Exam 3: A Costing Framework and Cost Allocation

The distinction between direct costs and indirect costs depends on their traceability to:

As the number of cost pools decreases the accuracy of the cost information decreases.

The reciprocal method is the simplest method of allocating support department costs when there is more than two support departments.

The method that allocates support department costs by ignoring all services rendered between support departments is:

Operating departments are the departments within an organisation responsible for providing goods or services to external customers.

Molten Works Ltd provides the following information about departmental consumption of allocation bases for its 3 support and 2 operating departments. Sugport Departments Operating Departments Personnel Cafeteria Maintenarice Machining Assembly Personnel 10\% 20\% 30\% 40\% Cafeteria 5\% 5\% 40\% 50\% Maintenarice 10\% 20\% 50\% 20\% For the reciprocal method, what proportion of the Cafeteria Department's costs will be allocated to the Machining Department?

The step down method allocates support department costs, one department at a time, to remaining support departments and operating departments in a cascading manner until all support department costs have been allocated.

Entities use either manual or computerised tracking systems to trace direct costs.

Only entities that are subject to accounting standards allocate indirect costs to cost objects.

Cost allocation is the process of assigning indirect costs to cost objects.

The cost object determines whether costs are classified as direct or indirect.

The accuracy of costing a cost object is increased when more costs can be identified as direct costs.

To improve the reliability and quality of allocated costs, accounting systems can be redesigned to more accurately trace costs to activities and generate better allocation base data.

Organisations use budgeted costs so they can calculate a predetermined indirect cost rate prior to actual costs becoming available.

Which of these departments would not be considered a support department for a manufacturer of bathroom fittings?

The allocation of indirect costs to cost objects is likely to be inaccurate if the allocation base used is not a cost driver.

The reciprocal allocation method simultaneously allocates costs between support departments and then from support departments to operating departments.

The allocation method for support department costs that can manipulate the costs allocated by changing the order of the support department cost allocation is:

The costs of the human resources department of an organisation are allocated to other departments at the rate of $150 per employee in the department. If Department A has 38 employees and Department B has 90 the human resource costs allocated to Department A will be $5,700.

When calculating the total cost for a cost object it is necessary to include both direct and indirect costs.