Lecture 3_Cost Allocation 1_complete_6perpage

Lecture 3_Cost Allocation 1_complete_6perpage - ACCT3104...

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ACCT3104 Managerial Costing and Control Lecture 3 Cost Allocation I Reading: Horngren Chapter 14 to p.508 (12 th to p 501); Chapter 15 to p 555 (12 th to p 547) 2 Lecture – Overview ± Purposes of Cost Allocation ± Criteria for cost allocation ± Guidelines for Cost Allocation ² Allocation base? ² Allocation based on cost behaviour? ² Allocation of actual or budgeted costs? ² Treatment of interdepartmental services (support)? ± Direct method ± Step-Down method ± Reciprocal method ± Allocation of common costs 3 Cost Allocation ± Assigning indirect costs to cost objects ± These costs are not traced ± Indirect costs often comprise a large percentage of Total (Overall) Costs ~ an inaccurate allocation can have significant costs 4 Purposes of Cost Allocation Four purposes Four purposes of cost allocation: 1 To provide information for economic decisions 2 To motivate managers and other employees 3 To justify costs or compute reimbursement 4 To measure income and assets for reporting to external parties 5 1. Provide Information What economic decisions may require cost allocation information? To decide whether to add a new product To decide whether to manufacture a component part or to purchase it from another manufacturer To decide on the selling price for a product Type of information required? Level of accuracy? 6 2. Motivation ± Managers and employees need to be encouraged to design products that are simpler to manufacture or less costly to service. ± Sales representatives need to be motivated to push high-margin products or services. ± How can cost allocation achieve these?
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7 3. Justify Costs ± It is important to cost products at a “fair”price, especially in government defence contracts. ± A consulting firm that is paid a percentage of the cost savings resulting from the implementation of its recommendations needs to justify the customers costs in order to compute reimbursement. 8 4. Reporting ± Inventory costs must be determined for external financial reporting and for reporting to tax authorities – they require allocation of manufacturing overhead. ± Under GAAP, inventoriable costs include manufacturing costs but exclude research and development, marketing, distribution, and customer service costs. Do these costs need to be allocated? Why? 9 The reason for allocating costs affects the choices of drivers we use Are the ‘capacity costs’ traceable? No need for allocations Need allocations Decision Making Reporting Income Cost-based Reimburse- ment Influencing behaviour Incentives Controllability Dominant influence in the choice of allocation procedure No Yes 10 Criteria for Cost-Allocation ± Cause and Effect – variables are identified that cause resources to be consumed ² Most credible to operating managers ² Integral part of ABC ± Benefits Received – the beneficiaries of the outputs of the cost object are charged with costs in proportion to the benefits received ² Examples?
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This note was uploaded on 08/27/2009 for the course BUSINESS ACCT3104 taught by Professor Sandra during the Spring '09 term at École Normale Supérieure.

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Lecture 3_Cost Allocation 1_complete_6perpage - ACCT3104...

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