Managerial Accounting - Chapter 6 Practice

32 Questions | Total Attempts: 78

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Accounting Quizzes & Trivia

Questions and Answers
  • 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. 
    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

  • 8. 
    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)

  • 9. 
    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)

  • 10. 
    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)

  • 11. 
    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

  • 12. 
    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

  • 13. 
    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

  • 14. 
    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

  • 15. 
    Allocating Service Department Costs - Organizational units of manufacturing firms classified as either: Production departments provide indirect support
    • A. 

      True

    • B. 

      False

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

      True

    • B. 

      False

  • 17. 
    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

  • 18. 
    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"

  • 19. 
    §Management should allocate based on actual rather than budgeted costs
    • A. 

      True

    • B. 

      False

  • 20. 
    Allocation of actual amounts allows service department to pass on cost of inefficiencies and waste to production departments
    • A. 

      True

    • B. 

      False

  • 21. 
    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

  • 22. 
    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

  • 23. 
    §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

  • 24. 
    §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

  • 25. 
    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

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