Saved Multiple Choice – 3 Points Each (Choose the BEST answer for each question.) 3. Regardless of the system used in departmental cost analysis: A. Direct costs are allocated to departments. Indirect costs are traced to departments. B. Direct costs are traced to departments. Indirect costs are allocated to departments. C. Both direct and indirect costs are allocated to departments. D. Neither direct nor indirect costs are allocated to departments. E. Total departmental costs will always be the same.
The Correct Answer and Explanation is:
Correct Answer: B. Direct costs are traced to departments. Indirect costs are allocated to departments.
Explanation
In departmental cost analysis, understanding the distinction between direct and indirect costs is essential for accurate reporting and efficient cost control. Direct costs are those that can be clearly and specifically linked to a particular department. These costs include items such as salaries of departmental employees, materials used exclusively by the department, or equipment dedicated to a single department’s operations. Because of their specific nature, these costs are traced directly to the department that incurs them, ensuring high accuracy in departmental cost assignment.
Indirect costs, on the other hand, are expenses that benefit multiple departments or the organization as a whole and cannot be easily traced to one specific department. These include utilities, rent, administrative salaries, and maintenance. Since these costs are shared across departments and lack a direct connection to one unit, they are allocated using predetermined methods. Common allocation bases include square footage for rent or machine hours for maintenance costs. These bases are used to distribute the indirect costs fairly and consistently among departments.
Choosing the correct method of assigning costs—tracing for direct and allocation for indirect—is essential for producing accurate departmental income statements, facilitating better decision-making, and enhancing accountability. Cost analysis systems, whether traditional or activity-based, rely on this fundamental distinction to maintain reliability and consistency in financial data.
Option A is incorrect because it reverses the correct roles of tracing and allocation. Option C inaccurately suggests both cost types are allocated. Option D is false since both types are assigned to departments, though by different means. Option E is misleading because total departmental costs can differ depending on allocation methods, assumptions, or changes in departmental structure.
Therefore, the best choice is B: Direct costs are traced to departments. Indirect costs are allocated to departments.
