CHAPTER 15.pdf - CHAPTER 15 ALLOCATION OF...

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15-1 CHAPTER 15 ALLOCATION OF SUPPORT-DEPARTMENT COSTS, COMMON COSTS, AND REVENUES 15-1 Distinguish between the single-rate and the dual-rate methods. The single-rate (cost-allocation) method makes no distinction between fixed costs and variable costs in the cost pool. It allocates costs in each cost pool to cost objects using the same rate per unit of the single allocation base. The dual-rate (cost-allocation) method classifies costs in each cost pool into two pools a variable-cost pool and a fixed-cost pool with each pool using a different cost-allocation base. 15-2 Describe how the dual-rate method is useful to division managers in decision making. The dual-rate method provides information to division managers about cost behavior. Recognizing the different behavior of fixed costs and variable costs is useful in decision making. 15-3 How do budgeted cost rates motivate the support-department manager to improve efficiency? Budgeted cost rates motivate the manager of the support department to improve efficiency because the support department bears the risk of any unfavorable cost variances. 15-4 Give examples of allocation bases used to allocate support-department cost pools to operating departments. Examples of bases used to allocate support department cost pools to operating departments include the number of employees, square feet of space, number of direct labor hours, and machine-hours. 15-5 Why might a manager prefer that budgeted rather than actual cost-allocation rates be used for costs being allocated to his or her department from another department? 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. c. Inefficiencies at the department providing the service do not affect the costs allocated to the user department. 15-6 To ensure unbiased cost allocations, fixed costs should be allocated on the basis of estimated long-run use by user- department managers.” Do you agree? Why?