Question 1

Today, companies are simplifying their cost systems and moving toward less-detailed and less-complex cost allocation bases.

Accepted Answer

Companies are moving toward more-detailed and more-complex cost allocations because today technology can capture these costs in a relatively inexpensive manner.

Question 2

When the purpose of cost allocation is to provide information for economic decisions or to motivate managers and employees, which of the following would be the best criteria?
A) the cause-and-effect and the ability-to bear criteria
B) the cause-and-effect and the benefits-received criteria
C) the benefits-received and the fairness criteria
D) the fairness and the ability-to-bear criteria

Accepted Answer

The cause-and-effect criterion is important for identifying the costs that are directly attributable to a specific operation, department or product. The benefits-received criterion is important for motivating managers and employees to maximize their benefits by reducing the costs of the products and services they create. This criterion also provides information for economic decisions. Therefore, the combination of these two criteria is the best choice for cost allocation when the purpose is to provide information for economic decisions or to motivate managers and employees.

Question 3

Under the cause and effect criterion, reasonableness is a matter of judgment rather than an operational
criterion.

Accepted Answer

Under the fairness or equity criterion, reasonableness is a matter of judgment rather than an operational criterion.

Question 4

The ability-to-bear criterion is considered superior when the purpose of cost allocation is motivation.

Accepted Answer

The cause-and-effect or benefits-received criteria is considered superior when the purpose of cost allocation is motivation.

Question 5

What might explain why some managers advocate fully allocating all costs, including corporate costs to distribution channels and to customers?
A) all costs are incurred to support sales of products to customers
B) division managers can influence and control corporate costs
C) distribution channel managers can control corporate costs
D) all costs need to be considered to conduct adequate variance analysis

Accepted Answer

Advocating for fully allocating all costs, including corporate costs, to distribution channels and customers likely refers to the belief that all costs are necessary and incurred to support sales of products to customers. Under this approach, all costs are viewed as contributing to the final product, so they should be allocated to the customer.

(Note: Options B and C are unlikely to be reasons for advocating full cost allocation, as they do not relate to the logic behind the decision. Option D is plausible, but Option A is a more direct explanation.)

Question 6

The benefits of implementing a more-complex cost allocation system are relatively easy to quantify for application of the cost-benefit approach.

Accepted Answer

The benefits of implementing a more-complex cost allocation system are difficult to measure.

Question 7

To guide cost allocation decisions, the benefits-received criterion ________.
A) generally uses the cost driver as the cost allocation base
B) advocates allocating costs in proportion to the cost object's ability to bear costs allocated to it
C) is the primarily used criterion in activity-based costing
D) may use an allocation base of division revenues to allocate advertising costs

Accepted Answer

The benefits-received criterion may use an allocation base of division revenues to allocate advertising costs. This criterion focuses on allocating costs to the products or services that directly receive the benefits of those costs. In this case, the division that generates the most revenue from the advertising would receive a higher allocation of the costs.

Question 8

When using the cause-and-effect criterion, cost drivers are selected as the cost allocation bases.

Accepted Answer

Cost drivers are used to allocate costs to products, services, or departments based on their cause-and-effect relationship with the costs incurred. Therefore, when using the cause-and-effect criterion, cost drivers are selected as the cost allocation bases.

Question 9

A company sets up cost pools for indirect cost allocation. Management sees clear cause-and-effect relationships between the incurrence of costs and the chosen the cost-allocation base. What other common relationships or basis with a cost allocation base might management utilize to allocate costs?
A) R&D expenses
B) benefits -received
C) Capital investment in a related process
D) gross profit proportions

Accepted Answer

Benefits-received is a common basis for allocating costs, as it distributes costs based on the perceived benefit each department or product line receives from the incurred costs.

Question 10

Which of the following is true of corporate-sustaining costs?
A) are common to all individual customers
B) have a clear cause-and-effect relationship with several cost-allocation bases
C) should be allocated for decisions regarding reducing customer costs
D) evaluates the effectiveness of sales personnel

Accepted Answer

Corporate-sustaining costs are costs that are common to all individual customers, not directly attributable to any specific product or service, but necessary for the overall functioning of the corporation.

Question 11

To guide cost allocation decisions, the fairness or equity criterion ________.
A) considers reasonableness as a matter of judgment rather than an operational criterion
B) allocates cost among the beneficiaries in proportion to the benefits each receives
C) is used more frequently than any other criteria
D) is the primary criterion used in activity-based costing

Accepted Answer

The fairness or equity criterion considers reasonableness as a matter of judgment rather than an operational criterion, as fairness is subjective and varies among stakeholders.

Question 12

Which of the following is a challenge to using cost-benefit criteria for allocating costs?
A) the costs of designing and implementing complex cost allocations are not readily apparent
B) the benefits of making better-informed pricing decisions are difficult to measure
C) cost systems are being simplified and fewer multiple cost-allocation bases are being used
D) the costs of collecting and processing information keep spiraling upward

Accepted Answer

The benefits of making better-informed pricing decisions are difficult to measure, making it challenging to assess the effectiveness of cost-benefit criteria in cost allocation.

Question 13

Which cost-allocation criterion is most likely to subsidize poor performers at the expense of the best performers?
A) the fairness or equity criterion
B) the benefits-received criterion
C) the ability to bear criterion
D) the cause-and-effect criterion

Accepted Answer

The ability to bear criterion allocates costs based on the ability of a department or division to absorb those costs, rather than on their actual use or cause of the costs. This can lead to situations where more profitable or efficient departments end up subsidizing less profitable or efficient ones, as they are deemed to have a greater ability to bear the costs.

Question 14

To guide cost allocation decisions, the cause-and-effect criterion ________.
A) is used less frequently than the other criteria
B) is the primary criterion used in activity-based costing
C) considers fairness as a matter of judgment rather than an operational criterion
D) advocates allocating costs in proportion to the cost object's ability to bear costs allocated to it

Accepted Answer

The cause-and-effect criterion is the primary criterion used in activity-based costing, which is a costing method that identifies the activities that cause costs to be incurred and allocates those costs to cost objects based on their consumption of the activity. This approach helps to more accurately allocate indirect costs to products or services based on the activities they use, which can lead to better decision-making.

Question 15

To guide cost allocation decisions, the ability to bear criterion ________.
A) is the primary criterion used in activity-based costing
B) allocates cost among the beneficiaries in proportion to the benefits each receives.
C) results in subsidizing products that are not profitable
D) is used more frequently than any other criteria

Accepted Answer

The ability to bear criterion often results in subsidizing products that are not profitable because it allocates costs based on the assumption that products with higher sales or margins can "bear" more of the overhead, rather than allocating costs based on actual cause-and-effect relationships.

Question 16

Using the fairness criterion, the costs are allocated among the beneficiaries in proportion to the benefits each receives.

Accepted Answer

Using the benefits received criterion, the costs are allocated among the beneficiaries in proportion to the benefits each receives.

Question 17

Briefly describe the four criteria used to guide cost-allocation decisions.

Accepted Answer

The answer of Briefly describe the four criteria used to...

Question 18

Why do managers prepare cost-hierarchy-based operating incomes statements?

Accepted Answer

The answer of Why do managers prepare cost-hierarchy-based operating incomes...

Question 19

Which of the following criteria has the presumption that the more-profitable divisions have a greater ability to absorb corporate administration costs?
A) the fairness or equity criterion
B) the ability to bear criterion
C) the cause-and-effect criterion
D) the benefits-received criterion

Accepted Answer

The ability to bear criterion is the one that presumes that more profitable divisions have a greater ability to absorb corporate administration costs. This criterion takes into consideration the financial capacity of each division and how it can handle additional costs.

Question 20

A customer cost hierarchy categorizes costs related to customers into different cost pools on the basis of different ________.
A) contribution-margin ratios of products
B) distribution-channel costs
C) levels of cause-and-effect relationships
D) division-sustaining costs

Accepted Answer

A customer cost hierarchy categorizes costs based on the levels of cause-and-effect relationships between different activities and cost drivers associated with serving customers. The hierarchy typically includes four levels: customer, order, product, and distribution channel. Thus, choice C is the correct option. The other options listed (A, B, and D) are not directly related to categorizing costs based on different activities and cost drivers associated with serving customers.

Quiz 14: Cost Allocation, Customer-Profitability Analysis, and Sales-Variance Analysis

Today, companies are simplifying their cost systems and moving toward less-detailed and less-complex cost allocation bases.

When the purpose of cost allocation is to provide information for economic decisions or to motivate managers and employees, which of the following would be the best criteria?

Under the cause and effect criterion, reasonableness is a matter of judgment rather than an operational criterion.

The ability-to-bear criterion is considered superior when the purpose of cost allocation is motivation.

What might explain why some managers advocate fully allocating all costs, including corporate costs to distribution channels and to customers?

The benefits of implementing a more-complex cost allocation system are relatively easy to quantify for application of the cost-benefit approach.

To guide cost allocation decisions, the benefits-received criterion ________.

When using the cause-and-effect criterion, cost drivers are selected as the cost allocation bases.

A company sets up cost pools for indirect cost allocation. Management sees clear cause-and-effect relationships between the incurrence of costs and the chosen the cost-allocation base. What other common relationships or basis with a cost allocation base might management utilize to allocate costs?

Which of the following is true of corporate-sustaining costs?

To guide cost allocation decisions, the fairness or equity criterion ________.

Which of the following is a challenge to using cost-benefit criteria for allocating costs?

Which cost-allocation criterion is most likely to subsidize poor performers at the expense of the best performers?

To guide cost allocation decisions, the cause-and-effect criterion ________.

To guide cost allocation decisions, the ability to bear criterion ________.

Using the fairness criterion, the costs are allocated among the beneficiaries in proportion to the benefits each receives.

Briefly describe the four criteria used to guide cost-allocation decisions.

Why do managers prepare cost-hierarchy-based operating incomes statements?

Which of the following criteria has the presumption that the more-profitable divisions have a greater ability to absorb corporate administration costs?

A customer cost hierarchy categorizes costs related to customers into different cost pools on the basis of different ________.