Required: Assume that you work for a Fortune 500 level company at corporate headquarters. Due to your excellent performance and the fact that the CEO of your firm noticed that you had listed on your resume' that you had taken a graduate-level Management Accounting course from a reputable institution, the CEO has sent you an e-mail containing a request that you respond to two very important questions. The CEO needs your answers within a relatively short time frame of making the request.

The questions are:

1. What criteria should the operating units (producing segments of the firm) use when deciding whether to use job-order costing or process costing approaches for costing the products they produce?

2. For costs that cannot be traced, what tests should a cost allocation basis ( not the cost allocation method) meet before that cost allocation basis (direct labor hours, machine hours, direct labor cost, etc.) can be used to allocate costs in the organization? In other words, what are the criteria that make a certain measurement or basis used to perform cost allocation a good one to use? Be sure to indicate as well whether your recommendations are universally applicable or situation-specific. (Please note that this question is not asking about the choice of allocation method (direct method, step/sequential method, or reciprocal/algebraic method) of cost allocation (that will be covered next week in the Appendix to Chapter 5). Rather, the question is asking about the choice of basis (direct labor hours, direct labor costs, machine hours, number of units shipped, number of machine setups, etc.) to be used as a gauge or measure of how much corresponding cost to assign.