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Unformatted text preview: Chapter 6 Cost Allocation and Activity-Based Costing QUESTIONS 1. 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 to cost objects these costs are classified as indirect costs and are allocated to the cost object via the use of an allocation base. 2. A cost objective is a product, service, or department that receives an allocation of cost. For example, a production department that receives an allocation of janitorial cost is a cost objective. Likewise, a product in a department that receives an allocation of depreciation of equipment is a cost objective. 3. A concern in forming a cost pool is that the costs within the cost pool be similar or homogeneous. It is unlikely that variable and fixed costs are similar (i.e., that one allocation base is suitable for allocating both fixed and variable costs). Homogeneous cost pools provide more accurate information and this would be a benefit of having one pool for variable costs and one for fixed costs. 4. Number of employees in a department would, most likely, result in a cause-and- effect allocation (at least for the variable costs in the cafeteria). 5. If budgeted costs are allocated, then service departments cannot pass on inefficiencies and waste. Allocating actual costs gives the service department little incentive to be efficient. 6. In a responsibility accounting system, revenues and costs are traced to departments/ divisions and individuals with related responsibility for generating revenues and controlling costs. This facilitates performance evaluation of managers and the operations under their control. 7. Sometimes managers are allocated costs beyond their control in order to make them aware that the costs exist and must be covered by revenues of the firm. 8. Traditional allocation methods use a small number of cost pools and allocation bases related to production volume. However, some costly activities are not Jiambalvo Managerial Accounting related to production volume. Consider the costs associated with setupsin a traditional costing system setup costs would be allocated based on production volume and high volume products will receive most of the allocated cost even though low volume products may require an equal number of setups. 9. The traditional costing approach typically uses allocation bases that are measures of production volume (e.g., direct labor hours, direct labor cost, or machine hours). Also, few cost pools are used under the traditional approach (e.g., one or two cost pools). ABC focuses on major activities that cause overhead costs to be incurred. Many of these activities are not related to production volume. Cost pools are formed for each major activity and costs are assigned to products using an allocation base that is a cost driver. Many of the cost drivers are not related to production volume. that is a cost driver....
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- Spring '09