Question

Which of the following statements is true about the direct method of allocation?

a.In the direct method of allocation, all costs of the support departments are allocated directly to producing departments in proportion to each producing department's usage of the service.
b.In the direct method of allocation, the unallocated cost of the support departments is included in the miscellaneous expenses.
c.In the direct method of allocation, the support departments are ranked as per the percentage of service provided to other support departments.
d.In the direct method of allocation, all the support department costs are added and allocated to the producing department in the ratio of the number of the units produced.

Answer 1

The true statement about the direct method of allocation is that support department costs are allocated directly to producing departments based on usage. Allocative efficiency reflects the balance between the supply and consumer demand and the price being equal to the marginal cost of production.

Step-by-step explanation:

The direct method of allocation pertains to the process of cost allocation in managerial accounting. Regarding the statements provided, the correct one is: "In the direct method of allocation, all costs of the support departments are allocated directly to producing departments in proportion to each producing department's usage of the service." This method does not involve the allocation of support department costs to other support departments; instead, it transfers all costs directly to the producing departments based on predetermined criteria, typically the extent of their usage of the support services.

Allocative efficiency relates to the optimal distribution of goods and services in a society, reflecting the societal preferences on the production possibility frontier. It is achieved when the supply matches the consumer demand and the marginal cost of production is equivalent to the price, denoting that the social benefits are balanced with the social costs.