Slide Deck 5

Question 1

Cost- Allocation
Define:
Goal:

Answer 1

A method to attribute/assign relevant indirect costs (or when tracing cost is not economically feasible)

Allocate period costs of non-manufacturing activities proportional to the different levels of benefits

There is no universal rule about how to allocate (non)manufacturing cost

Question 2

Period Cost:
Define:
They Must:

Full Product costing:
Define
Equation

Answer 2

-All costs incurred to generate revenue during a specific time period EXCEPT COGS
- Be assigned to output in a way that reflect the truth about economic activities

-Prices of finished output must recover all manufacturing and period cost
FC= Period cost + COGS

Question 3

4 Purposes of Cost Allocation

4 Benefits of Cost Allocation

4 Criteria for Cost Allocations

Answer 3

1. Provide information for economic decisions
2. Motivation Managers and employees
3. Justify cost/reimbursements
4. Measure IFRS (Compliant income and assets reporting to external parties)

A. More accurate full-product pricing
B. Improve Budget Process
C. Allows feedback through periodic variance analysis
D. Managers select the most profitable existing opportunity

(1 and 2 are most important here)
1. Cause and Effect (identify variables that causes resources to be consumed)
2. Benefits Received (identify beneficiaries of the output)
3. Fairness & Equity
4. Ability to Bear (Advocates cost n proportion to the cost objects ability to bear costs allocated to it)

Question 4

Core Divisions vs Support Divisions

Answer 4

CD: Operating/production division that adds value that is observable by a customer within the P/S

SP: Department that provides the services to assist other internal departments

Question 5

2 Questions regarding support department cost allocations

And which of the 2 methods you should use depending on the answer.

Answer 5

1. Should FC of support departments be allocated to operating divisions
2. If Fc are allocated, should vc and fc be allocated in the same way?

Single Rate if= no distinction between the fixed and variable cost

Dual Rate= if you separate between fc and vc

Bonus=often budgeted rate is used over actual cost rate
Bonus Bonus= Budgeted rate is known at the start of period, actual wont know until after

Question 6

Single Rate vs Dual Rate=

Answer 6

SR= Simple and cheap, but treats fixed cost like variable cost

DR= Treats fc and vc more realistic, but its more complex to implement

Question 7

What are the 3 alternative cost allocation methods:

Answer 7

1. Direct Cost Allocation
2. Step Down Cost Allocation
3. Reciprocal Cost Allocation

Question 8

Direct Cost Allocation:
What it does:
3 Benefits:

Answer 8

• Applies each support department cost directly to operating department

1. Easily Explained
2. Cheap to Implement
   3.Widely used

Question 9

Do a Direct Cost allocation exercise

Answer 9

Slide or pearson please.

Question 10

Step Down Cost Allocation Method:
Does:

Answer 10

Recognizes the costs services provided by one support department to the other support department before allocating remaining support cost to the operating departments

Question 11

Do A Step Down Allocation Method exercise

Answer 11

Pearson or slides please

Question 12

Reciprocal Cost Allocation Method

Answer 12

Recognizes the work that all support departments do for each other before allocating cost to operating departments.

Question 13

Do the comparison exercise

Answer 13

Pearson or slides please

Question 14

Do the stand alone cost allocation, and the incremental cost allocation exercise

Answer 14

Please`