FUNDAMENTALS OF COST ACCOUNTING
EXAMINATION TEST PAPER WITH
COMPLETE SOLUTION AND REVIEW
MATERIAL
●● Define Service Department cost allocation
Answer: Ensures that costs of support services are included in costs of
products.
●● Three methods of service department cost allocation
Answer: 1) Direct 2) Step 3) Reciprocal
●● Joint Cost Allocation
Answer: Assigns common costs to two or more products manufactured
from a common input.
●● Two methods of Joint Cost Allocation
Answer: 1) Net realizable Value 2) Physical quantities Method.
Acceptable for financial reporting but must be careful with decision
making due to arbitrariness in joint cost allocations
●● Why service costs are allocated
,Answer: To inform managers about the costs of running departments that
use the services of other departments. Also required for external
financial reporting and tax purposes.
●● Allocating service department costs using Direct Method
Answer: Allocates service department costs to user departments and
ignores any services used by other service departments. no inter-service-
department allocation
●● Allocating service department costs using Step Method
Answer: Based on allocation order, allocates service department costs to
other service departments and then to production departments. Partial
inter-service-department allocation
●● Allocating service department costs using Reciprocal Method
Answer: Simultaneous allocation of service department costs to and
from all other service departments. Fully recognizes inter-service-
department activities
●● Why Joint Costs are allocated
Answer: To assign common costs to two or more products manufactured
from a common input.
●● Joint costs with Net Realizable Value Method
, Answer: Allocates joint costs to products in proportion to their relative
sales values.
●● Joint Costs with physical quantities method
Answer: Allocates joint costs to products in proportion to a physical
measure
●● How cost data is used in sell-or-process further decision.
Answer: Joint costs are irrelevant
●● Why do companies allocate costs?
Answer: To estimate or assess the costs of their activities
●● Disadvantages of allocating costs
Answer: 1) Additional Bookkeepting, 2) Additional management costs
3) Costs of making the wrong decision if allocations provide misleading
information
●● Advantages of allocating costs
Answer: 1) Responsibility for all costs of the company in the division
managers 2) Relate indirect costs to contracts, jobs and products 3)
Construct more meaningful performance measures
EXAMINATION TEST PAPER WITH
COMPLETE SOLUTION AND REVIEW
MATERIAL
●● Define Service Department cost allocation
Answer: Ensures that costs of support services are included in costs of
products.
●● Three methods of service department cost allocation
Answer: 1) Direct 2) Step 3) Reciprocal
●● Joint Cost Allocation
Answer: Assigns common costs to two or more products manufactured
from a common input.
●● Two methods of Joint Cost Allocation
Answer: 1) Net realizable Value 2) Physical quantities Method.
Acceptable for financial reporting but must be careful with decision
making due to arbitrariness in joint cost allocations
●● Why service costs are allocated
,Answer: To inform managers about the costs of running departments that
use the services of other departments. Also required for external
financial reporting and tax purposes.
●● Allocating service department costs using Direct Method
Answer: Allocates service department costs to user departments and
ignores any services used by other service departments. no inter-service-
department allocation
●● Allocating service department costs using Step Method
Answer: Based on allocation order, allocates service department costs to
other service departments and then to production departments. Partial
inter-service-department allocation
●● Allocating service department costs using Reciprocal Method
Answer: Simultaneous allocation of service department costs to and
from all other service departments. Fully recognizes inter-service-
department activities
●● Why Joint Costs are allocated
Answer: To assign common costs to two or more products manufactured
from a common input.
●● Joint costs with Net Realizable Value Method
, Answer: Allocates joint costs to products in proportion to their relative
sales values.
●● Joint Costs with physical quantities method
Answer: Allocates joint costs to products in proportion to a physical
measure
●● How cost data is used in sell-or-process further decision.
Answer: Joint costs are irrelevant
●● Why do companies allocate costs?
Answer: To estimate or assess the costs of their activities
●● Disadvantages of allocating costs
Answer: 1) Additional Bookkeepting, 2) Additional management costs
3) Costs of making the wrong decision if allocations provide misleading
information
●● Advantages of allocating costs
Answer: 1) Responsibility for all costs of the company in the division
managers 2) Relate indirect costs to contracts, jobs and products 3)
Construct more meaningful performance measures
