Costs are allocated to cost objects in many ways and for many reasons. Which one of the following is a purpose of cost allocation?
Answer(s): B
Cost allocation is the process of assigning and reassigning costs to cost objects. It is used for those costs that cannot be directly associated with a specific cost object. Cost allocation is often used for purposes of measuring income and assets for external reporting purposes. Cost allocation is less meaningful for internal purposes because responsibility accounting systems emphasize controllability', a process often ignored in cost allocation.
Which one of the following is least likely to be an objective of a cost accounting system?
Answer(s): D
A cost accounting system has numerous objectives, including product costing, assessing departmental efficiency, inventory valuation. income determination, and planning, evaluating, and controlling operations. Determining sales commissions is not an objective of a cost accounting system because such commissions are based on sales, not costs.
When a firm prepares financial reports by using absorption costing,
Answer(s): C
In an absorption costing system, fixed overhead costs are included in inventory When sales exceed production, more overhead is expensed under absorption costing due to fixed overhead carried over from the prior inventory. If sales increase over production, more than one period's overhead is recognized as expense. Accordingly, if the increase in overhead expensed is greater than the contribution margin of the increased units sold, profit may be lower with an increased level of sales.
Incremental cost is
Answer(s): A
Incremental cost is the difference in total cost between two courses of action. "Decremental cost" is the term used when the difference is noted as a decline although "incremental" is the more common term. Incremental cost is also referred to as differential cost.
A company will produce 20000 units of product A at a unit variable cost of $7 and a unit selling price of $13. Fixed costs are $40,000. However, the company will still have 40% idle capacity. The company can use this idle capacity to produce 6,000 units of a different product B, which it can sell for $7 per unit. The incremental variable cost of producing a unit of B is $6. Present fixed costs that will be allocated to B amount to $10,000. To decide whether to produce B, the company should use
Nonroutine decisions involve such questions as whether to make or buy or accept a special order. These decisions should be made in part on the basis of relevant costs. Analysis of differential costs is therefore 1essentiaI). The difference between the relevant costs of two decision choices is differential (incremental) cost.
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