Week 3 Everything

Question 1

Types of cost centres

Answer 1

Organisations distinguish between operating departments and support departments.

Production (Operating) centres – directly add value to a product or service.

Support (service) cost centres – provides the services that assist other operating and support departments in the organisation.

Question 2

Service department overheads

Answer 2

The cost of service departments must be re-allocated among production departments. Different production departments may use different levels of service from the service departments. Hence, there must be a meaningful re-allocation basis.

Question 3

Allocating Corporate Costs

Answer 3

Some companies allocate all corporate coststo divisions because it sparks interest on the part of division managers regarding how corporate costs are planned and controlled, and to calculate the full costs of products. Other companies allocate only those costs for which there is widespread agreement, such as human resources. Other companies do not allocate corporate costs to divisions. They maintain that division managers generally have no say or role in incurring these costs.

Question 4

If Sandy Corporation allocates corporate costs to divisions, how many cost pools should it use to allocate corporate costs?
One single cost pool?
Numerous individual corporate cost pools?

Answer 4

A key factor is the concept of homogeneity. In a homogeneous cost pool, all costs have the same or a similar cause-and-effect or benefits-received relationship with thecost-allocation base. If each cost category has a different cost driver, companies may prefer to maintain separate cost pools for these costs.

Question 5

Single-rate method of cost-allocation

Answer 5

Single-rate method – allocates costs in each cost pool (service department) to cost objects (production departments) using the same rate per unit of a single allocation base. No distinction is made between fixed and variable costs in this method.

Question 6

Dual-rate method of cost-allocation

Answer 6

Dual-rate method segregates costs within each cost pool into two segments, a variable cost pool and a fixed cost pool.Uses a different cost-allocation base for each pool. Treats fixed and variable costs more realistically.

Question 7

Budgeted versus actual allocation rates

Answer 7

Under either (single or dual rate) method, allocation of support costs can be based on:

budgeted overhead rate and budgeted hours, or

budgeted overhead rate and actual hours.

Question 8

Allocation based on the supply of capacity

Answer 8

When practical capacity is used to allocate costs, the single-rate and the dual-rate methods allocate, respectively, only the actual fixed-cost resources used, or the budgeted fixed-cost resources to be used

Question 9

Using practical capacity to allocate costs:

Answer 9

focuses attention on managing unused capacity

avoids burdening the user divisions with the cost of unused capacity.

Question 10

Allocation may be based on:

Answer 10

Budgeted usage
Actual usage
Practical capacity

Actual usage may be equal to, greater than, or less than budgeted usage. When budgeted usage is the allocation base, user divisions know their allocated costs in advance. In all three cases, regardless of actual usage, the fixed-cost allocations are the same.

Question 11

Choosing between budgeted and actual rates

Answer 11

The decision of whether to use budgeted cost rates or actual cost rates affects the level of uncertainty user divisions face. Budgeted rates let the user department know in advance the cost rates they will be charged. Users are better equipped to determine the amount of the service to request. This information helps the user divisions with both short-run and long-run planning .Budgeted rates also help motivate the manager of the supplier department to improve efficiency.

Question 12

Why does the supplier department bear the risk of any unfavourable cost variance?

Answer 12

During the budget period, the supplier department, not the user departments, bears the risk of any unfavourable cost variances. Because the user departments do not pay for any costs that exceed the budgeted rates.

Question 13

Allocating costs of multiple support departments

Answer 13

Some companies may have multiple support departments. Three methods are widely used to allocatethe costs of support departments to operating departments.

Question 14

Three methods are widely used to allocatethe costs of support departments to operating departments:

Answer 14

Direct allocation method

Step-down method

Reciprocal method

Question 15

Direct allocation method:

Answer 15

Allocates support department costs to operating departments only.

Question 16

Step-down (sequential allocation) method:

Answer 16

Allocates support department costs to other support departments and to operating departments. This method partially recognises the mutual services provided among all support departments.

Question 17

Reciprocal allocation method:

Answer 17

Allocates support department costs to operating departments by fully recognising the mutual services provided among all support departments. The direct method and the step-down method are less accurate than the reciprocal method when support departments provide services to one another reciprocally.

Question 18

Allocating Common Costs

Answer 18

A common cost is a cost of operating a facility, activity, or like cost object that is shared by two or more users.

Question 19

There are two methods for allocating common costs:

Answer 19

Stand-alone cost allocation method

Incremental cost allocation method

Question 20

Stand-alone cost allocation method

Answer 20

The stand-alone cost allocation method uses information pertaining to each user of a cost object as a separate entity to determine the cost-allocation weights. Individual costs are added together and allocation percentages are calculated from the whole, and applied to the common cost

Question 21

Incremental cost allocation method

Answer 21

The incremental cost allocation method ranks the individual users of a cost object and then uses this ranking to allocate costs among those users. The first ranked user is the primary user and is allocated costs up to the costs of the primary user as a stand-alone user. The second ranked user is the first incremental user and is allocated the additional cost that arises from there being two users instead of only the primary user. Subsequent users are handled in the same manner as the second ranked user.