Chapter 7 : Cost Allocation Techniques

Question 1

The difference between operating income between absorbing and variable costing…

Answer 1

Inventory change = (Equals Units Produced vs Fixed Manufacturing Overhead Cost per unit)

Question 2

Methods to allocate joint costs

Answer 2

>> Direct: service department costs are allocated directly based on cost drivers without thinking about services rendered between each other (rule of thumb)

>> Step down: service departments are allocated to each other in the order that provides the most service to the other department, then it is allocated to the operating services based on proportions.

1. Check which service department contributes most to the other
2. The one that contributes the most is allocated amongst the other service departments and ALSO the producing departments.
3. What was initially at the receiving service department is added with the allocation from step 2 and will be allocated to the remaining departments.
4. In the end, total cost allocated have to sum total costs from beginning.

Question 3

MBO

Answer 3

The hallmark/premiss of MBO is the mutual setting of objectives by the superior and the subordinate as a basis for performance evaluation.