MALİYET VE YÖNETİM MUHASEBESİ - Deneme Sınavı - 7

Then cost object is the product to which costs are allocated. The basis that is used to allocate costs to cost objects (i.e. the number of material receipts in our example) is called an allocation base or cost driver.

The strategic role of cost allocation is linked to four objectives: 1. Determine accurate departmental and product costs as a basis for the evaluation of the cost efficiency of departments and the profitability of different products, for financial reporting, and for tax compliance. 2. Motivate executives for a high level of effort to achieve the goals targeted by senior management. 3. Right incentives are provided to the managers in order to make a decision consistent with the objectives of the senior management. 4. Identify the fairly rewards that managers earn for their effectiveness in their decisions.

An operating department (also called a production department in manufacturing companies) adds value to a product or service that is observable by a customer. These departments are directly responsible for creating the products or services sold to customers. In a manufacturing setting such as an automobile manufacturer or a furniture manifacturer, production departments are those that work directly on the products being manufactured (e.g., assembly and painting).

The second stage allocates support department costs to the production departments. This is the most complex of the allocation stages because services can flow back and forth between the support departments. These are often called reciprocal flows.

The single-rate method does not discriminate between fixed and variable costs. It allocates costs in each cost pool to cost objects using a single charging rate. In contrast, the dual-rate method divides the cost of each support department into two separate pools, variable and fixed. It distributes the cost of each pool by using a different charging rate.

The process for allocating support department costs to operating departments involves the following steps: 1. Explain the purpose of the allocation. 2. Identify support and operating department cost pools. 3. Assign costs to cost pools. 4. For each support department cost pool, choose an allocation base. 5. Choose and apply a method for allocating support department costs to operating departments. 6. If relevant, allocate support costs from the operating departments to units of goods or services.

A cost pool is a collection of costs to be assigned to a set of cost objects. Many organizations already accumulate costs by the department within their organizational structure. Departments are often used as cost pools.

The direct allocation method (often called the direct method) is the most widely used method of allocating support department costs. This method allocates each support department’s costs directly to the operating departments. In this method costs accumulated in service departments are allocated to the manufacturing departments depending on the services that each of the manufacturing department requires from each of the service department.

Three allocation methods can be used to allocate support departments costs to operating departments:Direct method, step-down method and reciprocal method.

Indirect costs are not directly identified with a cost object. Indirect costs of a particular cost object are costs that are related to that cost object but cannot be traced to it in an economically feasible or cost-effective way. Indirect costs often comprise a sizable percentage of the costs assigned to cost objects such as products, distribution channels, and customers. The four objectives for allocating indirect costs to these cost objects are as follows (Bhimani, Horngren, Datar and Rajan, 2015: 124):

1. To provide information for economic decisions,

2. To motivate managers and employees,

3. To justify costs or calculate reimbursement,

4. To measure income and assets for reporting to external parties

The correct answer is E.

The third objective that provides incentives for decision-making is achieved when the cost allocation effectively empowers authorized individual managers to act autonomously with the goals of the senior management.

The correct answer is E.

Cost allocation is the process of assigning costs in a cost pool to the appropriate cost objects with the help of representatives.

The correct answer is D.

Practical capacity is the amount that an entity can generate if the normal operating disruptions are considered. The correct answer is D.

A cost pool is a collection of costs to be assigned to a set of cost objects.

The ccorrrect answer is C.

Direct manufacturing costs, raw materials, and labor are traced directly to the departments. For example, in particular, direct raw materials and supplies used in the production departments and direct labor costs are directly traced to these departments. In the same way, direct raw materials and supplies and direct labor costs used in the support section are also traced to these departments. Indirect costs (manufacturing overhead), a predetermined cost driver is allocated to the departments that use these resources. For example, in all operating and support sections of the factory, the cost of the responsible manager is an indirect cost and must be allocated to all departments. While the indirect labor for inspection of the output of the two operating departments would be allocated only to those two operating departments (Blocher, Stout, and Cokins, 2010: 234). The correct answer is C.

Reciprocal Method This method is also known as algebraic method. The reciprocal allocation method allocates costs by explicitly including the mutual services provided among all support departments. Theoretically, the direct method and the step-down method are less accurate when support departments provide services to one another reciprocally.

The correct answer is C.

Step-down Method

In this method, the cost of service departments will be allocated to other service and operating departments depending on whether they provide services or not. In the method, first of all, the support departments should be ranked in the order that the step-down allocation will continue.

The correct answer is B.

The direct allocation method (often called the direct method) is the most widely used method of allocating support department costs. This method allocates each support department’s costs directly to the operating departments. In this method costs accumulated in service departments are allocated to the manufacturing departments depending on the services that each of the manufacturing department requires from each of the service department. In this method, firstly, we have to identify the service carried out by each of the service department. The correct answer is B.

The single-rate method does not discriminate between fixed and variable costs. It allocates costs in each cost pool to cost objects using a single charging rate. In contrast, the dual-rate method divides the cost of each support department into two separate pools, variable and fixed. It distributes the cost of each pool by using a different charging rate. When using either the single-rate method or the dual-rate method, managers can allocate support-department costs to operating divisions based on either a budgeted rate or the eventual actual cost rate (Datar and Rajan, 2018: 622). 

The correct answer is A.

The correct answer is B. Cost is the sacrifice, measured by the price paid or to be paid, to acquire goods or services. The expense is defined as a noun, a decrease in owners’ equity accompanying the decrease in net assets caused by selling goods or rendering services or by the passage of time.