6.1 What are the primary differences between direct and indirect costs?
The difference between direct and indirect costs is that direct costs are the unique and exclusive resources used only by one unit of an organization. They are fairly easy to measure. Indirect costs are inherently difficult to measure. This is because these costs constitute a shared resource of the organization as a whole. Direct cost can be matched directly to a specific product or service. It is the cost directly related to a product. Indirect Cost is not traceable directly to any particular cost object, but it does affect a lot of costs within a business.
6.2 What is the goal of cost allocation?
The goal of cost allocation is to assign as many of the costs an organization has as possible directly to the activities that cause them to ultimately be incurred.
6.3 a. What are the three primary methods of cost allocation?
The three primary methods of cost allocation are the direct method, reciprocal method, and step-down method.
b. What are the differences among them?
The difference between the methods is that the direct method recognizes no intrasupport department services, the reciprocal method recognizes all intrasupport department services, and the step-down method recognizes some of the intrasupport department services.
6.4 a. What is a cost pool?
A cost pool is the dollar amount of overhead services to be allocated. It is made up of the total costs of one support department.
b. What is a cost driver?
A cost driver is the basically the basis for making allocations from a cost pool. This is important because identifying a good cost driver is essential to a sound cost allocation system.
c. How is the cost allocation rate determined?
The cost allocation rate is determined by dividing the cost pool by the cost driver.
6.7 Briefly describe (illustrate) the cost allocation process. (To keep things simple, use the direct method for your illustration.)