A Disadvantage of Allocating Fixed Costs Using a Budgeted Rate

question 15

Multiple Choice

A disadvantage of allocating fixed costs using a budgeted rate and actual usage is that

• A)supplying division 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:

Fair Value

An estimate of the market value of an asset, based on what a knowledgeable, willing, and unpressured buyer would likely pay to a knowledgeable, willing, and unpressured seller in the market.

Commercial Substance

A concept in accounting indicating that a transaction has caused a change in the financial position of the parties involved.

Commercial Substance

A condition in financial accounting where a transaction significantly changes the economic position of an entity.

Book Value

The net value of an asset calculated as total assets minus total liabilities, often used to estimate a company's value.