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Assignment of Direct and Indirect Costs
Management Accounting
This document outlines the principles and methods for assigning direct and indirect costs to cost objects. It covers the classification of costs, different costing systems like traditional and activity-based costing, and the process of overhead absorption and allocation, including departmental and plant-wide rates. The document also touches upon inventory valuation and under/over absorption of overheads.
Cost Accounting
Overhead Allocation
Cost Management
22 Questions
Medium
Ages 16+
Mar 20, 2026
About this Study Set
This study set covers Management Accounting through
22 practice questions.
This document outlines the principles and methods for assigning direct and indirect costs to cost objects. It covers the classification of costs, different costing systems like traditional and activity-based costing, and the process of overhead absorption and allocation, including departmental and plant-wide rates. The document also touches upon inventory valuation and under/over absorption of overheads. Every question includes the correct answer so you can learn as you go — pick any format above to get started.
Questions & Answers
Browse all 22 questions from the
Assignment of Direct and Indirect Costs study set below.
Each question shows the correct answer — select a study format above to practice interactively.
1
Costs assigned to a cost object can be divided into which two main categories?
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A
Direct and Manufacturing
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B
Indirect and Non-manufacturing
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C
Direct and Indirect
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D
Manufacturing and Non-manufacturing
2
What are costs that cannot be assigned directly to a cost object because they are common to several cost objects called?
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A
Direct Costs
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B
Prime Costs
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C
Indirect Costs
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D
Variable Costs
3
Which type of indirect cost is used in manufacture and for valuing inventory for external reporting purposes?
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A
Non-manufacturing overheads
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B
Manufacturing overheads
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C
Selling expenses
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D
Administrative expenses
4
An example of non-manufacturing overheads given in the text is:
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A
Direct materials
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B
Direct labour
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C
Accountant's salary
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D
Machine maintenance
5
What is a function or location for which costs are determined called?
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A
Cost object
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B
Cost driver
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C
Cost centre
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D
Cost unit
6
Which of the following is an example of a production cost centre?
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A
IT department
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B
Assembly department
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C
Canteen
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D
Stores
7
Which of the following is an example of a service cost centre?
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A
Processing department
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B
Finishing department
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C
Maintenance department
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D
Mixing department
8
In the context of a plane flight, which cost is most likely a direct cost?
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A
Head office administrative costs
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B
Pilot and aircrew salary
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C
Petrol
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D
Maintenance
9
In the context of a plane flight, which cost is most likely an indirect cost (overhead)?
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A
Meals on the flight
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B
Petrol
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C
Pilot and aircrew salary
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D
Administrative costs of head office
10
The process of charging manufacturing overheads to cost units is called:
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A
Allocation
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B
Apportionment
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C
Absorption
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D
Assignment
11
What does a cost card show?
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A
Total company profit
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B
The cost to make one unit
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C
Sales revenue per unit
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D
Marketing expenses per unit
12
Which traditional costing model uses a single overhead rate calculated for the entire production plant?
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A
Departmental absorption rate
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B
Activity Based Costing
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C
Plant-wide (blanket) absorption rate
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D
Cost centre allocation
13
Which costing system aims for more accurate cost assignment by identifying activities that drive overhead costs?
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A
Traditional costing
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B
Plant-wide costing
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C
Departmental costing
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D
Activity Based Costing (ABC)
14
What is the formula for the Overhead Absorption Rate (OAR)?
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A
Activity level / Production overhead
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B
Production overhead / Activity level
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C
Budgeted overhead / Actual activity level
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D
Actual overhead / Budgeted activity level
15
Businesses typically estimate or pre-determine their OAR at the start of which period?
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A
Month
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B
Quarter
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C
Year
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D
Week
16
Normal costing includes predetermined overhead rates, whereas actual costing uses:
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A
Budgeted overheads
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B
Estimated activity levels
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C
Actual overheads
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D
Standard costs
17
What is a benefit of using an estimated (pre-determined) OAR over the actual OAR?
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A
Product cost calculations are delayed
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B
Overhead rates may fluctuate significantly
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C
Allows for timeous price quotations
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D
Costs are allocated less fairly if production varies
18
According to IAS 2 Inventories, for inventory valuation in external financial reports, what types of costs are assigned to products?
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A
All costs
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B
Non-manufacturing costs only
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C
Manufacturing costs only
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D
Direct costs only
19
Manufacturing costs consist of direct material, direct labour, and what else?
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A
Selling expenses
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B
Administrative overheads
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C
Manufacturing overhead
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D
Non-manufacturing overheads
20
In a departmental overhead rate system, how are overhead rates calculated?
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A
For the organization as a whole
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B
Per department
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C
Based on total company resources
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D
Using a single activity basis
21
Which method of reapportioning service department costs ignores inter-service department work and only allocates to production departments?
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A
Repeated distribution method
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B
Simultaneous equation method
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C
Direct allocation method
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D
Reciprocal method
22
Which method of reapportioning service department costs recognizes all inter-service department work?
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A
Direct allocation method
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B
Specified order of closing method
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C
Repeated distribution method
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D
Simultaneous equation method
