Chapter15 - CHAPTER 15 ALLOCATION OF SUPPORT-DEPARTMENT COSTS COMMON COSTS AND REVENUES 15-1 Disagree The dual-rate cost-allocation method provides

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15-1 CHAPTER 15 ALLOCATION OF SUPPORT-DEPARTMENT COSTS, COMMON COSTS, AND REVENUES 15-1 Disagree. The dual-rate cost-allocation method provides better information for decision making than the single-rate method. 15-2 The dual-rate method provides information to division managers about cost behavior. Knowing how fixed costs and variable costs behave differently is useful in decision making. 15-3 Disagree. When budgeted cost-allocation rates are used, managers of the supplier department are motivated to improve efficiency because the supplier department bears the risk of any unfavorable cost variances. 15-4 Examples of bases used to allocate support department cost pools to operating departments include the number of employees, square feet of space, number of hours, and machine-hours. 15-5 The use of budgeted indirect cost allocation rates rather than actual indirect rates has several attractive features to the manager of a user department: a. the user knows the costs in advance and can factor them into ongoing operating choices, b. the cost allocated to a particular user department does not depend on the amount of resources used by other user departments, and c. inefficiencies at the department providing the service do not affect the costs allocated to the user department. 15-6 Disagree. Allocating costs on “the basis of estimated long-run use by user department managers” means department managers can lower their cost allocations by deliberately underestimating their long-run use (assuming all other managers do not similarly underestimate their usage). 15-7 The three methods differ in how they recognize reciprocal services among support departments: a. The direct (allocation) method ignores any services rendered by one support department to another; it allocates each support department’s costs directly to the operating departments. b. The step-down (allocation) method allocates support-department costs to other support departments and to operating departments in a sequential manner that partially recognizes the mutual services provided among all support departments. c. The reciprocal (allocation) method allocates support-department costs to operating departments by fully recognizing the mutual services provided among all support departments.
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15-2 15-8 The reciprocal method is theoretically the most defensible method because it fully recognizes the mutual services provided among all departments, irrespective of whether those departments are operating or support departments. 15-9 A common cost is the cost belonging to a cost object that is shared by two or more users. Two methods used to allocate common costs would be the stand-alone method and the incremental method. The stand-alone method uses information pertaining to each user of the cost object to determine the cost allocation weights. The incremental method ranks individual users of the cost object and allocates common costs first to the primary user, and then to the other incremental users.
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This note was uploaded on 02/06/2012 for the course FIN 201 taught by Professor Dr.ada during the Summer '08 term at Alfred University.

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Chapter15 - CHAPTER 15 ALLOCATION OF SUPPORT-DEPARTMENT COSTS COMMON COSTS AND REVENUES 15-1 Disagree The dual-rate cost-allocation method provides

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