Question 1

The stand-alone cost allocation method ranks the individual users of a cost object in order of users most responsible for a common cost and then uses these rankings to allocate the costs among the users.

Accepted Answer

The incremental cost-allocation method ranks the individual users of a cost object in order of users most responsible for a common cost and then uses these rankings to allocate the costs among the users.

Question 2

The FASB (Financial Accounting Standards Board) provides cost accounting guidance (standards) for U.S. government contractors who do business with the federal government.

Accepted Answer

The CASB (Cost Accounting Standards Board) provides the cost accounting standards for contracts between private contractors and the federal government.

Question 3

Cost-plus contracts negotiated with suppliers of the government usually involves ________.

Accepted Answer

Cost-plus contracts typically involve the supplier's cost to perform the contract (provide the product or service) plus a fee. This type of contract is often used when the government wants to ensure that the supplier is reimbursed for all costs incurred in performing the contract and wants to provide some incentive for the supplier to control costs. Choice A is incorrect because the contract price may be above the break-even point. Choice B is also incorrect because the noncash benefits are not typically included in the contract price. Choice D is incorrect because the price typically includes a fee, not just direct and overhead costs.

Question 4

Under the incremental method, the first incremental user receives the largest allocation of the common costs.

Accepted Answer

The primary user usually receives the largest allocation of the common costs.

Question 5

Which of the following would be an explicit agreement of reimbursement on a contract?

Accepted Answer

The explicit agreement of reimbursement on a contract is when the contractor agrees with the customer beforehand on a set price. This establishes a clear understanding of the payment expectations for both parties. Option A and D suggest ambiguity in billing, while option B suggests the contractor does not need to be transparent about their pricing.

Question 6

The Shapley value method of allocating common costs considers each party as first the primary party and then the incremental party and computes an average allocation.

Accepted Answer

The Shapley value method allocates costs by considering each party's contribution both as the first (primary) party and then incrementally, averaging these contributions across all possible sequences to ensure a fair allocation.

Question 7

In costs-plus-fixed-fee contracts the allocation of a specific cost may be difficult to defend on the basis of any cause-and-effect reasoning.

Accepted Answer

In costs-plus-fixed-fee contracts, the fee is undetermined and is added to the actual cost of the work. Due to the nature of these contracts, it is often difficult to justify the allocation of specific costs based on cause-and-effect reasoning, leading to potential challenges and disputes.

Question 8

The Maintenance Department has been servicing Gizmo Production for four years. Beginning next year, the company is adding a Scrap-Processing Department to recycle the materials from Gizmo Production. As a result, maintenance costs are expected to increase from $460,000 per year to $525,000 per year. The Scrap-Processing Department will use 25% of the maintenance efforts.
Required:
a.Using the stand-alone cost-allocation method, identify the amount of maintenance cost that will be allocated to Gizmo Production and the Scrap-Processing Department next year.
b.Using the incremental cost-allocation method, identify the amount of maintenance cost that will be allocated to Gizmo Production and the Scrap-Processing Department next year.

Accepted Answer

The answer of The Maintenance Department has been servicing Gizmo...

Question 9

The issue of "allowable costs" is applicable in government cost-plus contracts.

Accepted Answer

Allowable costs are a key concept in government cost-plus contracts, where the contractor receives reimbursement for all eligible costs related to the project plus a fee or profit margin. These contracts typically require the contractor to follow certain rules and regulations in order to ensure that only allowable costs are charged to the government, such as only charging for direct costs that are necessary and reasonable, and not including certain indirect costs such as excessive entertainment or lobbying expenses. The government may audit the contractor's records to ensure that allowable costs are being properly charged and documented.

Question 10

In certain high-cost defense contracts involving new weapons and equipment, contracts are rarely subject to competitive bidding because ________.

Accepted Answer

In high-cost defense contracts involving new weapons and equipment, contracts are rarely subject to competitive bidding because no contractor is willing to assume all the risk of receiving a fixed price for the contract. This is because the complexity and uncertainty involved in developing new weapons or equipment makes it difficult for contractors to accurately estimate costs and timelines. As a result, cost-plus contracts are often used, where the government pays the contractor for its costs plus a profit margin, rather than a fixed price contract. This allows the contractor to be reimbursed for any unexpected cost overruns or delays.

Question 11

What is a "common cost"? What are two methods that a manager can use to allocate common costs to two or more users?

Accepted Answer

The answer of What is a "common cost"? What are...

Question 12

Buildz Corp has been servicing the Production Casting Department for five years. Beginning next year, the company is adding a Production Molding Department to compliment the materials produced by the Production Casting Department. As a result, data center costs are expected to increase from $800,000 per year to $1,000,000 per year. The Production Molding Department will use 20% of the data center efforts.
Required:
a.Using the stand-alone cost-allocation method, identify the amount of data center cost that will be allocated to Production Casting and the Production Molding Department next year.
b.Using the incremental cost-allocation method, identify the amount of data center cost that will be allocated to Production Casting and the Production Molding Department next year.

Accepted Answer

The answer of Buildz Corp has been servicing the Production...

Question 13

John Peters is drafting the provisions of a cost-plus contract and is concerned with ironing out any possible misunderstandings during the life of the contract. What advice can you provide to reduce contract disputes over reimbursement amounts based on costs?

Accepted Answer

The answer of John Peters is drafting the provisions of...

Question 14

There is uncertainty in defense contracts about the final cost to produce a new weapon or equipment. Explain.

Accepted Answer

The answer of There is uncertainty in defense contracts about...

Question 15

All contracts with U.S. government agencies must comply with the cost accounting standards issued by the SEC.

Accepted Answer

All contracts with U.S. government agencies must comply with the cost accounting standards issued by the Cost Accounting Standards Board (CASB).

Question 16

If the incremental users are newly formed companies or subunits, the incremental method may decrease their chances for short-run survival by assigning them a high allocation of the common costs.

Accepted Answer

If the incremental users are newly formed companies or subunits, such as a new product line or a new sales territory, the incremental method may enhance their chances for short-run survival by assigning them a low allocation of the common costs.

Question 17

Which of the following is an example of an allowable cost considered by U.S. government contract?

Accepted Answer

Supervision costs are typically an allowable cost under U.S. government contracts as they are necessary for the proper execution of the contract terms. Costs of lobbying activities, alcoholic beverages, and vacation for executives are generally not allowable under government contracts.

Question 18

Allocating common costs can best be achieved by using the stand-alone cost-allocation method.

Accepted Answer

Allocating common costs is very challenging and can generate disputes. Whenever feasible, the rules for the allocation of common costs should be agreed on in advance.

Question 19

Contract disputes regarding cost allocation can be reduced by defining which of the following?

Accepted Answer

Defining terms such as what constitutes direct labor can help avoid disputes over how costs should be allocated, which can ultimately reduce contract disputes. While the other options may also be important in some contexts, they are less directly related to cost allocation and therefore less effective in reducing such disputes.

Question 20

If the government wants to contract a very large scale project with significant uncertainty about what the final cost will be; often a cost-plus contract is awarded to attract qualified contractors who may otherwise not be willing to accept the risks inherent in a guaranteed bid price.

Accepted Answer

A cost-plus contract allows the contractor to be reimbursed for all of their allowable expenses and then receive additional payment as a percentage of the total cost of the project. This type of contract is often used for large-scale projects with significant uncertainty about the final cost. It can be beneficial for attracting qualified contractors who may be hesitant to accept the risks of a guaranteed bid price.

Quiz 15: Allocation of Support-Department Costs, Common Costs, and Revenues