A Disadvantage of Allocating Fixed Costs According to Actual Usage

question 59

Multiple Choice

A disadvantage of allocating fixed costs according to actual usage is that

• A) managers may be tempted underestimate usage.
• B) the allocation would capture the cause-and-effect relationship.
• C) variation in usage will result in variances that need to be managed.
• D) changes in one department's usage should not affect another department's allocation.
• E) some organizations offer rewards to managers who make accurate forecasts.

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Definitions:

Uncollectible Accounts

Accounts receivable that are considered unlikely to be collected and are therefore written off as a loss.

Direct Write-off Method

A method used in accounting to write off bad debts when they are determined to be uncollectible, impacting accounts receivable and expense accounts directly.

Recovery of Bad Debt

The process of collecting funds previously written off as uncollectible, generally resulting in an income statement gain the period it's recovered.

Percent of Sales Method

A financial forecasting approach that estimates future financial statements' items as a percentage of projected sales.