Cost Allocation
Easy Practice Test
Cost Accounting
Easy Practice Test
Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.
1. Decentralization can result in
a. a lack of working together among departments
b. greater job satisfaction among management
c. decreased time for decision making
d. all of the above
Answer
D. All of the above are common results of decentralization.
2. A manager of a cost center is evaluated based on
a. the profit earned on products sold
b. the amount of costs incurred by the entire organization
c. the amount of costs incurred by their department
d. none of the above
Answer
C. The manager of a cost center is only responsible for controllable costs incurred by the cost unit. Cost centers do not sell products. Cost centers incur costs to provide services to other cost and revenue units.
3. The document that provides the results of the revenues and costs under the control of a particular manager is called a (an)
a. quality report
b. evaluation report
c. financial statement
d. responsibility report
Answer
D. A responsibility report provides revenues and costs that are related to a particular manager’s area of responsibility. Quality reports relate to inventory. There is no common report called an evaluation report. The financial statement reports results for the entire company.
4. The cost of decentralization includes
a. an elaborate accounting system
b. additional training costs
c. the potential cost of poor decision making
d. all of the above
Answer
D. All of the above are potential costs and disadvantages of decentralization.
5. Which common allocation method assigns costs only to revenue producing units?
a. step method
b. direct method
c. indirect method
d. semi-direct method
Answer
B. The direct method assigns costs only to revenue producing units. The step method assigns costs to other cost units and then to revenue units. (c.) and (d.) are not common allocation methods.
6. Which allocation method assigns costs by considering all units in the organization the service is provided to?
a. step method
b. direct method
c. indirect method
d. semi-direct method
Answer
A. The step method allocates costs to cost and revenue units. This method allocates to all parts of the organization that receive benefit from the cost. The direct method only allocates to revenue units. (c.) and (d.) are not common allocation methods.
7. Which allocation method uses a ranking of benefits provided?
a. step method
b. direct method
c. indirect method
d. semi-direct method
Answer
A. The step method uses a ranking system. All cost units are ranked and costs are allocated to other lower ranking cost units and revenue units.
8. When allocating costs an activity is chosen that
a. has a cause and effect relationship to incurring costs
b. considers which costs are fixed and which costs are variable
c. distinguishes between product costs and period costs
d. can not be counted
Answer
A. Costs are allocated based on the activity that causes the cost unit to incur costs. The type of cost, fixed or variable or product or period does not matter to the allocation. All allocation bases must be quantified.
9. The allocation method that is 100% accurate is the
a. step method
b. direct method
c. algebraic method
d. none of the above
Answer
D. The allocation is an estimate and is never going to be 100% accurate. The method that is considered the most accurate is generally the algebraic method.
10. When using a responsibility accounting system, costs are classified as either
a. fixed or variable
b. controllable or non controllable
c. administrative or selling
d. product or period
Answer
B. Responsibility accounting assigns costs to the responsible manager. Managers are responsible when they can control the cost. The type of cost doe not matter.
11. A company has two service departments and 2 revenue generating units.
Information is as follows:
| Human Resources | Computer Services | |
| Direct Costs | $110,000 | $84,000 |
| Services provided to: | ||
| Human Resources | 10% | |
| Computer Services | 5% | |
| Revenue unit 1 | 40% | 20% |
| Revenue unit 2 | 55% | 70% |
A. Allocate costs using the direct method.
B. Allocate costs using the step method. Human resources is ranked the highest and will begin the allocation.
Answer
The only information you have is the % allocated. You must use this as a constant to determine the % of costs allocated.
A. Direct method: all costs go to revenue producing units only:
Human Resources –
| Rev 1 40 = .421 x 110,000 = 46,310 Rev 2 55 = .579 x 110,000 = 63,690 Total 95 |
Computer Services –
| Rev 1 20 = .222 x 84,000 = 18,648 Rev 2 70 = .778 x 84,000 = 65,352 Total 90 |
B. Step Method: Begin allocation with human resources and allocate to cost units and revenue producing units
Human Resources –
| Computer 5 = .05 x 110,000 = 5,500 computer services Rev 1 40 = .40 x 110,000 = 44,000 allocated to revenue 1 Rev 2 55 = .55 x 110,000 = 60,500 allocated to revenue 2 Total 100 |
Computer Services – $84,000 + $5,500 = $89,500 to allocate
| Rev 1 20 = .222 x 89,500 = 19,869 allocated to revenue 1 Rev 2 70 = .778 x 89,500 = 69,631 allocated to revenue 2 Total 90 |
Do not allocate computer services to the human resources because it is a higher-ranking cost unit.
Do not allocate revenue units costs.
12. A company has two cost units and 2 revenue generating units.
Information is as follows:
| Direct Costs | Employees | Products Sold | |
| Admin | $200,000 | 27 | 0 |
| Computer Services | $100,000 | 10 | 0 |
| West Sales Division | $238,000 | 19 | 750 |
| North Sales Division | $318,000 | 26 | 450 |
Administrative is allocated based on products sold. Computer services is allocated based on number of employees and is ranked the highest.
A. Allocate costs using the direct method.
B. Allocate costs using the step method. Admin is ranked the highest
Answer
A. Direct method – costs are allocated to revenue producing units only
Administrative –
| West 750 = .625 x 200,000 = 125,000 North 450 = .375 x 200,000 = 75,000 Total 1,200 |
Computer Services –
| West 19 = .422 x 100,000 = 42,200 North 26 = .578 x 100,000 = 57,800 Total 45 |
B. Step Method – begin allocation with computer services and allocate to cost units and revenue producing units
Computer Services –
| Admin 27 = .375 x 100,000 = 37,500 Rev 1 19 = .264 x 100,000 = 26,400 Rev 2 26 = .361 x 100,000 = 36,100 Total 72 |
Admin – $200,000 + $37,500 = $237,500 to allocate
| Rev 1 750 = .625 x 237,500 = 148,438 Rev 2 450 = .375 x 237,500 = 89,062 Total 1,200 |
Do not allocate admin to computer services because it is a higher-ranking unit.
13. A company has two service departments and 2 revenue generating units.
Information is as follows:
| Direct Costs | Pages printed | Pages Processed | |
| Copy Center | $120,000 | 2,300 | 1,200 |
| Computer Services | $280,000 | 10,340 | 5,200 |
| Revenue 1 | $368,000 | 19,235 | 25,750 |
| Revenue 2 | $328,000 | 26,145 | 30,600 |
Copy center is allocated based on pages processed. Computer services is allocated based on pages printed.
A. Allocate costs using the direct method.
B. Allocate costs using the step method. Computer services is ranked the highest among cost units.
Answer
A. Direct method – all costs go to revenue producing units only
Copy Center –
| Rev 1 25,750 = .457 x 120,000 = 54,840 Rev 2 30,600 = .543 x 120,000 = 65,160 Total 56,350 |
Computer Services –
| Rev 1 19,235 = .424 x 280,000 = 118,720 Rev 2 26,145 = .576 x 280,000 = 161,280 Total 45,380 |
B. Step Method – begin allocation with computer services and allocate to cost units and revenue producing units
Computer Services –
| Copy Ct 2,300 = .048 x 280,000 = 13,440 Rev 1 19,235 = .404 x 280,000 = 113,120 Rev 2 26,145 = .548 x 280,000 = 153,440 Total 47,680 |
Copy Center – $120,000 + $13,440 = $133,440 to allocate
| Rev 1 25,750 = .457 x 133,440 = 60,982 Rev 2 30,600 = .542 x 133,440 = 72,458 Total 56,350 |
Do not allocate costs to higher ranking cost units.
Do not allocate direct revenue units costs.