Cost allocation is the process of assigning indirect costs to a cost object.The indirect costs are grouped in cost pools and then allocated by a common allocation base to the cost object.The base that is employed to allocate a homogeneous cost pool should:
A)Assign the costs in the pool uniformly to cost objects even if the cost objects use resources in a nonuniform way.
B)Be a nonﬁnancial measure (e.g., number of setups) because a nonﬁnancial measure is more objective.
C)Have a cause-and-effect relationship with the cost items in the cost pool.
D)Have a high correlation with the cost items in the cost pool as the sole criterion for selection.
E)None of these answer choices is correct.

Question

Quizplus · Accepted Answer

The base that is employed to allocate a homogeneous cost pool should have a cause-and-effect relationship with the cost items in the cost pool. This ensures that the allocation is more accurate and reflects the actual usage of resources by the cost object. Nonuniform usage of resources by cost objects can be accounted for by selecting different cost pools and allocation bases. Nonfinancial measures may also be used as allocation bases as long as they have a clear cause-and-effect relationship with the cost items in the cost pool. High correlation is not the only criterion for selection, as it may not necessarily reflect the cause-and-effect relationship.

Cost Allocation Is the Process of Assigning Indirect Costs to a Cost