Cost Allocation
Self Test
Cost Accounting
Self Test
Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.
1. In a centralized organization most decisions are made by
a. lower level employees
b. management at all levels in the organization
c. upper level management only
d. anyone involved in the outcome of the decision
Answer
C. Upper management makes all significant decisions in a centralized organization. All employees the organization report to top management and decision making is not delegated.
2. In a decentralized organization most decisions are made by
a. lower level employees
b. management at all levels in the organization
c. upper level management only
d. anyone involved in the outcome of the decision
Answer
B. Management at key levels in the organization make decisions in a decentralized organization. Authority is delegated and reporting must be provided to evaluate performance of management.
3. For a decentralized organization to be effective, ________ accounting and reporting must be implemented
a. management
b. responsibility
c. centralized
d. variance
Answer
B. Responsibility accounting, which provides information on revenues and costs for each accountable manager, must be used in a decentralized organization in order to evaluate management performance.
4. A responsibility center is a part of the organization where management is
a. held accountable for sales or costs or profits in the area of control
b. held accountable for investments made only
c. not accountable for costs they can control
d. accountable for the performance of the entire organization
Answer
A. Responsibility centers are responsible for sales and controllable costs in the unit. (b.) is not a common “center”. The responsibility center is responsible for the results of operations they can control (c.), not the entire organization (d.).
5. A budget is used to
a. determine the difference between expected results and actual results
b. determine expected results
c. evaluate the performance of management
d. all of the above
Answer
D. The budget is commonly used for all of the listed activities.
6. A profit center is one where management has control over
a. only costs
b. sales and costs
c. sales, costs, and investments
d. investments only
Answer
B. A profit center is responsible for sales and controllable costs in the division. A cost center is only responsible for costs (a.). An investment center is responsible for (c.).
7. A revenue center is one where management has control over
a. costs only
b. sales prices and costs
c. revenues, costs, and investments
d. revenues only
Answer
D. A revenue center is responsible for revenues only. This type of center to not authorized to determine sales prices.
8. A cost center is one where management has control over
a. costs only
b. sales and costs
c. revenues, costs, and investments
d. revenues only
Answer
A. A cost center does not generate revenues and is responsible for costs of providing service to other parts of the organization only.
9. An investment center is one where management has control over
a. costs and investments
b. sales and costs
c. revenues, costs, and investments
d. investments only
Answer
C. An investment center has responsibility and control over sales, costs and investments made in assets.
10. The major difference between a service and an administrative cost unit is
a. who the service is performed for
b. the total cost of what is provided is much higher for service units
c. the total cost of what is provided is much higher for administrative units
d. when the service is performed
Answer
A. A service department provides a specific service for different units in the organization. The administrative unit provides service for the organization as a whole. The total cost of the service or the frequency of performance is not relevant to deciding the type of unit.
11. The direct method of allocating support department costs allocates to
a. only service/administrative departments
b. only revenue producing units
c. only service departments
d. only administrative departments
Answer
B. The direct method allocates support department costs only to revenue generating units for purposes of determining the profits of the revenue generating units.
12. Allocations are commonly based on a % of the
a. total of the activity generating the cost in that unit
b. total revenues generated from all revenue generating units
c. total of all service department and revenue department costs
d. none of the above
Answer
A. Both methods, direct and step, allocate based on a common activity that occurs in the cost unit.
13. The step method of allocating support department costs allocates to
a. only service/administrative departments
b. only revenue producing units
c. all service and administrative departments and revenue generating units
d. only administrative departments
Answer
C. The step method allocates to cost units and revenue generating units. Cost units are service and administrative departments.
14. The first thing you must do before implementing the step method is
a. identify the total revenues from revenue generating units
b. identify the ranking of service and administrative departments
c. identify direct costs of revenue generating units
d. total all service and administrative unit costs
Answer
B. The step method is implemented by using a “benefits ranking system”. The costs from the highest-ranking unit are allocated to all other cost and revenue units. Once a cost unit’s costs have been allocated it does not receive costs from other cost units.
15. The primary purpose of allocating service and administrative costs is to determine
a. the cost to produce all units
b. the cost per activity for each service and administrative unit
c. the profitability of each revenue generating unit
d. total company profitability
Answer
C. Support and administrative costs are allocated to revenue generating units in order to estimate the profitability of the revenue generating unit. Total company profits will not change regardless of how costs are allocated. The cost to produce one unit is determined from product costs and allocated service and support units are typically period costs. The cost per activity for each cost unit can be determined without allocating to other units.