Deck 3: A Costing Framework and Cost Allocation

Question 1

Indirect costs are traced and direct costs are allocated.

Answer 1

False

Question 2

Support department cost allocations should never be made when the information is to be used to evaluate the performance of an operating department manager.

Answer 2

False

Question 3

The allocation order of support department costs does not matter if the reciprocal method of allocation is used

Answer 3

True

Question 4

The same cost that is a direct cost for one cost object can be an indirect cost for a different cost object.

Question 5

As the number of cost pool increases the accuracy of the cost information decreases.

Question 6

Support department cost allocation is necessary for the preparation of externally issued financial statements.

Question 7

The distinction between direct costs and indirect costs depends on their traceability to

A) a cost object
B) a manufacturing operation
C) an activity
D) a product

Question 8

A cost driver provides a measure of activity that explains the cost object's use of a direct cost.

Question 9

The costs of the computer services department of an organisation are allocated to other departments at $81 per number of computers in the department. If Department X has 38 computers and Department Y has 89 the computer services costs allocated to Department Y will be $3382.

Question 10

Under the reciprocal method, the total costs allocated out of the support departments exceed the total costs of the support departments before cost allocation began.

Question 11

Direct costs are costs that can be directly linked to a cost object by physical tracking.

Question 12

Indirect costs are

A) costs that it is impossible to trace to a cost object
B) costs that cannot be traced to a cost object in an economic manner
C) the same as fixed costs
D) B and C

Question 13

A company must use the same method for allocating all support department costs to operating departments.

Question 14

Under the direct method of allocating support department costs the cost objects of interest are the operating departments.

Question 15

The allocation of indirect costs to cost objects is likely to be inaccurate if the allocation base used is not a cost driver.

Question 16

The reciprocal method is more likely to cause support department managers to control their use of other support department services than is the direct method.

Question 17

Indirect costs can also be referred to as overhead costs.

Question 18

A cost object cannot be:

A) a geographic region
B) a customer
C) a department
D) none of the above, i.e. all can be cost objects

Question 19

When the order of support department cost allocation must be determined, any reasonable procedure for ranking the support departments is acceptable.

Question 20

A cost object is a thing or activity for which costs need to be measured for decision making.

Question 21

Trucker industries provides the following information about departmental consumption of allocation bases for its 3 support and 2 operating departments. For the step-down method, what proportion of the Cafeteria's costs will be allocated to the Maintenance Department if the allocation order is Personnel, Cafeteria and Maintenance?

A) 11.1%
B) 10%
C) 8.1%
D) 30%

Question 22

Trucker industries provides the following information about departmental consumption of allocation bases for its 3 support and 2 operating departments. For the direct method, what proportion of the Personnel's costs will be allocated to the Machining Department?

A) 30%
B) 10%
C) 42.9%
D) 14.3%

Question 23

The reason for allocating indirect costs is:

A) for pricing decisions
B) to comply with external reporting requirements
C) to remind departmental managers of the full impact of their decisions
D) all of the above

Question 24

Which of these is an example of an indirect cost if Department T is the cost object?

A) Depreciation on the organisation's building, part of which is occupies by Department T
B) Depreciation on the computers held in Department T
C) Commission paid to the sales persons in Department T
D) A and B

Question 25

Which of these departments would not be considered a support department for a manufacturer of bathroom fittings?

A) accounts
B) security
C) computing departments
D) none of the above, i.e. all would be considered support departments for a manufacturer

Question 26

When discussing costing the indirect cost rate is:

A) the rate used to assign indirect costs to the cost object
B) the total costs incurred for a cost object
C) the input or activity that causes changes in total costs for a cost object
D) the method used to allocate the costs of each support department to the operating departments

Question 27

The allocation method for support department costs that can manipulate the costs allocated by changing the order of the support department cost allocation is:

A) the direct method
B) the step-down method
C) the reciprocal method
D) the dual-rate method

Question 28

Trucker industries provides the following information about departmental consumption of allocation bases for its 3 support and 2 operating departments. For the step-down method, what proportion of the Maintenance Department's costs will be allocated to the Assembly Department if the allocation order is Personnel, Cafeteria and Maintenance?

A) 20%
B) 28.6%
C) 42.9%
D) 30%

Question 29

Coburg Plumbing estimates that its overhead costs for the year will be $1,800,000 and it has decided to use direct labour hours as the cost driver. Its markup is 20% on cost. If a job for Martin S. used $400 of direct materials and 8 labour hours at $50 per hour how much will Coburg Plumbing charge Martin S?

A) $960
B) $800
C) $1360
D) cannot be calculated from the information given

Question 30

The cost driver that is a volume based cost driver is:

A) labour hours
B) number of set-ups
C) number of employees
D) all are volume based cost drivers

Question 31

Which of these is not an allocation method commonly used to allocate support department costs to operating departments?

A) indirect method
B) direct method
C) step-down method
D) none of the above, i.e. all are allocation methods commonly used to allocate support department costs to operating departments

Question 32

To avoid passing on inefficiencies of the support departments, support department costs should be allocated using:

A) a budgeted cost allocation rate
B) an actual cost allocation rate
C) only fixed costs per unit of service
D) only variable costs per unit of service

Question 33

Which of these cost drivers is not subjective?

A) benefits received
B) fairness
C) cause and effect
D) all are subjective

Question 34

The method that allocates support department costs by ignoring all services rendered between support departments is:

A) the direct method
B) the step-down method
C) the reciprocal method
D) the dual-rate method

Question 35

Sales Smart allocates advertising expenses to its two departments, F and M, using sales as the cost driver. For the current year the sales for department F are estimated to be $900,000 and for department M $600,000 and total advertising expenses are budgeted at $55,000. The indirect cost rate is:

A) F$33,000: M $22,000
B) $.036 per sales dollar
C) F$.0611: M $.0917 per sales dollar
D) F$36,667: M $18,333

Question 36

In determining the amount of indirect costs to be allocated to the cost object the first step is:

A) to develop a cost allocation formula
B) to decide on the number of cost pools
C) to select a cost driver
D) to develop a predetermined cost rate

Question 37

The allocation method for support department costs that allocates fixed and variable costs separately is:

A) the direct method
B) the step-down method
C) the reciprocal method
D) the dual-rate method

Question 38

If the cost object is the payroll department in a large manufacturing firm which of these would be a direct cost?

A) The raw materials cost of the products produced
B) A share of the building space occupied based on percentage of floor space used
C) the payroll department manager's yearly bonus payment
D) The salaries of the shop floor employees that are paid by the payroll department staff

Question 39

Sales Smart allocates indirect labour costs to its two departments, F and M using number of employees per department as the cost driver. For the current year the number of employees in department F are estimated to be 80 and for M department 45 and total indirect labour costs for the departments are budgeted at $2,400,000. The amount allocated to the departments are:

A) F $1,536,000: M $864,000
B) F$800,000: M $1,600,000
C) F $1,920,000: M $1,080,000
D) F $1,600,000: M $800,000

Question 40

Which of these statements concerning the determination of the full cost of a cost object is not true?

A) direct costs are traced via source documentation
B) full cost includes only manufacturing costs
C) indirect costs are allocated via the use of a cost driver
D) none of the statements is untrue

Question 41

Which of these is not a way in which the quality of support department cost allocations can be improved?

A) Consider perceived fairness
B) Educate managers concerning the meaning of allocations
C) Avoid the more complicated methods
D) None of the above, i.e. all are ways in which the quality of support department cost allocations can be improved

Question 42

The allocation method for support department costs that requires ranking of support departments in terms of service provided to other support departments is:

A) the direct method
B) the step-down method
C) the reciprocal method
D) the dual-rate method

Question 43

Which statement concerning the step-down method of allocating support department costs is not correct?

A) The method allocates costs one department at a time
B) The cost object in the allocation exercise is the support departments and the operating departments
C) The method recognises that support departments provide support for other support departments
D) The allocation process begins with the support department that provides the least service to the other support departments

Question 44

Which of these is a limitation of allocating support department costs?

A) identifying appropriate cost pools
B) the subjective nature of the exercise
C) the possibility of managers mistakenly believing that allocated costs are variable
D) all of the above are limitations

Question 45

Trucker industries provides the following information about departmental consumption of allocation bases for its 3 support and 2 operating departments. For the reciprocal method, what proportion of the Personnel' Department's costs will be allocated to the Machining Department?

A) 30%
B) 42.9%
C) 20%
D) 28.6%