CHAPTER 14 COST ALLOCATION, CUSTOMER-PROFITABILITY

TRUE/FALSE

1. Indirect
costs are costs that cannot be traced to cost objects in an economically
feasible way.

2. To
motivate engineers to design simpler products, costs for production,
distribution, and customer service may be included in product-cost estimates.

3. For
external reporting, inventoriable costs under GAAP sometimes include R&D
costs.

.

4. To
allocate a cost, it must satisfy all four purposes for which costs are
allocated.

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

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

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

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

9. Each
company must decide which corporate cost categories should be included in the
indirect costs of the divisions — all, only a subset, or none.

10. Full
allocation of corporate costs to divisions is justified when the notion of
controllability is applied.

11. When
there is a lesser degree of homogeneity, fewer cost pools are required to
accurately explain the use of company resources.

12. If
a cost pool is homogeneous, the cost allocations using that pool will be the
same as they would be if costs of each individual activity in that pool were
allocated separately.

13. Facility-sustaining
costs do not have a cause-and-effect relationship with individual products.

14. An
individual cost item can be simultaneously a direct cost of one cost object and
an indirect cost of another cost object.

15.
A homogenous cost pool has costs that have similar cause-and-effect
relationships with the cost-allocation base.

16. Once
a cost pool has been established, it should not need to be revisited or
revised.

17. All
customers are equally important to a company and should receive equal levels of
attention.

.

18. The
purpose of price discounting is to encourage increases in customer purchases.

19. There
are two elements that influence customer profitability — revenues and costs.

20. Companies
that only record the invoice price can usually track the magnitude of price
discounting.

21. A
customer cost hierarchy categorizes costs related to customers into different
cost pools on the basis of using only one cost driver.

22. An
activity-based costing system may focus on customers rather than products.

23. A
customer cost hierarchy may include distribution-channel costs.

24. The
cost of visiting customers is an example of a customer output unit-level cost.

25. In
general, distribution-channel costs are more easily influenced by customer
actions than customer batch-level costs.

26. If
one of four distribution channels is discontinued, corporate-sustaining costs
such as general administration costs will most likely be reduced by 25%.

27. To
more accurately assess customer profitability, corporate-sustaining costs
should be allocated.

28. It
is common to find that a small number of customers generate a high percentage
of operating income.

29. Managers
who utilize customer profitability charts should drop customers that generate a
negative customer operating income, since dropping an unprofitable customer
will automatically cause overall income to increase.

30. It
is possible that the largest customer in terms of revenue is not the most
profitable customer.

31. The
static-budget variance is the difference between an actual result and a
budgeted amount in the static budget.

32. The
flexible-budget variance is the difference between an actual result and the
flexible-budget amount based on the level of output actually achieved in the
budget period.

33. Additional
insight can be gained by dividing the sales-mix variance into the
flexible-budget variance and the sales-volume variance.

34. A
favorable sales-mix variance arises when the actual sales-mix percentage is
less than the budgeted sales-mix percentage.

.

35. A
composite unit is a hypothetical unit with weights based on the mix of
individual units.

36. The
sales-mix variance can be explained in terms of the budgeted contribution
margin per composite unit of the sales mix.

37. The
sales-quantity variance is favorable when budgeted unit sales exceed actual
unit sales.

38. The
sales mix variance is the difference between budgeted contribution margin for
the actual sales mix and the budgeted contribution margin for the budgeted
sales mix.

39. The
sales quantity variance is the difference between budgeted contribution margin
based on actual units sold of all products at the budgeted mix, and
contribution margin in the flexible budget.

40. The
market-share variance is caused solely by the actual market share being
different than the budgeted market share.

41. A
favorable market-size variance results with a decrease in market size.

42. The
flexible-budget variance can be further divided into the sales-mix variance and
the sales-quantity variance.

43. The
market share variance is the difference in budgeted contribution margin for
actual market size in units caused solely by the actual market share being
different from the budgeted market share.

44. The
market size variance is the difference in budgeted contribution margin at
budgeted market share caused solely by actual market size in units being
different from budgeted market size in units.

45. A difficulty with the market share and market size variances is that
accurate measures of market share and market size often do not exist.

46. The
direct materials mix variance is the sum of the direct materials mix variances
for each input.

47. An
unfavorable direct materials mix variance results when cheaper direct materials
are substituted for more expensive direct materials.

48. A
favorable direct materials yield variance results when less direct materials
are used than planned.

MULTIPLE CHOICE

49. Costs
which are not economically feasible to trace but which are related to a cost
object are known as:
a. fixed costs
b. direct costs
c. indirect costs
d. variable costs

50. Any
item for which a separate measurement of cost is desired is known as:
a. cost allocation
b. a cost object
c. a direct cost
d. an indirect cost