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.