ACCY 122 – Spring 2011 Cost Allocation Lab
Here are some review questions. Key on last page.
1. Cost objects could include:
a. products
b. customers
c. departments
d. All of these answers are correct.
2. The general term used to identify both the tracing and the allocation of accumulated costs to a cost object
is:
a. cost accumulation
b. cost assignment
c. cost tracing
d. conversion costing
3. Cost assignment is:
a. always arbitrary
b. includes tracing and allocating
c. the same as cost accumulation
d. finding the difference between budgeted and actual costs
4. Which of the following statements about the direct/indirect cost classification is NOT true?
a. Direct costs are always traced.
b. Direct costs are always allocated.
c. The design of operations affects the direct/indirect classification.
d. The direct/indirect classification depends on the choice of cost object.
5. Cost tracing is:
a. the assignment of direct costs to the chosen cost object
b. a function of cost allocation
c. the process of tracking both direct and indirect costs associated with a cost object
d. the process of determining the actual cost of the cost object
6. Cost allocation is:
a. the process of tracking both direct and indirect costs associated with a cost object
b. the process of determining the actual cost of the cost object
c. the assignment of indirect costs to the chosen cost object
d. a function of cost tracing
7. Classifying a cost as either direct or indirect depends upon:
a. the behavior of the cost in response to volume changes
b. whether the cost is expensed in the period in which it is incurred
c. whether the cost can be easily identified with the cost object
d. whether an expenditure is avoidable or not in the future
8. A manufacturing plant produces two product lines: football equipment and hockey equipment. An
indirect cost for the hockey equipment line is the:
a. material used to make the hockey sticks
b. labor to bind the shaft to the blade of the hockey stick
c. shift supervisor for the hockey line
d. plant supervisor
9. Indirect manufacturing costs:
a. can be traced to the product that created the costs
b. can be easily identified with the cost object
c. generally include the cost of material and the cost of labor
d. may include both variable and fixed costs
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ACCY 122 – Spring 2011 Cost Allocation Lab
10. All of the following are true EXCEPT that indirect costs:
a. may be included in prime costs
b. are not easily traced to products or services
c. vary with the selection of the cost object
d. may be included in manufacturing overhead
11. Cost behavior refers to:
a. how costs react to a change in the level of activity
b. whether a cost is incurred in a manufacturing, merchandising, or service company
c. classifying costs as either inventoriable or period costs
d. whether a particular expense has been ethically incurred
12. Cost-volume-profit analysis assumes all of the following EXCEPT:
a. all costs are variable or fixed
b. units manufactured equal units sold
c. total variable costs remain the same over the relevant range
d. total fixed costs remain the same over the relevant range
13. Which of the following items is NOT an assumption of CVP analysis?
a. Total costs can be divided into a fixed component and a component that is variable with respect to
the level of output.
b. When graphed, total costs curve upward.
c. The unit-selling price is known and constant.
d. All revenues and costs can be added and compared without taking into account the time value of
money.
14. Which of the following items is NOT an assumption of CVP analysis?
a. Costs may be separated into separate fixed and variable components.
b. Total revenues and total costs are linear in relation to output units.
c. Unit selling price, unit variable costs, and unit fixed costs are known and remain constant.
d. Proportion of different products will remain constant when multiple products are sold.
15. Which of the following is true about the assumptions underlying basic CVP analysis?
a. Only selling price is known and constant.
b. Only selling price and variable cost per unit are known and constant.
c. Only selling price, variable cost per unit, and total fixed costs are known and constant.
d. Selling price, variable cost per unit, fixed cost per unit, and total fixed costs are known and constant.
16. Contribution margin equals:
a. revenues minus period costs
b. revenues minus product costs
c. revenues minus variable costs
d. revenues minus fixed costs
17. The selling price per unit less the variable cost per unit is the:
a. fixed cost per unit
b. gross margin
c. margin of safety
d. contribution margin per unit
18. When 10,000 units are produced, fixed costs are $14 per unit. Therefore, when 20,000 units are produced
fixed costs will:
a. increase to $28 per unit
b. remain at $14 per unit
c. decrease to $7 per unit
d. total $280,000
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ACCY 122 – Spring 2011 Cost Allocation Lab
KEY:
1. d 6. c 12. c 17. d
2. b 7. c 13. b 18. c
3. b 8. d 14. c
4. b 9. d 15. c
5. a 10. a 16. c
Cost Allocations Issues
A. Depends on the type of cost
1. Direct Costs – Cost tracing to the
cost object
2. Indirect Costs – Cost allocation to
the cost object
B. Complicated by multi-
product/multi-services setting
who compete with single product
and single service organizations.
Example: Healthcare where we want
to determine the cost for a patient
at the hospital where the patient –
the cost object – receives services
and products from a number of
different sources
So What Costs Are To Be Transferred and How Do We Allocate?
This is a cost allocation issue:
Direct material and direct labor and in some cases direct overhead1 are traced to cost objects
Other indirect costs are allocated
Together cost tracing and cost allocation result in cost assignment to the cost object – often called the cost
structure of the cost object:
1. For economic decisions 3. For cost reimbursement
2. For motivation of managers, employers, and 4. For measuring income and assets
owners
Problem: how to allocate costs:
1. Cause an effect 3. Fairness
2. Benefits received 4. Ability to bear the costs
1
For example, say we have a license to use a design technology for a unit of the printer for HP and pay the patent holder
$0.25 per printer. This similar to direct material but is managed as an indirect purchase.
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ACCY 122 – Spring 2011 Cost Allocation Lab
Methods – remember we are only allocating indirect costs:
1. Full costing or absorption costing – both fixed and variable costs:
a. ABC
b. Direct allocation with indirect rates
c. Direct allocation with allocation rates such as a step-down method or reciprocal method
2. Variable costing only using the above three methods.
3. May or may not include all the costs in the value chain
4. May or may not include all the costs in the product life cycle
5. Additional complications with joint products and by-produc
Problem – there is an Excel worksheet on the class web
page as well on sent out on the class listserv for
this problem. We want to do two step-down
allocations using different orders and
allocation bases to see how doing so will result
in different costs for the operating departments.
Steps: 1. Use the statistics to get a cost-per-unit for
the statistic: Cost / statistic and then allocate
the cost by multiplying the cost per statistic
time the number of the statistic. You will see
on the worksheet. The total cost remains the
same, it is just the allocation or the totals by
department that change.
This is the worksheet from the class web page.
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