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Solutions manual

to accompany

Management accounting

3rd edition

by

Eldenburg et al.

Prepared by Rodney Dormer

© John Wiley & Sons Australia, Ltd 2017

Management Accounting Australian 3rd Edition EldenBurg Solutions Manual Visit TestBankDeal.com to get complete for all chapters

Chapter 3: A costing framework and cost allocation

© John Wiley and Sons Australia, Ltd 2017 3.1

Chapter 3: A costing framework and cost allocation

Questions

3.1 What is a cost object? Give 3 examples.(LO1)

A cost object is anything for which a separate measurement of cost is desired.Examples include products, services, geographic regions, departments, segments and customers.

3.2 Explain the difference between a direct cost and indirect cost.(LO2)

A direct cost can be directly traced to a cost object — a tracking system will enable the direct association. An indirect cost is incurred for the benefit of multiple cost objects and is not economically feasible to directly trace.

3.3 Discuss the importance of selecting an appropriate cost driver for cost allocation.(LO3)

A cost driver provides the link between the indirect cost and the cost object. A cost driver should explain the use of resources by the cost object. The selection of an inappropriate cost driver will lead to an incorrect cost allocation and affect decision making which incorporates the allocated cost.

3.4 Explain the differences and similarities among the direct, step-down, and reciprocal methods.(LO4)

Differences:

 Direct method ignores all interactions among support departments. The step-down method takes into account some of the interactions among support departments. The reciprocal method takes into account all of the interactions among support departments.

Similarities:

 All of the methods allocate support department costs to operating departments  All of the methods rely on allocation bases to assign costs of support departments to operating departments. All of the methods result in a total allocated cost per unit  All of the methods use cost pools, and those are usually departments.

Solutions manual to accompany: Management accounting 3e by Eldenburg et al.

© John Wiley and Sons Australia, Ltd 2017 3.2 3.5 Explain the similarities and differences between support department costs and manufacturing overhead costs.(LO3)

Support department costs are direct costs of the department, but indirect costs when allocated to other departments. Manufacturing overhead is a direct cost of the production process but it becomes an indirect cost when it is allocated to units.

3.6 What should determine the choice of cost allocation method (direct, step- down and reciprocal) discussed in this chapter?(LO4)

Management’s objectives should be the determining factor, tempered by the availability of the data and the cost of performing the allocation. For example, if the primary purpose is cost control, a method that recognises interdepartmental relationships is appropriate. If the firm has a computer and appropriate software, the reciprocal allocation method is preferred. If the primary purpose is product costing and the firm has a manual system, the direct method may be preferred.

Following are other factors to consider in choosing an appropriate allocation method:  As the number of cost pools increase, calculations become more complex under the reciprocal method,  When there are four or more support cost pools, software is needed to perform the reciprocal method calculations  The degree of interaction among support departments; fewer interactions result in fewer differences in allocation amounts

3.7 Explain how cost data is sourced in a costing framework.(LO4)

A costing system can be structured based on either actual or budgeted cost data using a match cost driver.

Actual Data Budgeted Data  Costs would be sourced from general ledger  Cost driver would be based on actual usage and this would require a system to collect this information  Costs would be sourced from budgeted information  Cost driver would be based on expected usage

Chapter 3: A costing framework and cost allocation

© John Wiley and Sons Australia, Ltd 2017 3.3 3.8 Outline the key steps in a costing framework.(LO4)

Key steps in a costing framework:

Step 1 Identify cost objects of interest, trace direct costs and determine indirect costs pools and cost drivers Step 2 Determine indirect cost rate for each cost pool Step 3 Allocate indirect costs to the cost objects Step 4 Allocate indirect cost to cost objects Step 5 Determine full costs by totalling indirect costs and direct costs

3.9 What factors should be considered when choosing allocation bases?(LO3)

Following are factors to consider in choosing an allocation base:

 Costs and benefits of the information gathered  Does one of the bases better reflect the use of the support department's resources? Will the allocation base be easy to measure and apply? Are data available for the allocation base? How accurate are the data?

3.10 A product is started in department 1 and completed in department 2. Is department 1 a support department or an operating department? Explain.(LO3)

Department 1 is an operating department because it works directly on the firm’s final product.

3.11 Explain the difference between operating departments and support departments.(LO3)

Operating departments manufacture goods or produce services that are sold to clients.Support departments interact primarily with operating departments and other support departments, and not with outside customers. Support departments provide operating departments with internal services such as accounting, research and development, and so on.

3.12 What are the advantages and disadvantages of using estimated support cost allocation rates?(LO7)

Estimated (budgeted) cost rates provide information for managers to use in budgeting and some of their decision-making. Managers can predict charges as they use the service. In addition, each department’s charges are not affected by other departments’ use of service. A disadvantage of budgeted rates is that user departments have little incentive to use resources efficiently because their charge is already known, and will not change with usage, if it is based on a fixed rate.