Test 2 Flashcards
Which of the following illustrates a purpose for allocating costs to cost objects?
A. to defer income and reduce taxes payable
B. to provide information for economic decisions
C. to determine employee benefit costs
D. to evaluate managers and employees
E. to reduce competition
B. to provide information for economic decisions
Deciding whether to make a component part or to purchase it, would be an example of which cost allocation purpose?
A. to determine employee’s wages
B. to measure income and assets for reporting to external parties
C. to provide information for economic decisions
D. to motivate managers
E. to motivate employees
C. to provide information for economic decisions
The belief that a corporate division with higher sales ought to be allocated more of the company’s advertising costs because it must have derived more benefit from the expenditures than a division with lower sales, is an example of which criteria for cost allocation decisions?
A. fairness and equity
B. benefit received
C. benefits expended
D. ability to bear
E. causality
B. benefit received
Resource consumption accounting (RCA) employs an allocation procedure akin to a dual-rate system. For each cost/resource pool, cost assignment rates for _______.
A. fixed and variable costs are based on budgeted quantities
B. fixed costs are based on actual quantity, while rates for variable costs are based on budgeted quantities
C. fixed costs are based on practical capacity supplied, while rates for variable costs are based on actual quantities
D. fixed costs are based on practical capacity supplied, while rates for variable costs are based on budgeted quantities
E. fixed and variable costs are based on actual output quantities
D. fixed costs are based on practical capacity supplied, while rates for variable costs are based on budgeted quantities
Benefits of the single-rate method include _______.
A. fixed costs that are transformed into variable costs for user decision making
B. there is a stronger cause and effect relationship
C. the low cost of implementation
D. information that leads to outsourcing decisions that benefit the organization as a whole
E. signals regarding how variable and fixed costs behave differently
C. the low cost of implementation
The method that allocates costs in each cost pool using the same rate per unit is known as the _______.
A. dual-rate cost allocation method
B. single-rate cost allocation method
C. reciprocal cost allocation method
D. incremental cost allocation method
E. homogeneous cost allocation method
B. single-rate cost allocation method
The method that allocates each department’s budgeted costs to operating departments only is called the _______.
A. sequential method
B. reciprocal method
C. step-down method
D. direct method
D. direct method
In a firm’s value chain, upstream costs are categorized as ________.
A. design costs
B. customer service costs
C. marketing costs
D. distribution costs
E. advertising costs
A. design costs
Which cost allocation method differentiates between variable and fixed costs?
A. heterogeneous method
B. single-rate method
C. fixed rate method
D. variable method
E. dual-rate method
E. dual-rate method
Which of the following does NOT apply to support departments?
A. A support department is an operating department.
B. To obtain accurate product costs requires the inclusion of support department costs.
C. Direct support costs are always traced, indirect support department costs are allocated.
D. Support departments create special accounting problems when they provide reciprocal support to each other.
E. An example of a support department would be a personnel department.
C. Direct support costs are always traced, indirect support department costs are allocated.
A disadvantage of allocating fixed costs using a budgeted rate and actual usage is that _______.
A. changes in one department’s usage should not affect another department’s allocation
B. the allocation would capture the cause-and-effect relationship
C. variation in usage will result in variances that need to be managed
D. some organizations offer rewards to managers who make accurate forecasts
E. supplying division managers may be tempted underestimate usage when budgeting unit costs
E. supplying division managers may be tempted underestimate usage when budgeting unit costs
The costs of unused capacity are highlighted when _______.
A. budgeted usage allocations are used
B. the dual-rate cost allocation method allocates fixed costs based on actual usage
C. practical capacity based allocations are used
D. actual usage based allocations are used
E. variable cost variances are evaluated
C. practical capacity based allocations are used
Benefits of the dual-rate method include _______.
A. increased costs of implementation
B. information that leads to outsourcing decisions that benefit the organization as a whole
C. variable costs that are transformed into fixed costs for user decision making
D. avoidance of expensive analysis for categorizing costs as either fixed or variable
E. the low cost of implementation
B. information that leads to outsourcing decisions that benefit the organization as a whole
Which purpose of cost allocation is used to encourage sales representatives to push high-margin products or services?
A. to motivate managers and other employees
B. to measure income and assets for reporting to external parties
C. to justify costs
D. to provide information for economic decisions
E. to compute reimbursement
A. to motivate managers and other employees
Which of the following is TRUE concerning cost allocation in a multi-product company?
A. When the indirect costs are fixed and each product is assembled sequentially, the causality criterion can guide the choice of a cost allocation base.
B. When the indirect costs are variable and each product is assembled sequentially, the causality criterion can guide the choice of a cost allocation base.
C. When the indirect costs are fixed and each product is not assembled sequentially, the causality criterion can guide the choice of a cost allocation base.
D. When the indirect costs are fixed and the products are produced jointly, it is possible to identify specific cause-and-effect relationships between work on an individual product and total costs incurred.
E. When the indirect costs are variable and each product is not assembled sequentially, the causality criterion can guide the choice of a cost allocation base.
E. When the indirect costs are variable and each product is not assembled sequentially, the causality criterion can guide the choice of a cost allocation base.
To discourage unnecessary use of a support department, management might
A. allocate a fixed amount of support department costs to each department regardless of use.
B. issue memos on useful services provided by the support department.
C. allocate support department costs based upon user department usage.
D. allocate only variable costs based on budgeted usage.
E. not allocate any support department costs to user departments.
C. allocate support department costs based upon user department usage.
Under which of the following methods of cost allocation is there no distinction between fixed and variable costs?
A. fixed method
B. homogeneous method
C. dual-rate method
D. standard cost method
E. single-rate method
E. single-rate method
For the economic decision purpose:
A. period costs are not allocated.
B. costing is only related to product pricing.
C. the costs in all six business functions should be included.
D. costs for only one function is included.
E. only inventoriable costs under ASPE/IFRS should be included
C. the costs in all six business functions should be included.
Fixed cost allocation rates should be determined using _______.
A. short-term expected usage
B. past production capacity
C. long-term expected usage
D. actual usage
E. short-term average usage
C. long-term expected usage
In a firm’s value chain, downstream costs are categorized as ________.
A. manufacturing quality control costs
B. research and development costs
C. customer service costs
D. design costs
E. production costs
C. customer service costs
Which of the following methods of allocating support department costs is both simple and intuitive?
A. hybrid method
B. linear equation method
C. direct allocation method
D. reciprocal method
E. step-down method
C. direct allocation method
An advantage to using budgeted usage, rather than actual usage, for the allocation base is that _______.
A. ASPE/IFRS requires it for comparability to previous years
B. it is consistent with a short-run time horizon
C. management does not have to be accountable for actual costs since the system only deals with budgeted costs
D. variable costs are lower
E. user divisions will know their allocated costs in advance
E. user divisions will know their allocated costs in advance
Which of the following is the first step in the cost-allocation decision process?
A. Calculate the cost-allocation rate for each indirect cost pool.
B. Analyze the alternatives and select the best one for the denominator.
C. Identify the relevant indirect costs included in the cost pool(s) or numerator(s).
D. Identify the purpose of the cost allocation.
E. Identify the direct inputs that are already measured.
D. Identify the purpose of the cost allocation.
When choosing between using budgeted rates, and actual rates, which of the following is TRUE?
A. Actual rates let users know in advance what their costs are.
B. When budgeted rates are used, users must wait till the end of the budget period to know what their costs are.
C. With actual rates, a support department, rather than a user department, bears the risk of unfavourable cost variances.
D. Budgeted rates based on user department estimates may lead to outsourcing needed work, rather than relying on an internal support department.
E. Budgeted rates may help the manager of a support department to improve efficiency.
E. Budgeted rates may help the manager of a support department to improve efficiency.
Which of the following criteria subsidizes poor performers at the expense of the best performers?
A. benefits expended
B. benefit received
C. fairness and equity
D. causality
E. ability to bear
E. ability to bear
Ben Tool Company is a tool manufacturer. Production capacity is 3,000 units per month; however, they are considering alternative ways to increase capacity to 3,500 units. One of the alternatives involves purchasing new equipment. In this alternative, there are two choices: machine A will provide increased capacity of 4,000 units per month, with unit costs of $14 at capacity, and machine B will increase capacity to 3,600 units per month with unit costs of $15 at capacity. Both machines are adequate since Ben’s does not intend to go beyond the 3,500 units per month level for the foreseeable future.
Relevant information for this decision includes __________.
A. whether other costs will change solely due to a capacity increase
B. excess capacity of either machine
C. Ben’s planned capacity utilization
D. the different unit cost of production between the two machines at their capacity levels
E. the different unit cost of production between the two machines at Ben’s planned capacity levels
E. the different unit cost of production between the two machines at Ben’s planned capacity levels
The Good Gameshop manufactures specialized board games. Management is attempting to search for ways to reduce costs and is considering two alternatives for an upcoming project of special games that must be delivered to the customer in 12 months’ time. Management agreed to the special project job as they have an idle plant that is scheduled for demolition 18 months from now, and either alternative will easily meet the delivery deadline.
Alternative 1 requires 10 machine operators and 2.5 individuals to handle direct materials. Employee pay averages $17.50 per hour and will increase to $18.50 at the mid-point (July 1) of next year. Each employee currently works 2,500 hours but will decrease to 2,400 hours if Alternative 2 is implemented. The second proposal only requires 8.5 workers.
Which of the following items of information are relevant to this decision?
A. the timing of the wage increase
B. hourly wage rates
C. the delivery deadline
D. the number of employees required in each alternative
E. property taxes for the idle plant
D. the number of employees required in each alternative
Which of the following would not be considered in a make or buy decision?
A. potential rental income from space occupied by production area
B. variable costs of production
C. qualitative factors
D. unchanged fixed costs
E. potential usage of manufacturing capacity
D. unchanged fixed costs
A company has two manufacturing facilities: one in Alberta that produces a bulk chemical that it sells to many different retailers and one in Ontario that is dedicated to producing a specialty chemical for one client only. The annual profit from the single client is $150,000, and the profit from the other facility’s sales is $1,500,000 after allocating combined fixed costs based on units produced. Another company has offered to lease the Ontario facilities for $260,000.
Which of the following is TRUE?
A. The $260,000 is an opportunity cost of continuing to use the Ontario plant.
B. Incremental costs exceed incremental revenues if the plant is rented.
C. Incremental revenues exceed total costs if the plant is rented.
D. The company incurred a $260,000 opportunity cost for the past years, but this was not recorded on its books.
E. The company needs to determine the contribution margin for each product before making any decisions.
A. The $260,000 is an opportunity cost of continuing to use the Ontario plant.
Koch Brothers purchased a new production machine for $200,000. It is capable of producing 400,000 units over its useful life, thus the manufacturer’s salesperson claimed the unit cost would only be $0.50. Koch’s own engineers recommended that the company acquire a machine that would have a unit cost of production of no more than $0.48 (with a $0.03 variance). A competitor of the vendor, who also was trying to sell Koch some equipment, claimed that the $0.50 is understated by $0.04 per unit. The total anticipated demand over the asset’s useful life is 300,000 units.
Relevant information includes ___________.
A. the fact that the $0.50 falls below the $0.48 + $0.03 variance
B. being able to produce at excess capacity
C. the $0.50 unit cost
D. the unit cost at Koch’s planned capacity utilization
E. the different unit costs of production between the two vendors’ machines
D. the unit cost at Koch’s planned capacity utilization
The variation in total costs between two alternatives is known as __________.
A. predictable cost
B. differential cost
C. analyzed cost
D. expected cost
E. irrelevant cost
B. differential cost
Which of the following is TRUE concerning opportunity costs?
A. They are relevant for the make/buy decision.
B. They require accounting journal entries.
C. They entail cash disbursements.
D. They are incorporated into formal financial accounting reports.
E. They entail cash receipts.
A. They are relevant for the make/buy decision.
Past costs that are unavoidable and unchangeable are known as _____.
A. operating costs
B. sunk costs
C. product production costs
D. constraining costs
E. fixed overhead costs
B. sunk costs
When considering a project that will require production using otherwise idle resources, which of the following are TRUE?
A. Only the variable costs of the project are relevant.
B. Avoidable fixed costs are irrelevant.
C. In the short run, even if revenue is less than the total costs of production, the project could help the company’s overall operating income.
D. Only financial factors should be considered.
E. The project should not be undertaken if total revenue from the project is less than the total costs of production.
C. In the short run, even if revenue is less than the total costs of production, the project could help the company’s overall operating income.
Sunk costs ________.
A. are relevant
B. are differential
C. are evaluated to determine if they are relevant or not evaluating alternatives
D. have future implications
E. are irrelevant and ignored when evaluating alternatives
E. are irrelevant and ignored when evaluating alternatives
Which of the following should management consider to avoid the pitfalls of relevant-cost analysis?
A. Historic revenues and costs for items that differ according to alternatives should be considered.
B. Assume that all variable costs are relevant.
C. Assume that all fixed costs are irrelevant.
D. Consider all current revenues and costs.
E. Include any item of revenue or cost that is either an expected future revenue or expected future cost, and, differs between the alternatives.
E. Include any item of revenue or cost that is either an expected future revenue or expected future cost, and, differs between the alternatives.
Which of the following represents a qualitative factor?
A. the timing of variable costs
B. any nonfinancial factor
C. historical costs
D. an outcome that cannot be measured in numerical terms
E. relevant costs
D. an outcome that cannot be measured in numerical terms
