Unit--2 Allocating Cost to Departments.ppt - Ch-2 Cost Allocations Learning Outcome After completion of this chapter student should be able to discuss

Unit--2 Allocating Cost to Departments.ppt - Ch-2 Cost...

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Ch-2 Cost Allocations
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Learning OutcomeAfter completion of this chapter, student should be able to discussthe process of allocating cost todepartments.
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3IntroductionWe will emphasize the allocation of costs to departmentsalso address the common cost allocationthe joint cost allocations;
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4Why allocate Cost?We allocate indirect costs that can not be easily traced to products, services, etc.Why do managers allocate indirect costs to these cost objects?
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5Purposes of Cost Allocation1To provide information for economic decisions2To motivate managers and other employees3To justify costs or compute reimbursement4To measure income and assets for reporting to external parties
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6CriteriaCause-and-effect: identify the variable or variables that cause resources to be consumedAllocation based on this relation would be the most acceptable by the departments/managers
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7CriteriaBenefits-received:managers identify the beneficiaries of the outputs of the cost objectThe costs of the cost object are allocated among the beneficiaries in proportion to the benefits each receivesHave to convince the managers of departments
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8CriteriaFairness or equity: This criterion is often cited on government contracts when cost allocations are the basis for establishing a price satisfactory to the government and its suppliers.Cost allocation is viewed as a “reasonable” or “fair” means of establishing a selling price in the minds of the contracting parties.
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9CriteriaAbility to bear: This criterion advocates allocating costs in proportion to the cost object’s ability to bear them.An example is the allocation of corporate executive salaries on the basis of division operating income.
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10Cost-Benefit ApproachCompanies place great importance on the cost-benefit approach when designing and implementing their cost-allocation system.The costs of designing and implementing a system are highly visible.The benefits from using a well-designed system are difficult to measure and are frequently less visible.
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11Allocating Costs of a Supporting Department to Operating DepartmentsSupporting (Service) Department – provides the services that assist other internal departments in the companyOperating (Production) Department – directly adds value to a product or service
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12Methods to Allocate Support Department CostsSingle-Rate Method – allocates costs in each cost pool (service department) to cost objects (production departments) using the same rate per unit of a single allocation baseNo distinction is made between fixed and variable costs in this method
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13Methods to Allocate Support Department CostsDual-Rate Method – segregates costs within each cost pool into two segments: a variable-cost pool and a fixed-cost pool.
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  • Fall '18
  • jane
  • Accounting, production departments, departments

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