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Chapter 4
BMGT 221
24
Accounting
Undergraduate 2
11/02/2008

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Term
Allocation
Definition
Process of dividing a total cost into parts and assigning the parts to the relevant cost objects.
Term
Allocation Base
Definition
The factor used as the base for cost allocation
Term
Allocation Rate
Definition
The mathematical factor used to allocate or assign costs to a cost object, determined by dividing the total cost to be allocated by the appropriate cost driver or allocation base.
Term
Cost Accumulation
Definition
Measuring the cost of a particular object by combining many individual costs into a single total cost.
Term
Cost Allocation
Definition
Process of dividing a total cost into parts and assigning the parts to relevant objects.
Term
Cost Driver
Definition
Any factor, usually a volume measure, that causes cost to be incurred
Term
Cost Objects
Definition
Items for which managers need to measure cost
Term
Cost Tracing
Definition
Assigning specific costs to the objects that cause their incurrence.
Term
Direct Cost
Definition
Cost that is easily traceable to a cost object and for which it is economically feasible to do so.
Term
Direct Method
Definition
(1) Allocation method that allocates service center costs directly to operating department cost pools
Term
Indirect Cost
Definition
Cost that either cannot be easily traced to a cost object or for which it is not economically feasible to do so. See also overhead.
Term
Interdepartmental Service
Definition
Service performed by one service department for the benefit of another service department.
Term
Joint Costs
Definition
Common costs incurred in the process of making two or more products.
Term
Joint Products
Definition
Separate products derived from common inputs.
Term
Operating Departments
Definition
Departments that perform tasks directly related to accomplishing the organization's objectives. (Contrast with service departments.)
Term
Overhead Costs
Definition
Indirect costs of operating a business that cannot be directly traced to a product, department, process, or service, such as depreciation.
Term
Predetermined Overhead Rate
Definition
Allocation rate calculated before actual costs or activity are known
Term
Reciprocal Method
Definition
Allocation method that uses simultaneous linear equations to account for two-way relationships among service centers (service centers both provide services to and receive services from other service centers)
Term
Reciprocal Relationships
Definition
Two-way relationships in which departments provide services to and receive services from one another.
Term
Service Departments
Definition
Departments such as quality control, repair and maintenance, personnel, and accounting that provide support to other departments. (Contrast with operating departments.)
Term
Split-off Point
Definition
Stage in the production process where products made from common inputs become separate and identifiable.
Term
Step Method
Definition
Two-step allocation method that accounts for one-way interdepartmental service center relationships by allocating costs from service centers to service centers as well as from service centers to operating departments
Term
Managers must have reliable cost information to:
Definition
Price products.
Evaluate performance.
Control operations.
Prepare financial statements.
Term
Allocation of indirect costs involves a two-step process:
Definition
1. Calculate an allocation rate by dividing the indirect cost by the total amount of the cost driver activity.
2. Allocate the indirect cost by multiplying the allocation rate times the weight of the cost driver activity.
The weight of the cost driver activity is the amount of the cost driver consumed in the department.
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