Session+10QPAS - Session 10 Questions(Problems...

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Session 10: Questions (Problems) & Answers (Solutions) Questions Q1. Explain why indirect costs are allocated. Q2. Is the following statement true: “Cost allocation refers to the process of assigning direct costs”? Discuss. Q3. Explain what a cost objective is and give two examples. Q4 Describe the cost allocation process. Q5. Discuss allocation of service department costs. Q6. If a company is allocating cafeteria costs to all departments within the company, what allocation base might results in a cause-and effect relationship? Q7. Why is it a good idea to allocate budgeted, rather than actual, service department costs? Q8. Identify potential problems with cost allocation. Q9. Explain how the allocation process can make a fixed cost appear variable leading to a poor decision. Q10. Why might non-controllable costs be allocated to a department? Q11. What is a responsibility accounting system? Q12. Briefly explain how traditional methods of allocating overhead to products might under-allocate costs to low-production-volume products? Q13. Discuss activity-based costing (ABC) and cost drivers. Q14. How does activity-based costing differ from the traditional costing approach?
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Q15. When would activity-based costing give more accurate costs than traditional costing systems? Q16. Distinguish activity-based costing (ABC) from activity-based management (ABM). Q17. Explain the role of incremental analysis (analysis of incremental costs and revenues) in management decisions. Q18. What are differential costs and revenues? Q19. Define sunk cost, avoidable cost, and opportunity cost and explain how to use these concepts in analyzing decisions. Q20. Why are sunk costs irrelevant to decision making? Q21. What are avoidable costs? Q22. Why are opportunity costs relevant when making decisions? Q23. Analyze Decisions involving joint costs. Q24. What is the proper approach to analyzing whether a product line should be dropped? Q25. Give an example of a fixed cost that is not sunk but is still irrelevant. Q26. What is a qualitative advantage of making rather than buying a component? Q27. Why is relative sales value a more logical basis for allocating joint costs than physical quantity? Q28. Discuss the importance of qualitative considerations in management decisions .
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Answers to Questions Q1. Indirect costs are allocated to: (i) provide information for decision making, (ii) reduce frivolous use of common resources, (iii) encourage managers to evaluate the efficiency of internally provided services, and (vi) calculate the “full cost” of products for GAAP reporting. From a decision-making standpoint, the allocation should measure the opportunity cost of using a company resource. However, this is difficult to operationalize in practice, since opportunity costs often change quickly. Q2. The statement is false. Cost allocation refers to the process of assigning indirect costs. Direct costs are traced to cost objects. Costs are allocated for a variety of reasons. It is not economically feasible to directly trace some costs
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