Deck 3: A Costing Framework and Cost Allocation

Question 1

Cost allocation is the process of assigning indirect costs to cost objects.

Answer 1

A

Question 2

A geographic region could be a cost object for a service organisation.

Answer 2

A

Question 3

Only entities that are subject to accounting standards allocate indirect costs to cost objects.

Answer 3

B

Question 4

Entities use either manual or computerised tracking systems to trace direct costs.

Question 5

Direct costs can also be referred to as overhead costs.

Question 6

Before determining whether a cost is direct or indirect it is necessary to know what the cost object is.

Question 7

Cost benefit analysis is used to determine whether a cost object has made use of a particular resource.

Question 8

Some costs are treated as indirect because it is too difficult or costly to trace them directly to the cost object.

Question 9

Costs that are common to many cost objects and cannot easily be traced to a specific cost object are known as indirect costs.

Question 10

One reason that entities allocate indirect costs to cost objects is to encourage the use of central resources.

Question 11

The cost object determines whether costs are classified as direct or indirect.

Question 12

Understanding how costs are incurred help organisations to remain competitive and generate a profit.

Question 13

A cost object is anything for which a separate measurement of cost is required.

Question 14

The glue used on the spines of mass produced textbooks is an example of an indirect cost.

Question 15

An example of a cost tracing system is the time card which indicates how much time an employee has spent working on a particular job.

Question 16

The accuracy of costing a cost object is increased when more costs can be identified as direct costs.

Question 17

Direct costs do not have a cause and effect relationship with the cost object.

Question 18

Total costs for a firm vary depending on how many cost objects they have.

Question 19

The only cost object for a manufacturing firm is the finished product.

Question 20

When calculating the total cost for a cost object it is necessary to include both direct and indirect costs.

Question 21

While the basic costing structure for entities is similar, the number of cost pools and types of cost driver used are dependent upon the entity's specific cost information needs.

Question 22

Organisations typically allocate costs from operating departments to support departments.

Question 23

The costs of the human resources department of an organisation are allocated to other departments at the rate of $150 per employee in the department. If Department A has 38 employees and Department B has 90 the human resource costs allocated to Department B will be $13,500.

Question 24

Support departments provide internal services to each other and the operating departments.

Question 25

Allocating indirect costs based on machine hours is an example of using an activity driver.

Question 26

As the number of cost pools decreases the accuracy of the cost information decreases.

Question 27

The costs of the human resources department of an organisation are allocated to other departments at the rate of $150 per employee in the department. If Department A has 38 employees and Department B has 90 the human resource costs allocated to Department A will be $5,700.

Question 28

Cost drivers are used to allocate indirect costs to direct cost pools.

Question 29

The budgeted cost of maintenance for a production department is $250 000. The organisation has decided to use machine hours as the cost driver for allocating indirect costs. The budgeted amount of machine hours for the production department is 125 000 machine hours. Therefore the indirect cost rate is calculated as $250 000/125 000 = $2 per machine hour.

Question 30

A cost driver or allocation base provides a measure of activity that explains the cost object's use of the indirect cost.

Question 31

The prime consideration when selecting a cost driver is the accuracy of the full cost measurement.

Question 32

Operating departments are the departments within an organisation responsible for providing goods or services to external customers.

Question 33

The indirect cost rate is determined by dividing the budgeted indirect cost by the budgeted cost driver usage in each indirect cost pool.

Question 34

The first step in allocating indirect costs is to calculate the indirect cost rate.

Question 35

The full cost of a cost object includes direct costs plus allocated indirect costs.

Question 36

To develop a cost allocation formula entities need to decide on the number of indirect cost pools.

Question 37

Indirect costs are allocated to cost objects while direct costs are traced directly via source documentation.

Question 38

To be consistent in the cost assignment process the same cost driver must be chosen for each indirect cost pool.

Question 39

Cost drivers can be volume drivers or activity drivers.

Question 40

Organisations use budgeted costs so they can calculate a predetermined indirect cost rate prior to actual costs becoming available.

Question 41

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

Question 42

Regardless of method adopted the first step in allocating support department costs to operating departments is to choose the allocation basis.

Question 43

Once the total cost pool for each support department has been determined the next step is to choose the allocation basis.

Question 44

There are two support departments, Accounting and Catering. Accounting provides 5% of its services to Catering. Catering provides 10% of its services to Accounting. Catering should be allocated first in the step down method.

Question 45

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 46

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

Question 47

It is not important to use the dual rate method for support department allocations because most support department costs are variable.

Question 48

The reciprocal method is the simplest method of allocating support department costs when there is more than two support departments.

Question 49

Dual rate allocation methods separate support costs into direct and indirect cost pools.

Question 50

The reciprocal method of allocating support departments uses simultaneous equations to mathematically allocate costs between support departments.

Question 51

The three methods of allocating support department costs to operating departments are called the direct method, the step down method and the proportional method.

Question 52

The step down method requires a ranking of support departments based on the amount of service provided to other support departments.

Question 53

The reciprocal allocation method simultaneously allocates costs between support departments and then from support departments to operating departments.

Question 54

One limitation of support department cost allocations is that it is subject to judgement when making decisions about allocation bases and the allocation method.

Question 55

The department which provides the least amount of services to other support departments should be allocated first in the step down method.

Question 56

The step down method allocates support department costs, one department at a time, to remaining support departments and operating departments in a cascading manner until all support department costs have been allocated.

Question 57

To improve the reliability and quality of allocated costs, accounting systems can be redesigned to more accurately trace costs to activities and generate better allocation base data.

Question 58

The direct method of allocating support department costs ignores the fact that support departments provide services to other support departments.

Question 59

The step method recognises some interaction between support departments but not all because it only allocates support department costs in one direction.

Question 60

The total cost allocated is the same under the direct method, step down method and the reciprocal method.

Question 61

The formula for calculating a predetermined indirect cost rate is:

A) actual indirect costs/actual usage of the cost driver
B) budgeted indirect costs/actual usage of the cost driver
C) budgeted indirect costs/budgeted usage of the cost driver
D) actual indirect costs/budgeted usage of the cost driver

Question 62

Paws Pet Resort and Spa is located in Christchurch. The company employs three pet attendants, four pet groomers and two front office staff who book appointments and keep records. The spa provides a range of services for dogs and cats including boarding, grooming, and obedience training. The grooming area includes a small retail section that carries dog and cat food, pet supplies, and toys. If the cost object is the total cost of the grooming product line, which of the following is a direct cost?

A) Front office staff salaries
B) Labour cost of employees who groom pets
C) Public liability insurance.
D) Rent on the premises.

Question 63

Which of the following is least likely to be a cost object for a car manufacturer:

A) Human Resources Department
B) Assembly Division
C) Gordon Lee - a part time employee in the cafeteria.
D) Charlie's Car Company - a long term customer.

Question 64

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) laminating department

Question 65

If the cost object is the production 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) Research and development costs for future products.

Question 66

Smart Choices allocates advertising expenses to its two departments, Lifestyle and Storage Solutions, using sales as the cost driver. For the current year the sales for Lifestyle are estimated to be $450,000 and for department Storage Solutions $900,000 and total advertising expenses are budgeted at $110,000. The indirect cost rate is:

A) Lifestyle: $0.24 per sales dollar: Storage Solutions: $0.12 per sales dollar
B) $.036 per sales dollar
C) $.081 per sales dollar
D) $12.27 per sales dollar

Question 67

The reason for allocating indirect costs is:

A) to set product prices
B) to comply with external reporting requirements
C) to help with making decisions about which products to produce
D) all of the above

Question 68

In relation to product costing the indirect cost rate is:

A) the rate used to assign indirect costs to the cost object
B) added to direct costs to calculate the full product cost
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 69

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) overheads are included
C) indirect costs are allocated via the use of a cost driver
D) full cost includes only manufacturing costs

Question 70

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

A) Insurance on the organisation's building, part of which is occupied by Department M
B) Rent on the organisation's building, part of which is occupied by Department M
C) Commission paid to the sales persons in Department M
D) A and B

Question 71

If the cost object is the cosmetics department of a large department store which of the following is a direct cost?

A) Advertising costs for the store's annual stock take sale.
B) Brand specific cosmetic product training.
C) The payroll department manager's yearly bonus payment
D) Security staff wages for the store.

Question 72

Smart Choices allocates indirect labour costs to its two departments, Lifestyle and Storage Solutions using number of employees per department as the cost driver. For the current year the number of employees in department Lifestyle are estimated to be 50 and for Storage Solutions department 30 and total indirect labour costs for the departments are budgeted at $1,400,000. The amount allocated to the departments are:

A) Lifestyle $48,000: Storage Solutions $80,000
B) Lifestyle $875,000: Storage Solutions $525,000
B) Lifestyle $875,000: Storage Solutions $80,000
C) Lifestyle $525,000: Storage Solutions $875,000

Question 73

Jones Plumbing estimates that its overhead costs for the year will be $800,000 and it has decided to use direct labour hours as the cost driver. Its mark-up is 20% on cost. If a job for Martin Z used $800 of direct materials and 5 labour hours at $50 per hour how much will Jones Plumbing charge Martin Z?

A) $960
B) $800
C) $2,460
D) cannot be calculated from the information given

Question 74

Which of these cost drivers is not a criteria for allocating costs?

A) benefits received
B) fairness
C) standardisation
D) behavioural

Question 75

Mollie's Lollie Manufacturer has budged total overhead to be $269 500 and the expected cost driver is 55 000 machine hours. Last year actual machine hours was 50 000. The predetermined indirect cost rate is.

A) $5.39
B) $1.10
C) $.20
D) $4.90

Question 76

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

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

Question 77

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

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

Question 78

Paws Pet Resort and Spa is located in Christchurch. The company employs three pet attendants, four pet groomers and two front office staff who book appointments and keep records. The spa provides a range of services for dogs and cats including boarding, grooming, and obedience training. The grooming area includes a small retail section that carries dog and cat food, pet supplies, and toys. If the cost object is cost per day of boarding, which of the following is an indirect cost?

A) Pet food
B) Front office staff salaries
C) Cleaning costs for the kennels.
D) Maintenance on the kennels.

Question 79

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

Question 80

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) also known as overhead costs.
D) B and C