Podcast
Questions and Answers
What is the primary reason managers need reliable cost estimates?
What is the primary reason managers need reliable cost estimates?
Which of the following is not considered a secondary cost object in the promotion example?
Which of the following is not considered a secondary cost object in the promotion example?
Which factor best describes a cost driver?
Which factor best describes a cost driver?
What should management consider before deciding to run the promotion?
What should management consider before deciding to run the promotion?
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Which of the following is an example of a variable overhead cost?
Which of the following is an example of a variable overhead cost?
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In the context of cost allocation, what is meant by 'salary allocation methods'?
In the context of cost allocation, what is meant by 'salary allocation methods'?
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What impact can departmental bonuses have on cost management?
What impact can departmental bonuses have on cost management?
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How does the number of advertisements act as a cost driver?
How does the number of advertisements act as a cost driver?
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What is the purpose of calculating the allocation rate in cost allocation?
What is the purpose of calculating the allocation rate in cost allocation?
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How is the allocation rate per direct labor hour calculated?
How is the allocation rate per direct labor hour calculated?
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When using direct labor hours as the cost driver, how much is allocated for desks?
When using direct labor hours as the cost driver, how much is allocated for desks?
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Which statement best explains the relationship between direct materials and indirect materials in cost allocation?
Which statement best explains the relationship between direct materials and indirect materials in cost allocation?
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What is a common misconception about using labor hours as the cost driver?
What is a common misconception about using labor hours as the cost driver?
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What allocation method might Filmier employ if labor hours are deemed inappropriate?
What allocation method might Filmier employ if labor hours are deemed inappropriate?
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In the given calculations, what was the total allocation for chairs when using direct labor hours?
In the given calculations, what was the total allocation for chairs when using direct labor hours?
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Which option best describes the impact of cost drivers in production?
Which option best describes the impact of cost drivers in production?
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What is the purpose of accumulating individual costs into a single cost pool?
What is the purpose of accumulating individual costs into a single cost pool?
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Which cost driver would be most appropriate for the allocation of the utilities cost?
Which cost driver would be most appropriate for the allocation of the utilities cost?
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How much is allocated to the Women's department based on the rent allocation rate?
How much is allocated to the Women's department based on the rent allocation rate?
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Why might ISI use the driver linked to the total amount of sales for shopping bags?
Why might ISI use the driver linked to the total amount of sales for shopping bags?
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What is the utility allocation rate calculated per square foot?
What is the utility allocation rate calculated per square foot?
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Which of the following statements about cost drivers is correct?
Which of the following statements about cost drivers is correct?
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What is the total rent allocated for the Children's department based on the allocation?
What is the total rent allocated for the Children's department based on the allocation?
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In which scenario would the allocation of bonuses to departments potentially impact overall costs?
In which scenario would the allocation of bonuses to departments potentially impact overall costs?
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The total costs to be allocated for rent were $______.
The total costs to be allocated for rent were $______.
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The allocation rate for rent was calculated to be $______ per square foot.
The allocation rate for rent was calculated to be $______ per square foot.
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For the Men's department, the cost allocated was $______.
For the Men's department, the cost allocated was $______.
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The total utility costs to be allocated were $______.
The total utility costs to be allocated were $______.
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The allocation rate for utilities was calculated at $______ per square foot.
The allocation rate for utilities was calculated at $______ per square foot.
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For the Children's department, the total allocated amount for utilities was $______.
For the Children's department, the total allocated amount for utilities was $______.
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In cost allocation, many individual costs are accumulated into a single cost ______.
In cost allocation, many individual costs are accumulated into a single cost ______.
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Selecting the right cost ______ is crucial for effective cost allocation.
Selecting the right cost ______ is crucial for effective cost allocation.
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The children's department uses more shopping bags than the ______ department.
The children's department uses more shopping bags than the ______ department.
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To allocate supply cost to the departments, ISI must maintain a record of the number of ______ transactions per department.
To allocate supply cost to the departments, ISI must maintain a record of the number of ______ transactions per department.
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The allocation rate for supplies is calculated as total costs to be allocated divided by total costs ______.
The allocation rate for supplies is calculated as total costs to be allocated divided by total costs ______.
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The allocation for the Women's department based on sales of $190,000 at an allocation rate of $0.0025 is ______.
The allocation for the Women's department based on sales of $190,000 at an allocation rate of $0.0025 is ______.
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For advertising, the allocation rate is calculated as advertising costs divided by total costs ______.
For advertising, the allocation rate is calculated as advertising costs divided by total costs ______.
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There is no strong cause-and-effect relationship between the store manager’s salary and the ______.
There is no strong cause-and-effect relationship between the store manager’s salary and the ______.
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The total allocation for advertisements across all departments amounts to ______.
The total allocation for advertisements across all departments amounts to ______.
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Total Costs to be allocated is $60,000 Indirect Materials divided by the total ___ Driver.
Total Costs to be allocated is $60,000 Indirect Materials divided by the total ___ Driver.
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The Allocation Rate for indirect materials is calculated to be $12 per ___.
The Allocation Rate for indirect materials is calculated to be $12 per ___.
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The allocation rate for supplies calculated was ______ per sales dollar.
The allocation rate for supplies calculated was ______ per sales dollar.
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$60,000 Indirect Materials divided by 6,000 Hours results in an Allocation Rate of $10 per direct labor ___.
$60,000 Indirect Materials divided by 6,000 Hours results in an Allocation Rate of $10 per direct labor ___.
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The total allocation for desks when using direct labor hours is $___,000.
The total allocation for desks when using direct labor hours is $___,000.
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If direct materials usage is considered, the usage is measured in material ___.
If direct materials usage is considered, the usage is measured in material ___.
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When using labor hours as the cost driver, Filmier allocates $10 per direct labor hour to ___.
When using labor hours as the cost driver, Filmier allocates $10 per direct labor hour to ___.
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The total costs allocated for chairs is calculated by multiplying $10 per direct labor hour by the ___ units allocated.
The total costs allocated for chairs is calculated by multiplying $10 per direct labor hour by the ___ units allocated.
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The total cost allocated across desks and chairs is ___ to match the total indirect materials cost.
The total cost allocated across desks and chairs is ___ to match the total indirect materials cost.
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The total costs to be allocated for Rent is ______.
The total costs to be allocated for Rent is ______.
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The allocation rate for Rent per bottle is ______ per Bottle.
The allocation rate for Rent per bottle is ______ per Bottle.
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The term used for the overhead allocation rate determined before actual cost and volume data are available is ______.
The term used for the overhead allocation rate determined before actual cost and volume data are available is ______.
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Grave Manufacturing estimates its supervisor’s salary to be ______ per year.
Grave Manufacturing estimates its supervisor’s salary to be ______ per year.
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The allocation rate per unit for the supervisor’s salary is calculated as ______ per Unit.
The allocation rate per unit for the supervisor’s salary is calculated as ______ per Unit.
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In January, the allocation for production based on the allocation rate is ______.
In January, the allocation for production based on the allocation rate is ______.
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Cost allocations can significantly influence managers’ performance evaluations and ______.
Cost allocations can significantly influence managers’ performance evaluations and ______.
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Control over resources usually offers managers ______ and influence over organizational operations.
Control over resources usually offers managers ______ and influence over organizational operations.
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Managers use estimated costs to make decisions about the ______.
Managers use estimated costs to make decisions about the ______.
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Companies use cost estimates to establish ______ and use actual costs to evaluate management performance.
Companies use cost estimates to establish ______ and use actual costs to evaluate management performance.
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Direct costs can be easily traced to a cost ______.
Direct costs can be easily traced to a cost ______.
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Indirect costs are also called ______ costs.
Indirect costs are also called ______ costs.
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In Style, Inc. began paying managers a ______ based on departmental sales revenue.
In Style, Inc. began paying managers a ______ based on departmental sales revenue.
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Whether or not a cost is easily traceable requires cost / benefit ______.
Whether or not a cost is easily traceable requires cost / benefit ______.
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Estimated costs are used to ______ on contracts.
Estimated costs are used to ______ on contracts.
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Evaluating proposals requires comparing estimated costs to ______ cost data.
Evaluating proposals requires comparing estimated costs to ______ cost data.
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Dean Southport addressed the allocation of copying resources with a total budgeted cost of $______.
Dean Southport addressed the allocation of copying resources with a total budgeted cost of $______.
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The allocation for the management department was initially set at $______.
The allocation for the management department was initially set at $______.
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There are a total of ______ faculty members in the School of Business.
There are a total of ______ faculty members in the School of Business.
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The cost allocation per faculty member was calculated to be $______.
The cost allocation per faculty member was calculated to be $______.
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The allocation for accounting based on the number of faculty was $______.
The allocation for accounting based on the number of faculty was $______.
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Dr. Smethers questioned the accuracy of using the number of faculty members as the ______.
Dr. Smethers questioned the accuracy of using the number of faculty members as the ______.
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For the finance department, the allocation calculated was $______.
For the finance department, the allocation calculated was $______.
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Dr. Smethers suggested using the number of ______ as a cost driver instead of faculty members.
Dr. Smethers suggested using the number of ______ as a cost driver instead of faculty members.
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Managers must have reliable cost estimates to price ______.
Managers must have reliable cost estimates to price ______.
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Cost objects are the things for which we are trying to determine the ______.
Cost objects are the things for which we are trying to determine the ______.
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A cost ______ is any factor that causes or drives an activity's costs.
A cost ______ is any factor that causes or drives an activity's costs.
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Cost accumulation begins with identifying the cost ______.
Cost accumulation begins with identifying the cost ______.
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The number of caps serves as a cost ______ for the cost of caps.
The number of caps serves as a cost ______ for the cost of caps.
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To determine costs, accountants use cost ______ to measure the expenses related to specific objects.
To determine costs, accountants use cost ______ to measure the expenses related to specific objects.
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The total promotion costs will be considered worthwhile if expected revenues exceed ______.
The total promotion costs will be considered worthwhile if expected revenues exceed ______.
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The cost of advertising in a promotion is considered a secondary cost ______.
The cost of advertising in a promotion is considered a secondary cost ______.
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Managers use estimated costs to ______ prices.
Managers use estimated costs to ______ prices.
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Actual cost data is used to evaluate ______ performance.
Actual cost data is used to evaluate ______ performance.
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Indirect costs are often referred to as ______ costs.
Indirect costs are often referred to as ______ costs.
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Assigning costs to departments requires ______ tracing and cost allocation.
Assigning costs to departments requires ______ tracing and cost allocation.
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Companies use ______ estimates to establish goals.
Companies use ______ estimates to establish goals.
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A new bonus strategy requires determining the cost of operating each ______.
A new bonus strategy requires determining the cost of operating each ______.
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Cost / benefit analysis helps in determining whether a cost is easily ______.
Cost / benefit analysis helps in determining whether a cost is easily ______.
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Managers bid on contracts based on their ______ costs.
Managers bid on contracts based on their ______ costs.
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The total costs to be allocated were $______.
The total costs to be allocated were $______.
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Using the allocation rate, $36,000 divided by 1,200 students gives an allocation rate of $______ per student.
Using the allocation rate, $36,000 divided by 1,200 students gives an allocation rate of $______ per student.
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Costs for the Management department were allocated with a total of $______ based on 330 students.
Costs for the Management department were allocated with a total of $______ based on 330 students.
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Dr. Thompson argued that the size of the ______ is a more appropriate allocation base.
Dr. Thompson argued that the size of the ______ is a more appropriate allocation base.
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The allocation for the Finance department based on 290 students amounts to $______.
The allocation for the Finance department based on 290 students amounts to $______.
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The total number of students taught during the most recent academic year was ______.
The total number of students taught during the most recent academic year was ______.
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The total allocation for the Marketing department based on 220 students is $______.
The total allocation for the Marketing department based on 220 students is $______.
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Dr. Smethers sided with Dr. Thompson regarding the best approach to allocating ______ costs.
Dr. Smethers sided with Dr. Thompson regarding the best approach to allocating ______ costs.
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The predetermined overhead rate (POHR) is calculated using total costs to be allocated divided by total costs ______.
The predetermined overhead rate (POHR) is calculated using total costs to be allocated divided by total costs ______.
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Grave Manufacturing's estimated supervisor's salary is $______ per year.
Grave Manufacturing's estimated supervisor's salary is $______ per year.
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In January, when the allocation rate is $2.00 per unit, the total cost allocated for 800 units is $______.
In January, when the allocation rate is $2.00 per unit, the total cost allocated for 800 units is $______.
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The allocation rate for fixed costs will vary based on monthly production ______.
The allocation rate for fixed costs will vary based on monthly production ______.
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The total costs to be allocated for rent amounts to $______.
The total costs to be allocated for rent amounts to $______.
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The calculation for the allocation rate involved $28,000 rent divided by 2,000,000 bottles produced, resulting in $______ per bottle.
The calculation for the allocation rate involved $28,000 rent divided by 2,000,000 bottles produced, resulting in $______ per bottle.
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Control over resources typically grants managers prestige and ______ over organizational operations.
Control over resources typically grants managers prestige and ______ over organizational operations.
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Monthly production volume variations can lead to customers perceiving price differences as ______.
Monthly production volume variations can lead to customers perceiving price differences as ______.
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The total costs to be allocated are $60,000 Indirect Materials divided by the total ______ Driver.
The total costs to be allocated are $60,000 Indirect Materials divided by the total ______ Driver.
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For allocating fringe benefits, ______ hours would be a more appropriate cost driver.
For allocating fringe benefits, ______ hours would be a more appropriate cost driver.
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The total costs to be allocated is $9360 ______ Salary.
The total costs to be allocated is $9360 ______ Salary.
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The Lednicky Bottling Company rents its manufacturing facility for $______ per year.
The Lednicky Bottling Company rents its manufacturing facility for $______ per year.
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The allocation rate for store manager's salary is calculated as total costs to be allocated divided by total costs ______.
The allocation rate for store manager's salary is calculated as total costs to be allocated divided by total costs ______.
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If Lednicky produced 2,000,000 bottles of juice, the allocation of rental cost is spread over total ______.
If Lednicky produced 2,000,000 bottles of juice, the allocation of rental cost is spread over total ______.
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The store manager allocates their salary equally among the ______.
The store manager allocates their salary equally among the ______.
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Management must use judgment to decide on the best ______ based on allocation accuracy.
Management must use judgment to decide on the best ______ based on allocation accuracy.
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A causal relationship exists between variable overhead costs and the ______ of production.
A causal relationship exists between variable overhead costs and the ______ of production.
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Filmier Furniture produced 4,000 chairs and ______ desks.
Filmier Furniture produced 4,000 chairs and ______ desks.
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Allocating fixed overhead costs often requires an allocation base that spreads total overhead cost ______ over total production.
Allocating fixed overhead costs often requires an allocation base that spreads total overhead cost ______ over total production.
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$60,000 of indirect materials cost incurred during the period should be allocated based on the number of ______.
$60,000 of indirect materials cost incurred during the period should be allocated based on the number of ______.
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If the allocation of machine maintenance costs is needed, a different volume-based cost driver, ______ hours, would be appropriate.
If the allocation of machine maintenance costs is needed, a different volume-based cost driver, ______ hours, would be appropriate.
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To allocate rental costs effectively, it is important to consider both ending inventory and cost of goods ______.
To allocate rental costs effectively, it is important to consider both ending inventory and cost of goods ______.
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Departmental managers received ______ based on each department’s profitability.
Departmental managers received ______ based on each department’s profitability.
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The allocation for the ______ department was determined by calculating the number of units produced.
The allocation for the ______ department was determined by calculating the number of units produced.
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Study Notes
Cost Accumulation, Tracing, and Allocation
- Cost accumulation starts by identifying cost objects.
- The primary cost object is the overall cost of something, for example, a promotion.
- Secondary cost objects are the parts that make up the primary cost object, like materials, advertising, labor.
- The costs of secondary objects combine to determine the total cost of the primary object.
- Cost drivers are factors that cause a cost object's costs to change.
- Cost drivers have a cause-and-effect relationship with cost objects.
- Managers need reliable cost estimates to price products, evaluate performance, control operations, and prepare financial statements.
- Accountants use cost accumulation to determine the cost of a particular object.
- Cost objects are the things managers want to know the cost of.
Determining the Cost of Cost Objects
- Example: A promotion offering free caps to children attending a ball game.
- The cost components are: cost of caps, advertising, and employee labor.
Cost of Primary Cost Object
- Cost object, cost per unit X cost driver = total cost of object.
- Example calculation for cost of cap promotion
- 10,000forcostofcaps+10,000 for cost of caps + 10,000forcostofcaps+5,000 advertising + 800costoflabor=800 cost of labor = 800costoflabor=15,800 total cost.
Estimated Versus Actual Cost
- Managers use estimated costs for making decisions about the future.
- Estimated costs are used for setting prices, bidding on contracts, evaluating proposals, distributing resources, plan production, and set goals.
- Actual costs are used in published financial reports and managerial performance evaluations.
Assignment of Costs to Objects in a Retail Business
- In Style, Inc. has retail clothing departments.
- In Style, Inc. pays department managers bonuses based on departmental sales.
- This bonus system had negative consequences, impacting future bonuses based on profitability.
- Income statement shows sales revenue, cost of goods sold, gross margin, departmental and store manager’s salaries, depreciation, rental fees, utilities, advertising, supplies, and net income.
Identifying Direct and Indirect Costs
- Costs can be assigned to a cost object by being either direct or indirect.
- Direct costs are easily traced to a cost object.
- Indirect costs are not easily traced to a cost object.
- Whether a cost is direct or indirect depends on the cost object.
- Indirect costs are also called overhead costs.
- Costs are tracked on an income statement, classifying them as Direct or Indirect, and listing the values for each category.
- Costs are tracked for Women’s, Men’s, and Children’s departments individually as an example
Cost Allocation Process
- Cost allocation involves dividing costs and assigning to cost objects.
- First, identify a cost driver for each cost to be allocated.
- An example is store size driver for rent cost.
- Achieve a rational allocation of the rent cost using a two-step process
Cost Allocation Process - Two-Step Process
- Compute the allocation rate (step 1) using the formula: Total costs to be allocated/Total Cost Driver.
- Multiply the allocation rate by the weight of the cost driver to determine allocation per cost object (step 2). The cost driver is called the allocation base.
Cost Allocation - Template
- Examples of calculating allocation rate and allocating costs for examples of rent and utilities.
- Different costs can be allocated based on different factors, like rent or utilities.
Determining the Cost to be Allocated using Cost Pools
- Instead of tracking every single indirect cost, group multiple costs into a single cost pool.
- Examples include costs for gas, water, electricity, and telephone which are grouped into a single utilities cost pool for easier tracking.
Selecting the Cost Driver
- Companies can identify more than one cost driver for a particular indirect cost.
- Examples: ISI's cost of shopping bags can be linked to either the number of sales transactions or the total amount of sales.
- Choose the cost driver with the strongest cause-and-effect relationship.
Selecting the Best Cost Driver
- Since every transaction uses a shopping bag, the department with higher transaction volume should pay a higher portion of the related cost.
- The information available will affect the cost driver decisions.
Cost Allocation - Template Calculation Examples
- Examples calculating allocation rates and allocating for costs such as supplies and advertising.
- Different cost allocation methods (e.g., number of sales, number of employees).
Cause-and-Effect Relationship
- There is no strong cause-and-effect relationship between the store manager's salary and specific departments.
- Store managers’ salaries are paid regardless of sales level or any identifiable variable.
Cost Allocation - Template for Store Manager's Salary Allocation
- Example of allocating a store (or supervisor) manager's salary using cost allocation
- Total cost to be allocated is divided by the total cost driver
Behavioral Implications
- Cost allocation methods can change managerial behavior.
- For example, department heads may react to changes in allocation processes and methods.
Profit Analysis by Department
- Departments income statements, including sales, cost of goods sold, sales commissions, department manager's salaries, depreciation, store manager's salary, rental fees, utilities, advertising, and supplies.
Cost Drivers for Variable Overhead Costs
- Volume measures are good cost drivers for allocating variable overhead costs.
- Examples of volume measures are units produced, labor hours, and materials used.
Using Units as the Cost Driver
- If a cost is driven by volume, unit produced can be a valid cost driver.
- Example: Filmier Furniture produced 4,000 chairs and 1,000 desks, and incurred $60,000 indirect material costs, distributed this cost accordingly and used unit produced in the calculation
Using Labor Hours as the Cost Driver
- Direct labor hours and direct materials cost indicate the use of more indirect materials for desks than chairs.
- Direct labor used is likely related to the amount of indirect materials used.
Using Direct Labor Hours as the Cost Driver
- Allocation rate calculated using total costs to be allocated / total cost driver (example provided).
- Examples of allocating costs based on direct labor hours for chairs and desks..
Using Direct Materials Dollars as the Cost Driver
- If labor hours are not a suitable cost driver, direct materials usage (measured in dollars) can be used as an alternative.
- It's plausible to assume that the more a company uses direct materials such as lumber, the more its need for indirect materials like nails and glue, which would be appropriate to calculate the allocation of these costs.
Selecting the Best Cost Driver
- Deciding which volume-based cost driver (units, labor hours, or direct material dollars) leads to the most accurate allocation of overhead costs requires judgment
- Volume driver like units produced, direct labor hours, or material usage may be the appropriate measure for calculating allocation.
Cost Drivers for Fixed Overhead Costs
- The volume of production does not influence fixed costs.
- The cost driver for allocating fixed costs to products is to distribute a rational share of overhead across products.
Allocating Fixed Overhead Costs
- Example: Lednicky Bottling Company rents its facility for $28,000 per year, produced 2 million bottles, and sold 1.8 million bottles.
- Allocation rate for rental cost calculated by dividing the total cost by the total cost driver, which is 2 million bottles.
- Allocation calculated for ending inventory and cost of goods sold using the step 2 allocation rate and the cost driver.
Allocating Fixed Costs When the Volume of Production Varies
- Monthly fluctuations in production volume complicate fixed cost allocations.
- Allocation rates change from month to month.
Predetermined Overhead Rate
- Calculating an allocation rate before the actual cost and volume data is available and using it to allocate the overhead costs.
Cost Allocation: The Human Factor
- Cost allocation significantly impacts individuals' performance evaluations, compensation, and resource allocation.
- Control over organizational resources provides prestige and influence.
Using Cost Allocations in a Budgeting Decision
- Dean Southport faces challenges allocating copying resources across different departments.
- Department protests against the existing method and requests for a fairer method that accounts for a department's specific usage.
- A method based on number of faculty is challenged and a new allocation method based on number of students is proposed and illustrated for the given scenario
Using Cost Drivers to Make Allocations
- Steps in allocating costs by defining the cost driver and rate.
- Step 1: Identify the total cost to be allocated, and identify a cost driver and calculate the cost for allocation.
- Step 2: Multiply the allocation rate by the appropriate cost driver
The Human Factor
- Dr. Smethers questioned the validity of using the number of faculty members as a cost driver, proposing student numbers as a more effective measure instead.
Allocating By Number of Students
- The number of students is used as a cost driver to allocate copying costs more accurately based on student enrollment in different departments. Examples are shown of allocation process, illustrating the allocation based on the new method that uses the number of students.
Selecting the Best Cost Driver and Controlling Emotions
- Choosing cost drivers based on a combination of technical expertise, persuasive skills, and emotional intelligence is essential.
- Consider multiple cost drivers when determining the most accurate approach.
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Description
This quiz explores the principles of cost accumulation, tracing, and allocation as fundamental concepts in accounting. You will learn about primary and secondary cost objects, cost drivers, and their importance in pricing and performance evaluation. Test your understanding of these key accounting practices.
