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MANAGERIAL ACCOUNTING SOMNATH DAS COST ALLOCATION A. Overview Costs are often assigned to such cost objectives as periods, processes, programs, departments, and divisions. Ultimately, costs have to be assigned to products. The identification and assignment of costs to departments, products or cost object is called cost allocation - provide a link of a groups of costs to products and or production divisions. - The main purposes of cost allocation are: 1. Facilitate decision making. 2. Measure income and assets for external parties. 3. Justify prices charged to customers for products and services. 4. Cost control / resource conservation 5. Create incentives for optimal resource utilization Main Steps in Cost Allocation 1. Determine the cost objective : a cost objective may be either intermediate, such as a manufacturing department, or final, such as the finished product. 2. Identify and accumulate the costs that pertain to the cost objective (e.g., selected manufacturing and non-manufacturing costs). A Cost Pool is a grouping of individual costs. 3. Choose an allocation base for linking costs to objectives: e.g., direct-labor hours or machine hours. 1
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: There are three main types of allocation: 1. Inter-temporal allocation e.g. depreciation of a long term asset. (cost object=product produced; cost pool=cost of equipment; allocation basis=# of units, expected life in years) 2. Joint cost allocation 3. Common cost allocation Joint Cost Allocation For certain production processes two (or more) products may undergo the same steps before they come to a split-off point and are then finished separately. This situation is common, for example, in the manufacture of chemicals, pharmaceuticals and semiconductors. For product costing purposes it is necessary to assign the production costs incurred during the early stages of joint production to the separate final products Common Cost Allocation: 1. Allocation of Overhead Costs: The problem here is to assign overhead costs to individual products. Specifically, for a standard costing system the task is to determine the standard rates at which overhead is applied. (Up to this point in the course, these rates were always given.) 2. Service Department Cost Allocation: The typical situation here is one where a number of service departments provide services for other departments, called user departments. The costs incurred by the service departments have to be allocated to the user departments, where they may then be allocated to products. This problem becomes fairly complex when there are interdependencies among the service departments, e.g., some service departments cater not only to the user departments but also to other service departments. 2
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This note was uploaded on 11/09/2010 for the course ACC 3313 taught by Professor Ann during the Spring '10 term at Nanyang Technological University.

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