Acc550-ch 14 - ACC550 CHAPTER 14 COST ALLOCATION, CUSTOMER...

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ACC550 CHAPTER 14 General discussion of cost allocations The first few pages of this chapter deal with the general purposes of cost allocations and the different criteria used to perform such allocations. The concepts discussed here are essentially the same as we discussed in our coverage of activity based costing in chapter 5. Again, we are looking to assign indirect costs to cost objects by finding cause and effect relationships between costs and cost drivers. Costs that share similar cost drivers are grouped together into homogeneous cost pools and allocated to cost objects using the same cost driver activity base. This should all sound familiar. When a cause and effect relationship cannot easily be determined, we can allocate costs based on benefits received. For example, corporate advertising costs could be allocated to individual divisions based on revenues. Here, we make an assumption that revenues are the end result of advertising costs. A common cost allocation decision involves the relationship between corporate headquarters and individual divisions. The costs incurred by a corporate headquarters can be treated three different ways. First, all corporate costs can be allocated to divisions. This follows the philosophy that corporate costs are incurred to support divisions and should therefore be assigned to divisions. Second, no corporate headquarters can be allocated to divisions. This follows the philosophy that division management has no control over corporate costs and should therefore not be held accountable to those costs. Third, a portion of corporate costs can be allocated to divisions. Typically in such cases, only those corporate costs that provide an explicit benefit to divisions are assigned to divisions. Examples include corporate human resources and corporate payroll. Again, the methodology used to allocate corporate costs to divisions is no different than we learned in ABC costing. Customer profitability analysis 1) Customer profitability analysis involves the comparison of a) Customer revenues i) List price ii) Price discounts b) All costs required to design, produce and distribute to the customer. 2) A customer cost hierarchy helps to a) Identify cost drivers. b) Group customer related activities into homogeneous cost pools. 3) Five typical hierarchy levels a) Customer output unit level costs b) Customer batch level costs c) Customer sustaining costs d) Distribution channel costs e) Corporate sustaining costs 4) Customer output unit level costs a) These are costs of activities related to individual units sold to customers. b) A large customer order will generate more costs than a small customer order. c)
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This note was uploaded on 02/21/2009 for the course ACC 100 taught by Professor Smith during the Spring '09 term at University of Phoenix.

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Acc550-ch 14 - ACC550 CHAPTER 14 COST ALLOCATION, CUSTOMER...

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