Question

Match the following cost allocation method with the taxing illustration.

Answer 1

The question focuses on cost allocation and tax incidence in relation to elasticity of demand and supply. It is demonstrated how inelastic demand can lead to consumers bearing the tax burden, and in markets with elastic demand and supply, lower tax revenue is generated.

Step-by-step explanation:

The question involves understanding the cost allocation method and relates to tax incidence in the context of elasticity of demand and supply. Cost allocation is central to the concept of determining who bears the burden of a tax – consumers, producers, or both. The provided information elaborates how tax incidence is influenced by whether demand or supply is more inelastic or elastic. When demand is inelastic, such as with cigarettes, consumers tend to bear a larger burden of the tax. Conversely, when supply is more elastic than demand, the tax burden shifts more towards consumers. The shaded area in a graph typically represents the tax revenue generated by the tax per unit multiplied by the total quantity sold, and the elasticity of demand and supply determines if imposing a tax will generate low or high revenue.

Answer 2

Cost allocation method: Direct method

Taxing illustration: Assigning the cost of a support department directly to production departments.

Step-by-step explanation:

In the context of cost allocation methods, the direct method involves allocating the costs of service departments directly to production departments without considering any reciprocal services between service departments.

In the taxing illustration mentioned, this method would mean assigning the entire cost of a support department directly to the production departments it serves. This approach simplifies the allocation process but may not account for the interdependence between service departments.

Cost allocation methods play a crucial role in distributing indirect costs among various departments in an organization. The choice of method can impact the accuracy of cost distribution and influence decision making processes.

Understanding the nuances of each method is essential for effective financial management.