CH 4 Cost Allocation

What are cost objects?

Cost objects are entities for which costs are measured, such as products, processes, departments, services, and activities.

What are the two primary components of cost accumulation?

Cost accumulation involves identifying cost objects and cost drivers.

How does a cost driver relate to a cost object?

A cost driver establishes a cause-and-effect relationship with a cost object, indicating the reason costs are incurred.

Why do managers use estimated costs?

Managers use estimated costs for budgeting and decision-making purposes.

What is the difference between direct and indirect costs?

Direct costs can be traced directly to a specific cost object, while indirect costs (overhead) require allocation.

What are common costs?

Common costs are expenses that support multiple cost objects but cannot be traced directly to any single one.

What are the two steps in cost allocation?

1. Compute the allocation rate; 2. Multiply the rate by the weight of the cost driver.

Why is the store manager’s salary arbitrarily allocated?

The store manager’s salary is arbitrarily allocated because there is no strong cost-driver relationship.

What volume measures serve as cost drivers for variable overhead?

Common volume measures include units produced, direct labor hours, and direct materials used.

How should companies select the best cost driver?

Companies should select the best cost driver by identifying one with the strongest cause-and-effect relationship.

What is a joint cost, and how is it allocated?

A joint cost is a common cost incurred in producing multiple products before they become separate, and it can be allocated by volume or relative sales value.

What is the impact of cost allocation on employee motivation?

Cost allocation affects employee motivation by influencing performance evaluations and resource distribution, creating perceptions of fairness or unfairness.

What are the main types of cost objects?

The main types of cost objects include products, processes, departments, services, and activities.

What is the purpose of cost accumulation?

The purpose of cost accumulation is to accurately gather and determine the costs associated with specific cost objects.

Why is cost allocation necessary for indirect costs?

Cost allocation is necessary for indirect costs to properly distribute these expenses among various cost objects.

What are the characteristics of a strong cost driver?

A strong cost driver has a clear cause-and-effect relationship with a cost object, accurately reflecting the factors that influence its costs.

What are the differences between estimated and actual costs?

Estimated costs are projections used for budgeting, while actual costs are the precise amounts incurred, which may vary from estimates.

Why might multiple cost drivers be used in allocation?

Multiple cost drivers may be used in allocation for more accurate cost distribution, reflecting the complexities of cost relationships.

How does cost allocation affect managerial decision-making?

Cost allocation informs managerial decision-making by providing insights into cost structures and influences financial performance.

What is the split-off point in joint cost allocation?

The split-off point is the point in the production process where joint products become separate and identifiable.

How do controllable costs differ from non-controllable costs?

Controllable costs can be influenced and managed by managerial decisions, while non-controllable costs cannot be changed.

What is the impact of cost allocation on profitability analysis?

Cost allocation impacts profitability analysis by ensuring that costs are fairly distributed, affecting profit margins and resource allocation.

How are fixed overhead costs allocated?

Fixed overhead costs are allocated to cost objects based on a predetermined rate, ensuring rational distribution across products.

What are examples of volume measures used in cost allocation?

Examples of volume measures include units produced, labor hours worked, and direct materials used.