1.Many firms dedicate separate production facilities to each of their product lines. What are some of the advantages and disadvantages of this approach from the perspective of allocating costs for decision making?
2.Suppose a firm currently makes three products using the same capacity resources and that one of the products has a negative profit margin. Identify two reasons why the firm may wish to continue making the unprofitable product.
3.“Depreciation is nothing but an allocation of the purchase price over different accounting periods.” Do you agree with this statement? If so, identify the elements of cost allocations (cost pool, cost objects, cost driver, denominator volume) Implicit in the computation of depreciation. If not, identify differences between cost allocations and depreciation.
4.Assume a firm’s overall inventory has increased during the period. Is it possible for income under variable costing to exceed income under absorption costing? (Hint: think about multiproduct firms or changing prices and inventory layers).
5.The IRS exempts qualified charities from income taxes, provided the income relates to their charitable activities. The provision exists because many charities conduct activities deemed unrelated to their core charitable mission. For example, a museum may earn income on its cafeteria sales or by renting out its lobby for a corporate reception. Such unrelated business income is taxable. Determining the portion of income that is taxable often involves extensive cost allocations. How might a charity be strategic in its choice of allocation methods? (Hint: An academic study found that nearly 30% of sampled charities reported exactly $0 as their unrelated business income.)