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Cost allocation, master budgeting, capital decisions

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1. Why is cost allocation imprecise?? Pick one of the different methods we can use, describe it and the pluses and minuses of that method?

2. The master budget contains three types of budgets. What do you think is the cornerstone (or most critical element) of the master budget? Discuss why?

3. Fundamental to the decision-making process is the ability to determine whether a cost is relevant to the decision. Tactical decision making consists of choosing among alternatives with an immediate or limited end in view. It should be noted, however, that short-term decisions can lead to long-term consequences. Tactical decision making consists of choosing among alternatives with an immediate or limited end in view. Tactical decisions can be short term or small scale in nature but must be made so that larger strategic objectives are served. Identify the primary qualities of revenues and costs that are relevant for decision making.

4. There are four primary methods of examining capital decisions - two are discounting methods and two are not. Please pick one of them, explain the method and the pros and cons. Remember; include a discussion on the difference between discounting and non-discounting methods.

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Solution Preview

1. Cost Allocation Method pros and cons: Direct Method

I personally like the direct method for allocating costs from service departments to operating departments.
Pro: It is simple and easy to compute and explain.
Pro: It assigns costs to producing departments based on their use of resources.
Con: It ignores how service departments use indirect resources and thus may lead to overuse by service departments (it seems free to them)

2. Critical element for master budget

The critical element for the master budget is the sales forecast. That is because nearly all of the variable costs are based on the level of activity and the products needed to make the sales forecast. For instance, if the sales forecast indicates that you expect 100,000 units to sell, you need to produce enough or purchase enough to have 100,000 on hand, a store that can handle that level of merchandise, enough cashiers to check out that many ...

Solution Summary

Your discussion is 553 words and two references and discusses two pros one con of the direct method, the critical budget for master budgets, how to discern the relevant sales and costs for a decision, the two discounted methods and the two undiscounted methods, and three pros and three cons of internal rate of return (IRR).