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Unformatted text preview: C HAPTER 16 S UPPORT A CTIVITY AND DUAL- RATE ALLOCATIONS SOLUTIONS R EVIEW Q UESTIONS 16. 1. A line activity directly relates to producing services or products, whereas a support activ- ity is not directly related to making or selling a product or service. Examples of a line activity include engineering, machining, and assembly. Examples of a support activity in- clude accounting and payroll. 16. 2. The reciprocity in consumption among support activities – such departments not only provide services for line activities, but also for each other. 16. 3. (1) the direct method, (2) the step-down method, and (3) the reciprocal method. 16. 4. The direct method ignores reciprocity in consumption, whereas the step-method partially accounts for it. 16. 5. Changing the order matters for the step-down method, but it does not for the direct and reciprocal methods. 16. 6. We ignore such self-consumption. 16. 7. The step-method partially accounts for reciprocity in consumption, whereas the reciproc- al method fully accounts for it. 16. 8. The dual-rate allocation method uses two pools, one for long-term or fixed costs and one for short-term or variable costs, to allocate costs from a department. This dual-rate, or two-factor, allocation informs managers about the different controllability of the costs. 16. 9. We allocate capacity costs using expected demand and operating costs using actual de- mand. 16. 10. Using rates set on budgets instead of actual costs prevents cost inefficiencies being passed on to user departments. Rather, they are isolated in the cost center, potentially per- mitting superior control. Balakrishnan, Managerial Accounting 1e FOR INSTRUCTOR USE ONLY D ISCUSSION Q UESTIONS 16. 11. When we allocate support activity costs, we are in essence assuming that the support re- source have positive opportunity costs over the relevant horizon. For short-term de- cisions, we must include only those support costs that are controllable in the short term (e.g., variable support costs). For long-term decisions such as product planning and capa- city planning, it makes sense to allocate capacity costs of support activities as well under the assumption that these costs are controllable over that horizon. 16. 12. We cannot say for sure. Allocating the support department of the largest size first -- or the support department that provides the most support (transaction volume, support de- partment involving expensive resources) first -- typically give rise to small errors because the cost of reciprocal services from other departments is likely to be less material. 16. 13. Predetermined overhead rates are based on budgeted usage. So they insulate each depart- ment from other departments’ actual usage patterns. They can be computed at the time budgets are prepared. They are convenient to implement because each department is charged for its requested usage for support department resources in a timely fashion, much like a “transfer price.” 16. 14. Transfer price is a term used to refer to the price of internal transfers of goods and ser-...
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- Spring '08
- Managerial Accounting