Test Two Notes

Test Two Notes - Chapter4Notes 15:13 CostAllocations: Costs,, o Costsallocations(averagecosts) serviceswithinfirms,allocat

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Chapter 4 Notes 15:13 Cost Allocations: Justification and Properties Costs, both fixed and variable, are  allocated  to units of output. o The costs allocations are just average costs. Costs allocations (average costs) are used to “price” intermediate goods and  services within firms, allocate (apply) factory overhead to finished goods, and  track cost flows through the production process.  Allocations, or the fixed and variable cost analysis underlying them, are also  used in solving scarce resource problems, evaluating product line profitability,  evaluating (accepting or rejecting) special orders, and evaluating  performance. Demand for Prices to Ration Resources     Most firms charge user departments for use of intermediate goods and  services. Essentially, any good or service obtainable in markets is also produced  internally by some firms.  o The service providers can be either cost centers or profit centers. Why do some firms charge for internal goods and services at all? o Cost accounting systems are  costly  to operate. o Since firms continue to operate cost allocation systems, there must be an  offsetting benefit that exceeds the processing cost. o This benefit is that price systems provide efficient signals that induce both  buyers and sellers to increase value. Economic systems ration scarce resources, and price systems ration  resources efficiently. Buyers who value a resource most are willing to pay the highest price,  so resources flow to the buyers who value the resources most. o communist systems “ration by waiting”, rather than “ration by price.” Tales of Soviet citizens standing in line for days to buy toilet paper  illustrate the point. Therefore, resources flow to the people who value their time least,  rather than those who value the resources most.  Rationing by waiting generates black markets, which are usually illegal.
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o Rationing by price and rationing by waiting are both inefficient. Price systems are an efficient way to ration scarce resources. o The “right” price ensures that supply and demand are equal; there is no  excess demand or excess supply. To ration scarce resources within firms, firms need an internal price system. o Firms must charge user departments for goods and services. o Cost allocations are the internal “prices.” In equilibrium, holding supply fixed, demand and price should move in  the same direction. o
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This note was uploaded on 10/05/2010 for the course ACC 17706 taught by Professor stahl during the Spring '10 term at LSU.

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Test Two Notes - Chapter4Notes 15:13 CostAllocations: Costs,, o Costsallocations(averagecosts) serviceswithinfirms,allocat

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