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Summary lectures 5+6 FA.docx - WEEK 6 – LECTURE 5 (Chapter...

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WEEK 6 – LECTURE 5 (Chapter 5 + 6)CHAPTER 5Four purposes of cost allocation1.Provide information for economic decisions2.Motivate managers and employees3.Justify costs or calculate reimbursement4.Measure income and assets for reporting to external partiesHomogeneous cost pools:- All costs of the activities included in the pool have the same or similar cause-and-effect relationshipbetween the cost allocator and the cost of the activity.Allocating costs from one department to another:- Single rate cost allocation method = one cost pool and one allocation base or rate- Dual rate cost allocation method = two cost pools and two allocation bases or ratesAn operating department add value to a product that is observable by a customer.A support department provides the services that maintain other internal departments in the organization.Support department cost-allocation methods:1.Direct (allocation) method- The support department’s costs are directly allocated to the operating departments based on thebudgeted allocation base for the operating departments.2.Step-down method- This method allows for partial recognition of the services rendered by support departments toother support departments.- Support departments must be ranked in the order in which the allocation is to proceed.3.Reciprocal method- This method allocates costs by explicitly including the mutual services provided among all supportdepartments.- Most accurate method because it takes all relationships into account.Implementing the reciprocal method (3):1.Express support department costs and reciprocal relationships in linear equations.2.Solve the set of simultaneous equations to obtain the complete reciprocated costs.3.Allocate complete reciprocated costs of each support department to all other departments.Allocating common costs:- A common cost is a cost of operating a facility, operation, activity or other cost object that is shared bytwo or more users.Two methods to allocate a common cost:1. Stand-alone cost-allocation method2. Incremental cost-allocation methodJoint-cost situationsmeaning of joint products and by-products terms.

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Term
Spring
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PURPOSES OF COST ALLOCATION

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