Cost Allocation: Master the Art of Distributing Costs

Question 1

Which cost allocation method uses specific cost drivers associated with activities to assign overhead costs?

Accepted Answer

Activity-based costing

Answer

Simple costing

Answer

Traditional costing

Answer

Job costing

Question 2

What is the fundamental purpose of cost allocation?

Accepted Answer

To distribute costs fairly to specific products, departments, or services

Answer

To minimize overall production expenses

Answer

To determine the profitability of individual products or services

Answer

To calculate the total overhead expenditures incurred

Question 3

How are cost centers and activity centers differentiated?

Accepted Answer

Cost centers gather costs while activity centers assign them

Answer

Activity centers gather costs while cost centers assign them

Answer

Cost centers and activity centers serve identical purposes

Answer

Cost centers are specific to manufacturing costs, while activity centers are specific to non-manufacturing costs

Question 4

To calculate the overhead rate using the predetermined overhead rate method, which formula is used?

Accepted Answer

Overhead costs / Forecasted activity level

Answer

Activity level / Overhead costs

Answer

Overhead costs + Forecasted activity level

Answer

Activity level - Overhead costs

Question 5

What is a key limitation of traditional costing methods?

Accepted Answer

Neglecting different activities' impact on costs

Answer

Assigning overhead costs based on arbitrary measures

Answer

Excessive complexity in implementation

Answer

Applicability only to small-scale businesses

Question 6

Distinguish between a direct cost and an indirect cost.

Accepted Answer

Direct costs can be directly traced to a specific product or service, while indirect costs cannot

Answer

Indirect costs can be directly traced to a specific product or service, while direct costs cannot

Answer

Direct costs are fixed costs, while indirect costs are variable costs

Answer

There is no distinction between direct and indirect costs

Question 7

Which of the following is the primary goal of cost allocation?

Accepted Answer

Distributing costs to products or services and business units

Answer

Simplifying financial statements

Answer

Measuring the efficiency of individual departments

Answer

Determining the profitability of different business units

Question 8

Which cost allocation method assigns costs based on the actual usage of resources by each activity?

Accepted Answer

Activity-based costing

Answer

Traditional costing

Answer

Overhead allocation

Answer

Job order costing

Question 9

What is a key advantage of using activity-based costing?

Accepted Answer

Enhanced product profitability analysis

Answer

Reduced overhead costs

Answer

Simplified cost accounting system

Answer

Increased production efficiency

Question 10

What is the primary purpose of overhead allocation?

Accepted Answer

Distributing indirect costs to departments or products

Answer

Reducing administrative expenses

Answer

Measuring the profitability of different products

Answer

Improving inventory management

Question 11

What is the main distinction between traditional costing and activity-based costing?

Accepted Answer

Traditional costing allocates costs based on direct labor, while activity-based costing allocates costs based on activities.

Answer

Traditional costing is more complex than activity-based costing.

Answer

Traditional costing is more accurate than activity-based costing.

Answer

Traditional costing is limited to manufacturing companies, while activity-based costing is applicable to both manufacturing and service companies.

Question 12

True or False: Cost allocation is only relevant for manufacturing companies.

Accepted Answer

False

Answer

True

Question 13

Which among the following is not a method of allocating costs?

Accepted Answer

Cost-Volume-Profit Analysis (CVP)

Answer

Activity-based Costing (ABC)

Answer

Overhead Allocation

Answer

Traditional Costing

Question 14

The primary objective of activity-based costing (ABC) is to:

Accepted Answer

Allocate costs to products or services based on the activities that utilize resources

Answer

Distribute overhead costs to departments

Answer

Calculate the total cost of manufacturing

Answer

Minimize production expenses

Question 15

What is a key advantage of activity-based costing compared to traditional costing?

Accepted Answer

Enhanced accuracy in cost allocation

Answer

Reduced overhead costs

Answer

Increased production efficiency

Answer

Simplified accounting procedures

Question 16

The process of assigning indirect costs to individual cost objects is known as:

Accepted Answer

Cost allocation

Answer

Cost accounting

Answer

Overhead analysis

Answer

Cost estimation

Question 17

In engineering economics, the primary purpose of cost allocation is to:

Accepted Answer

Distribute costs equitably and accurately to different products or services

Answer

Reduce the overall cost of production

Answer

Simplify financial reporting

Answer

Comply with legal and regulatory requirements

Question 18

Which of the following is a fundamental principle of Activity-Based Costing (ABC)?

Accepted Answer

Costs are assigned to products or services based on the activities they drive.

Answer

Overhead costs are allocated based on direct labor hours.

Answer

Only variable costs are considered in cost allocation.

Answer

Costs are assigned to departments based on their square footage.

Question 19

Which overhead allocation method assigns overhead costs based on the percentage of direct labor dollars?

Accepted Answer

Traditional allocation

Answer

Activity-based costing

Answer

Plant-wide allocation

Answer

Departmental allocation

Question 20

What is a primary advantage of Activity-Based Costing (ABC) over traditional costing methods?

Accepted Answer

Increased cost allocation accuracy.

Answer

Simplified data collection.

Answer

Lower implementation costs.

Answer

Improved financial reporting.

Question 21

What is the primary purpose of overhead cost pools?

Accepted Answer

To accumulate similar overhead costs.

Answer

To allocate overhead costs to products or services.

Answer

To reduce the number of general ledger accounts.

Answer

To identify opportunities for cost savings.

Question 22

What is the primary objective of cost allocation?

Accepted Answer

To assign costs to products or services for pricing purposes.

Answer

To determine the cost of goods sold.

Answer

To track expenses by department.

Answer

To improve production efficiency.

Question 23

Which of the following is an example of a non-manufacturing cost?

Accepted Answer

Marketing expenses

Answer

Direct materials

Answer

Direct labor

Answer

Factory overhead

Question 24

Revised: Which fundamental principle underlies activity-based costing (ABC)?

Accepted Answer

Activities drive cost incurrence.

Answer

Overhead costs vary directly with production volume.

Answer

Actual costs form the basis for calculating activity rates.

Answer

All costs are allocated based on labor hours.

Question 25

Revised: Which of the following is not an advantage of activity-based costing (ABC)?

Accepted Answer

Lowered administrative costs

Answer

Improved cost allocation accuracy

Answer

Enhanced decision-making capabilities

Answer

Increased cost efficiency

Question 26

Revised: How do plantwide overhead allocation rates differ from departmental overhead allocation rates?

Accepted Answer

Plantwide rates allocate costs across all departments; departmental rates allocate costs within specific departments.

Answer

Plantwide rates rely on direct labor hours; departmental rates rely on machine hours.

Answer

Plantwide rates are used for basic costing systems; departmental rates are used for more complex systems.

Answer

There is no distinction between these two types of rates.

Question 27

Revised: What is a common challenge associated with using overhead allocation rates?

Accepted Answer

Inaccuracy due to changing product mix

Answer

Difficulty in identifying suitable cost drivers

Answer

Excessive data collection requirements

Answer

Lack of transparency in cost allocations

Question 28

How does cost allocation inform strategic planning, particularly in optimizing product offerings?

Accepted Answer

It enables managers to determine product profitability, guiding decisions about resource allocation and production focus.

Answer

It solely aids in pricing strategies, with no impact on product mix.

Answer

It is only relevant for cost control and has no bearing on product decisions.

Answer

It primarily assists in inventory management, with limited relevance to product mix.

Question 29

Which of the following is NOT a purpose of cost allocation?

Accepted Answer

Asset valuation

Answer

Determining product profitability

Answer

Pricing decisions

Answer

Budgeting and forecasting

Question 30

What is a primary advantage of implementing activity-based costing (ABC) in an organization?

Accepted Answer

Precisely assigning indirect costs

Answer

Eliminating cost variations

Answer

Simplifying the allocation of administrative expenses

Answer

Reducing the number of cost centers

Question 31

In activity-based costing (ABC), costs are allocated based on:

Accepted Answer

Activities that consume resources

Answer

Activities that occur in a specific department

Answer

Activities that generate revenue

Answer

Direct labor hours

Question 32

In activity-based costing, which of the following is considered a cost driver?

Accepted Answer

Number of customer orders processed

Answer

Manufacturing overhead costs

Answer

Total sales volume

Question 33

An advantage of using activity-based costing is:

Accepted Answer

Improved cost visibility

Answer

Reduced production time

Answer

Simplified budgeting process

Answer

Increased inventory levels

Question 34

In a job-order costing system, indirect costs are allocated to specific jobs based on:

Accepted Answer

A predetermined rate

Answer

The estimated time spent on each job

Answer

The selling price of each job

Answer

The number of units produced in each job

Question 35

When using the plant-wide rate method to allocate costs, the allocation base is typically:

Accepted Answer

Direct labor hours

Answer

Sales revenue

Answer

Number of units produced

Answer

Machine hours

Question 36

A limitation of the single-rate allocation method is that:

Accepted Answer

It does not account for different levels of resource consumption by different products or services

Answer

It is not suitable for companies with diverse product lines

Answer

It is too complex to implement

Question 37

In cost allocation, a cost pool is used for:

Accepted Answer

Accumulating costs from various sources related to a particular activity or department

Answer

Simplifying the allocation of costs to individual products or services

Answer

Reducing the total number of cost categories

Question 38

Which cost allocation method assigns costs based on the amount of resources utilized?

Accepted Answer

Activity-Based Costing

Answer

Actual Costing

Answer

Overhead Allocation

Question 39

Which of the following is **NOT** a benefit of Activity-Based Costing (ABC)?

Accepted Answer

Simplified cost tracking

Answer

Increased efficiency and productivity

Answer

Accurate product costing

Answer

Improved decision-making

Question 40

Overhead allocation is primarily used to allocate:

Accepted Answer

Indirect costs

Answer

Direct costs

Answer

Fixed costs

Answer

Variable costs

Question 41

Which overhead allocation method is based on the cause-and-effect relationship between activities and costs?

Accepted Answer

Activity-based costing

Answer

Traditional costing

Answer

Equal allocation

Answer

Simple allocation

Question 42

The primary goal of cost allocation is to:

Accepted Answer

Assign costs to activities, cost objects (products/services), or departments

Answer

Increase profits

Answer

Reduce overall costs

Answer

Improve employee morale

Question 43

Which of the following is a common criticism of Activity-Based Costing (ABC)?

Accepted Answer

Complexity and high implementation costs

Answer

Lack of flexibility

Answer

Inaccurate product costing

Answer

Reduced operational efficiency

Question 44

Indirect costs are those that:

Accepted Answer

Cannot be directly traced to specific products or services

Answer

Vary with the volume of production

Answer

Are incurred only during production

Answer

Are always fixed costs

Question 45

Activity-based costing involves a series of steps. Which of the following is **NOT** one of these steps?

Accepted Answer

Estimating cost of goods sold

Answer

Identifying activities

Answer

Allocating costs to cost objects

Answer

Assigning costs to activities

Question 46

The 'simple allocation' method for overhead allocation has several limitations. Which of the following is **NOT** a potential limitation?

Accepted Answer

It provides highly accurate cost information

Answer

It does not consider varying resource consumption

Answer

It can lead to distorted product costs

Answer

It can be difficult to implement

Question 47

The 'equal allocation' method for overhead allocation distributes costs:

Accepted Answer

Equally to all products or services, regardless of their resource consumption

Answer

Based on the level of direct labor hours

Answer

Proportionally to the sales revenue generated

Answer

Based on the number of units produced

Question 48

Activity-based costing is particularly useful for organizations that:

Accepted Answer

Have diverse operations with multiple products or services

Answer

Are in the retail industry

Answer

Have a small number of products or services

Answer

Are primarily service-based

Question 49

A company produces two products, A and B, with different machine time requirements per unit (Product A: 2 hours, Product B: 3 hours).  The total machine hours available are 1,200. To maximize profits, which cost allocation method would likely be most helpful in determining the optimal production mix?

Accepted Answer

Activity-based costing

Answer

Traditional costing

Answer

Direct costing

Answer

Absorption costing

Question 50

A company uses direct labor hours to allocate overhead costs. If the overhead rate is $10 per direct labor hour and a product requires 5 direct labor hours, what is the allocated overhead cost for that product?

Accepted Answer

$50

Answer

$20

Answer

$100

Answer

$10

Question 51

Which of these is NOT considered a benefit of activity-based costing (ABC)?

Accepted Answer

Simplified cost allocation process

Answer

Improved accuracy of cost allocation

Answer

More informed pricing decisions

Answer

Better understanding of cost drivers

Question 52

A company estimates its overhead costs at $500,000 and its machine hours at 100,000. What is the predetermined overhead rate if the company uses machine hours as the allocation base?

Accepted Answer

$5 per machine hour

Answer

$10 per machine hour

Answer

$2 per machine hour

Question 53

A company uses a plantwide overhead rate for cost allocation.  What is a potential drawback of this method?

Accepted Answer

It may not accurately reflect the actual cost of producing different products.

Answer

It can reduce the need for detailed cost tracking.

Answer

It is a simple and easy-to-use method.

Question 54

Which of the following is an example of a cost driver commonly used for allocating overhead costs?

Accepted Answer

Number of machine setups

Answer

Direct materials cost

Answer

Selling price per unit

Answer

Direct labor cost

Question 55

A company makes two products, X and Y, with different machine hour requirements per unit (Product X: 2 hours, Product Y: 3 hours). The company has 600 machine hours available. If machine hours are allocated based on usage, how many machine hours should be allocated to Product X?

Accepted Answer

240 machine hours

Answer

120 machine hours

Answer

300 machine hours

Answer

360 machine hours

Question 56

Which statement is TRUE about traditional costing systems?

Accepted Answer

They often use a single overhead rate for the entire company.

Answer

They are more accurate than activity-based costing systems.

Answer

They are well-suited for companies with a high degree of product diversity.

Question 57

A company allocates overhead costs based on the volume of materials used for each product. This method is known as:

Accepted Answer

Material-based allocation

Answer

Activity-based costing

Answer

Absorption costing

Answer

Direct costing

Question 58

Which of these is NOT a common cost allocation base used for overhead allocation?

Accepted Answer

Number of customer complaints

Answer

Machine hours

Answer

Direct labor hours