Chapter 4: Manufacturing Cost Allocation Answers to Review Questions R4.1. Companies allocate costs to estimate or assess the costs of their cost objects (products, processes, divisions, etc.). The main issue in cost allocation is that estimated costs are assigned to the cost objects, which are subject to inaccuracies due to the use of the allocation bases are arbitrarily chosen.
R4.2. There are three commonly used methods to allocate support costs: 1) the direct method; 2) the sequential (or step) method; and 3) the reciprocal method. The direct method is the simplest method among all three, while the reciprocal method is the most complicated among all three. R4.3. Cost allocation is the process of distributing an overhead cost across multiple products, business units, or cost objects/centers. R4.4. Costs allocating serves three main purposes: 1) make decisions, 2) reduce non-value-added costs, and 3) determine pricing. R4.5. 1) Add up total overhead in groups of costs pools; 2) Compute the overhead allocation rate by dividing total overhead by the total measure of cost allocation basis (e.g., number of direct labor hours); 3) Apply overhead by multiplying the overhead rate by the measure of allocation basis for each product. R4.6. The three common methods used to allocate of costs support departments to operating/production departments are: (1) direct method. (2) sequential method, and. (3) reciprocal method. R4.7. A service department is a unit in a firm that is not involved directly in producing its goods or services. However, service departments provide services that enable the production departments to perform their functions. Production departments, on the other hand, are the units that are directly involved in producing goods and services. R4.8. The term reciprocal services refers to the situation in which two or more service departments provide services to each other.
