Cost Allocation“The idea of the necessity of the cost allocation has been argued both pro and con very convincingly.” What is the true cost of a service or product? We know that cost allocation is necessary for decision-making, evaluation of resources and services, and GAAP reporting. The full cost of a product must include fixed and variable costs not only for management but also as a GAAP requirement. In contrast, if we didn’t show the full cost of a product or service, how could we allocate for all resources? Resources which were not allocated for would then take on a zero based cost. By knowing the full cost of a product management is able to perfect their decision making by seeing the whole picture and evaluating their usage of resources through the allocation of charges. A long-run picture can only be seen when all costs are allocated for. Additionally, a business needs to understand their cost behavior. Understanding the cost structure of an entity allows a manager to anticipate performance. Cost structure has a
This is the end of the preview.
access the rest of the document.