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Unformatted text preview: Chapter 4 Cost Accumulation, Tracing, and Allocation Answers to Questions 1. A cost object is something for which one is trying to determine the cost. Cost objects that accountants would need to know the cost of would include products, activities, services, and departments. 2. Managers need timely cost information. They may have to sacrifice accuracy in order to get the information in time for decision mak- ing. For instance, managers need cost information for planning (budgeting) before the activities that cause the costs have oc- curred. Consequently, they rely on estimates and judgment that are not as precise as actual cost data. 3. For product costing one needs to accumulate the costs necessary to produce the product, which are direct materials, direct labor, and overhead. 4. A direct cost is a cost that is easily traceable to a cost object. A cost-benefit analysis is necessary to determine if a cost is easily traceable to a cost object. If the costs or sacrifices to trace a cost are small in relation to the informational benefits, the cost is easily traceable. 5. A direct cost can be either a fixed or variable cost and an indirect cost can be either a fixed or variable cost. For example, super- visor salaries are usually fixed costs but they are direct or indirect depending on the cost object. If the cost object is the product, su- pervisor salaries are indirect costs; whereas, if the cost object is the department, supervisor salaries are direct costs. 6. The depreciation on machinery used in only one department is a dir- ect cost to that department but the depreciation is not avoidable if the activities of the department are eliminated. 4-1 Chapter 4 Cost Accumulation, Tracing, and Allocation 7. The cost driver chosen to use in allocating a cost should be some activity that drives the cost. In other words, the cost driver should be the activity responsible for changes in the cost. The best cost driver is not only the one that drives the cost to be allocated but the activity that accomplishes the intended goals in allocating the cost. In other words, the cost driver should provide an assign- ment of costs such that the allocation motivates behavior toward intended objectives. 8. To determine an allocation rate divide the total cost to be allocated by the total cost driver for that cost. To make an allocation to a cost object multiply the allocation rate by the weight (the actual amount) of the cost driver for that object. 9. Direct material and direct labor costs are direct costs of the product. Overhead costs are indirect costs of the product. Over- head is composed of a myriad of costs that have the common property of being indirect costs of the product....
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This note was uploaded on 11/05/2008 for the course ACC U301 taught by Professor Udihoitash during the Fall '08 term at Northeastern.
- Fall '08
- Managerial Accounting