) / 800 = PM

(116,000 + 1,600) / 200 = IT

then substitute each equation into the other and solve

Question 15

consequences of inappropriate allocation base?

Answer 15

• managers may make excessive use of external suppliers for parts that have a high direct manufacturing labour content
• product may be under/over costed
• managers may pay excessive attention to the wrong aspects

Question 16

are cost drivers and cost allocation bases synonymous?

Answer 16

not always

Question 17

when may cost allocation bases not be the cost driver?

Answer 17

when improving accuracy of individual product costs are less important to a company than other goals

cost driver information may not be readily available

accounting systems with many cost pools are expensive to maintain