L3 Job Costing, Activity-Based Costing, Allocation of Support-Department Costs

Question 1

Total cost of a product

Answer 1

sum of direct and indirect costs

Question 2

What is cost allocation?

Answer 2

the assignment of indirect costs to products through the use of cost drivers

Question 3

What is the importance of cost allocation?

Answer 3

The importance increases, as in many sectors direct material and labor costs are decreasing while overhead costs are increasing. These overhead costs need to be assigned via cost allocation

Question 4

What is used for the cost allocation?

Answer 4

a cost pool

Question 5

Three components of a costing system

Answer 5

1. Cost Accumulation Method
2. Cost Measurement Method
3. Overhead Application Method

Question 6

Which choice do we have to make with the cost accumulation method?

Answer 6

At which level of detail do we want to accumulate production costs?
- job or process costing

Question 7

Which choice do we have to make with the cost measurement method?

Answer 7

How do we measure costs?

- actual, normal or standard costing

Question 8

Which choice do we have to make with the overhead application method?

Answer 8

How do we apply overhead costs to products?

- volume-based or activity based?

Question 9

What is the cost object in job-costing?

Answer 9

the cost object is a unit or multiple units of a distinct product, service or project called a job

Question 10

Which firms use job costing?

Answer 10

construction companies, printing shops, custom furniture-manufacturing plants, law firms, advertising agencies

Question 11

What is process-costing?

Answer 11

Here the cost object are masses of identical or similar units

Question 12

What problem arises when you have multiple, different product but allocate costs based on a volume-based cost driver, such as production volume?

Answer 12

Production volume as a cost driver charges each product the same amount of overhead

Question 13

How does the Volume-based approach allocated overhead?

Answer 13

Based on a single volume-based cost driver

Question 14

Should the volume-based approach measure the cost driver based on output or input?

Answer 14

It should measure based on input factors such as direct labor hours or machine hours. Overhead in each product should be proportional to direct labor hours or machine hours needed to manufacture that unit. When it is based on output (# units produced) then different amount of overhead required for different products is not accounted for.

Question 15

How does the ABC approach allocate overhead?

Answer 15

overhead is allocated based on cause-and-effect relationships with multiple cost drivers

Question 16

when is overhead under-allocated?

Answer 16

If allocated overhead < actual overhead

Question 17

when is overhead over-allocated?

Answer 17

If allocated overhead > actual overhead

Question 18

How can the difference in predetermined and actual overhead be accounted for?

Answer 18

by the proration approach and the write-off approach

Question 19

Proration approach

Answer 19

The difference is allocated between COGS, WIP and finished goods based on their relative sizes

Question 20

Write-off approach

Answer 20

the difference is simply written off to COGS

Question 21

What are the limitations of the volume based approach?

Answer 21

Limitations is that it is assumed that the overhead costs are proportional to product’s usage of direct cost driver. However, indirect costs do not always occur in proportion to output volume

Question 22

What does activity-based costing do well in comparison to volume-based costing

Answer 22

It splits up heterogeneous overhead into smaller pools of homogeneous costs.

Question 23

Does the traditional volume-based approach allocate too much or to little overhead to high volume products?

Answer 23

• it allocates too much overhead to high volume products

- it allocates too little value to low volume products

Question 24

What is overcosting?

Answer 24

a product consumes a low level of resources but is allocate high costs per unit

Question 25

What is undercosting?

Answer 25

When a product consumers high levels of resources but is allocated low costs per unit

Question 26

What does the production (operating) department do?

Answer 26

It directly adds value to a product

Question 27

What do support (service) departments do?

Answer 27

They provide the service that assist other departments in the company

Question 28

How do we allocate costs of support departments to production departments?

Answer 28

There are three methods, increasing in complexity:

1. Direct method
2. Step-down method
3. Reciprocal method

Question 29

How does the direct method work?

Answer 29

• Allocates support costs only to production departments

- does not allocate support-department costs to other support departments

Question 30

Step-down method

Answer 30

• allocates in a sequential manner and partially recognizes provision of mutual services
• usually begin with the supporting department that gives highest percentage of services to other supporting departments (or with highest cost)

Question 31

Reciprocal Method

Answer 31

allocates costs by fully recognizing the mutual services provided among all support departments