Topic 3 - Cost Allocation

Question 1

Overhead allocation

Answer 1

• Basic overhead allocation involves distributing overhead costs to cost objects using different bases.
• The type of cost allocation base significantly impacts over head distribution

Question 2

Purpose of Allocation

Answer 2

• To provide information for decision-making
• Motivate managers/employees
• Measures income and assets

Question 3

Normal costing

Answer 3

• Allocates indirect costs based on budgeted indirect cost rates multiplied by actual quantities of CAB

Question 4

Actual Costing

Answer 4

• Allocates indirect costs using actual indirect cost rates and actual quantities of CAB

Question 5

Plantwide Rate

Answer 5

Single rate for the entire plant, assuming all products use resources similarily

Question 6

Departmental Rate

Answer 6

Different CAB for each department, reflecting how products use resources differently across departments

Question 7

Normal Vs Actual

Answer 7

• Normal costing provides more stability in cost estimates by using a budgeted rate, which helps avoid fluctuations caused by actual indirect costs that may vary during the year
• Normal costing is timely, as actual data isn’t available until the end of the period, whereas normal costing can be applied as soon as the job is completed.

Question 8

Direct Method

Answer 8

Ignore

Question 9

Step Down

Answer 9

Partially recognise

Question 10

Reciprocal

Answer 10

Fully recognise

Question 11

Features of the Direct

Answer 11

• Simple, easy to use
• More understandable for managers
• Ignore reciprocal services provided among support departments could lead to inaccuracy

Question 12

When to use step down?

Answer 12

If one supports dept does a lot for others but the other does little

Question 13

Reciprocal

Answer 13

• More Accurate
• More complicated

Question 14

What method would you want as the manager

Answer 14

As the manager you would prefer the method that minimizes the total costs allocated to your department as this would improve the evaluation of your performance

Question 15

Advantages of ABC

Answer 15

• ABC provides a more precise allocation of overheads by tracing them back to specific activities leading to a better understanding of the actual costs involved in producing a product
• Help us make more informed decisions
• Helps identify inefficenies and eliminate non-value added products
• Shows which processes are consuming the most resources
• Improves costing accuracy

Question 16

Disadvantages of ABC

Answer 16

• Complex and time-consuming, complicated to implement and maintain, requires significant time and effort
• More expensive
• Employees and managers may resist to switch to the ABC due to the learning curve and perceived disruption to established procedures.