Managerial Accounting - Chapter 6 Practice

32 Questions  I  By Rmerklen3
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  • 1. 
    Which ISN'T a purpose of Cost Allocation?
    • A. 

      Provide information for decision making

    • B. 

      Reduce frivolous use of common resources

    • C. 

      Encourage evaluation of services

    • D. 

      Provide "full cost" information

    • E. 

      Review actions of employees overseeing budgets


  • 2. 
    Cost Allocation -  One purpose of Cost Allocation is to provide information for decisions.  Which options are associated with that purpose?
    • A. 

      When managers use a company resource they are receiving a charge for use (Allocated cost should measure the opportunity cost of using a company resource)

    • B. 

      Provides a useful benchmark (The closer to the opportunity cost of use, the better the allocation)

    • C. 

      When managers are not charged for a service, they may tend to use it for nonessential purposes (Nonessential use may have hidden cost such as slower service)

    • D. 

      Allocation provides incentive for departments to reduce nonessential use

    • E. 

      If costs are not allocated, there is no incentive to evaluate the services and look for lower cost alternatives

    • F. 

      With cost allocation, there is a strong incentive to critically evaluate the efficiency and necessity of services (Users will certainly bring lower cost alternatives to the company’s attention)

    • G. 

      GAAP requires full costing for external reporting purposes

    • H. 

      Full cost information is needed when the company has an agreement whereby revenue received depends upon cost incurred (Also called “cost-plus” contracts)


  • 3. 
    Cost Allocation -  One purpose of Cost Allocation is to reduce frivolous use of common resources.  Which options are associated with that purpose?
    • A. 

      When managers use a company resource they are receiving a charge for use (Allocated cost should measure the opportunity cost of using a company resource)

    • B. 

      Provides a useful benchmark (The closer to the opportunity cost of use, the better the allocation)

    • C. 

      When managers are not charged for a service, they may tend to use it for nonessential purposes (Nonessential use may have hidden cost such as slower service)

    • D. 

      Allocation provides incentive for departments to reduce nonessential use

    • E. 

      If costs are not allocated, there is no incentive to evaluate the services and look for lower cost alternatives

    • F. 

      With cost allocation, there is a strong incentive to critically evaluate the efficiency and necessity of services (Users will certainly bring lower cost alternatives to the company’s attention)

    • G. 

      GAAP requires full costing for external reporting purposes

    • H. 

      Full cost information is needed when the company has an agreement whereby revenue received depends upon cost incurred (Also called “cost-plus” contracts)


  • 4. 
    Cost Allocation -  One purpose of Cost Allocation is to encourage evaluation of services.  Which options are associated with that purpose?
    • A. 

      When managers use a company resource they are receiving a charge for use (Allocated cost should measure the opportunity cost of using a company resource)

    • B. 

      Provides a useful benchmark (The closer to the opportunity cost of use, the better the allocation)

    • C. 

      When managers are not charged for a service, they may tend to use it for nonessential purposes (Nonessential use may have hidden cost such as slower service)

    • D. 

      Allocation provides incentive for departments to reduce nonessential use

    • E. 

      If costs are not allocated, there is no incentive to evaluate the services and look for lower cost alternatives

    • F. 

      With cost allocation, there is a strong incentive to critically evaluate the efficiency and necessity of services (Users will certainly bring lower cost alternatives to the company’s attention)

    • G. 

      GAAP requires full costing for external reporting purposes

    • H. 

      Full cost information is needed when the company has an agreement whereby revenue received depends upon cost incurred (Also called “cost-plus” contracts)


  • 5. 
    Cost Allocation -  One purpose of Cost Allocation is to provide "full cost" information.  Which options are associated with that purpose?
    • A. 

      When managers use a company resource they are receiving a charge for use (Allocated cost should measure the opportunity cost of using a company resource)

    • B. 

      Provides a useful benchmark (The closer to the opportunity cost of use, the better the allocation)

    • C. 

      When managers are not charged for a service, they may tend to use it for nonessential purposes (Nonessential use may have hidden cost such as slower service)

    • D. 

      Allocation provides incentive for departments to reduce nonessential use

    • E. 

      If costs are not allocated, there is no incentive to evaluate the services and look for lower cost alternatives

    • F. 

      With cost allocation, there is a strong incentive to critically evaluate the efficiency and necessity of services (Users will certainly bring lower cost alternatives to the company’s attention)

    • G. 

      GAAP requires full costing for external reporting purposes

    • H. 

      Full cost information is needed when the company has an agreement whereby revenue received depends upon cost incurred (Also called “cost-plus” contracts)


  • 6. 
    All of the following are reasons indirect costs are allocated to products, services and departments, except:
    • A. 

      To improve decision making

    • B. 

      To reduce frivolous use of resources

    • C. 

      To provide information on variable and fixed costs

    • D. 

      To encourage evaluation of services


  • 7. 
    Cost allocation is achieved by a three step process:
    • A. 1
    • A.
    • B. 2
    • B.
    • C. 3
    • C.

  • 8. 
    In the cost allocation process, the cost objective is the:
    • A. 

      The allocation base used to allocate the costs

    • B. 

      A grouping of individual costs whose total is allocated using one allocation base

    • C. 

      The product, service or department that is to receive the allocation

    • D. 

      None of these


  • 9. 
    Cost Allocation Process - The first step of Cost Allocation is to determine the cost objective.  Which of the below are associated with that step?
    • A. 

      Determine the product, service, or department that is to receive the allocation

    • B. 

      The object of the allocation is referred to as the cost objective (For example, if computer costs are allocated to contracts worked on, the contracts are the cost objectives)

    • C. 

      A cost pool is a grouping of individual costs whose total is allocated using one allocation base

    • D. 

      Cost pools can be organized along departmental lines or major activities, e.g. equipment setups, inspections.

    • E. 

      Costs in the pool must be homogeneous (similar)

    • F. 

      The base must be some characteristic that is common to all of the cost objectives

    • G. 

      Deciding which base to use is not easy (The allocation should be based on a cause-and-effect relationship - Establishing cause-and-effect relationships is not feasible when indirect costs are fixed)


  • 10. 
    Cost Allocation Process - The second step of Cost Allocation is to form cost pools.  Which of the below are associated with that step?
    • A. 

      Determine the product, service, or department that is to receive the allocation

    • B. 

      The object of the allocation is referred to as the cost objective (For example, if computer costs are allocated to contracts worked on, the contracts are the cost objectives)

    • C. 

      A cost pool is a grouping of individual costs whose total is allocated using one allocation base

    • D. 

      Cost pools can be organized along departmental lines or major activities, e.g. equipment setups, inspections.

    • E. 

      Costs in the pool must be homogeneous (similar)

    • F. 

      The base must be some characteristic that is common to all of the cost objectives

    • G. 

      Deciding which base to use is not easy (The allocation should be based on a cause-and-effect relationship - Establishing cause-and-effect relationships is not feasible when indirect costs are fixed)


  • 11. 
    Cost Allocation Process - The third step of Cost Allocation is to select an allocation base that relates the cost pool to the cost objectives.  Which of the below are associated with that step?
    • A. 

      Determine the product, service, or department that is to receive the allocation

    • B. 

      The object of the allocation is referred to as the cost objective (For example, if computer costs are allocated to contracts worked on, the contracts are the cost objectives)

    • C. 

      A cost pool is a grouping of individual costs whose total is allocated using one allocation base

    • D. 

      Cost pools can be organized along departmental lines or major activities, e.g. equipment setups, inspections.

    • E. 

      Costs in the pool must be homogeneous (similar)

    • F. 

      The base must be some characteristic that is common to all of the cost objectives

    • G. 

      Deciding which base to use is not easy (The allocation should be based on a cause-and-effect relationship - Establishing cause-and-effect relationships is not feasible when indirect costs are fixed)


  • 12. 
    Fixed Indirect Costs – Other Approaches Which is Relative benefits approach to allocation?
    • A. 

      More costs allocated to those objectives that benefit most from incurring the cost

    • B. 

      More costs allocated to products, services or departments that are more profitable

    • C. 

      Base results in allocations that are perceived to be fair or equitable


  • 13. 
    Fixed Indirect Costs – Other Approaches Which is Ability to bear costs?
    • A. 

      More costs allocated to those objectives that benefit most from incurring the cost

    • B. 

      More costs allocated to products, services or departments that are more profitable

    • C. 

      Base results in allocations that are perceived to be fair or equitable


  • 14. 
    Fixed Indirect Costs – Other Approaches Which is Equity approach to allocation?
    • A. 

      More costs allocated to those objectives that benefit most from incurring the cost

    • B. 

      More costs allocated to products, services or departments that are more profitable

    • C. 

      Base results in allocations that are perceived to be fair or equitable


  • 15. 
    In the cost allocation process, an allocation base:
    • A. 

      Must be some characteristic that is common to all of the cost objectives

    • B. 

      Ideally should result in cost being allocated based on a cause-and-effect relationship

    • C. 

      Both of these

    • D. 

      None of these


  • 16. 
    Allocating Service Department Costs - Organizational units of manufacturing firms classified as either: Production departments provide indirect support
    • A. 

      True

    • B. 

      False


  • 17. 
    Allocating Service Department Costs - Organizational units of manufacturing firms classified as either: Service departments provide indirect support
    • A. 

      True

    • B. 

      False


  • 18. 
    Allocating Service Department Costs - Organizational units of manufacturing firms classified as either: Cost pools are formed by service departments and are allocated to production departments.
    • A. 

      True

    • B. 

      False


  • 19. 
    The direct method of allocating costs:
    • A. 

      Allocates service department costs to other service departments

    • B. 

      Allocates only direct costs

    • C. 

      Allocates service department costs to production departments only

    • D. 

      Both "Allocates only direct costs" and "Allocates service department costs to production departments only"


  • 20. 
    §Management should allocate based on actual rather than budgeted costs
    • A. 

      True

    • B. 

      False


  • 21. 
    Allocation of actual amounts allows service department to pass on cost of inefficiencies and waste to production departments
    • A. 

      True

    • B. 

      False


  • 22. 
    Problems with Cost Allocation - Potential problems are brought about by:
    • A. 

      Allocations of costs that are not controllable

    • B. 

      Arbitrary allocations

    • C. 

      Allocation of fixed costs that make the fixed costs appear to be variable costs

    • D. 

      Allocations of manufacturing overhead to products using too few overhead cost pools

    • E. 

      Use of only volume-related allocation bases


  • 23. 
    In almost all situations, determining the true allocation is impossible               Managers support the allocation which makes them look best               Managers reject allocations which cast an unfavorable light on their performance
    • A. 

      True

    • B. 

      False


  • 24. 
    §The allocation process may make fixed costs appear to be variable costs §This happens when fixed costs are unitized §Unitized fixed costs are stated on a per unit basis §When managers increase sales they also increase their allocated general and administrative costs §This could lead to decisions which could hurt the profitability of the company
    • A. 

      True

    • B. 

      False


  • 25. 
    §Allocations of fixed costs can be made that they appear fixed to managers §This is achieved by lump-sum allocations of fixed costs §A lump-sum allocation is not affected by changes in the activity level of the organizational unit §Lump-sum allocations generally should remain the same from year to year
    • A. 

      True

    • B. 

      False


  • 26. 
    When fixed costs are stated on a per unit basis:
    • A. 

      Fixed costs are said to be controllable

    • B. 

      Fixed costs may appear to be variable to managers receiving allocations

    • C. 

      A lump-sum allocation has been made

    • D. 

      Divisions with high sales receive a low amount of allocated costs


  • 27. 
    §Some companies assign overhead to products using only one or two overhead cost pools §Although simple, this may lead to distortion of cost allocation §Some products will be overcosted §Some products will be undercosted §This problem is solved by setting up separate cost pools for overhead
    • A. 

      True

    • B. 

      False


  • 28. 
    Which of the following is not a volume-related cost driver?
    • A. 

      Direct labor hours

    • B. 

      Direct labor cost

    • C. 

      Machine time

    • D. 

      Time to set up a production run


  • 29. 
    Order of the Activity-Based Costing approach:
    • A. 1
    • A.
    • B. 2
    • B.
    • C. 3
    • C.
    • D. 4
    • D.

  • 30. 
    Relating Cost Pools to Products Using Cost Drivers §The company will estimate the total cost assigned to each cost pool §The company will then decide on an appropriate driver, such as number of inspections for inspection costs §The company will then estimate the activity in the driver §The overhead allocation rate is: (Estimated total cost of the cost pool)/(Estimated activity in the driver)
    • A. 

      True

    • B. 

      False


  • 31. 
    Pros and Cons of ABC §Benefits §Less likely to undercost complex low volume products and overcost simple high volume products §Drivers used in ABC are not always volume related §ABC may lead to improvements in cost control §Costs are not buried in one or two pools
    • A. 

      True

    • B. 

      False


  • 32. 
    Pros and Cons of ABC §Limitations §More costly to develop and maintain than a traditional costing system §Allocations are made from each cost pool to each product §Used to develop full cost of products §Includes fixed costs §Lacks incremental information necessary for decision making
    • A. 

      True

    • B. 

      False


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