Unformatted text preview: ine the allocation rate.
Allocation rate =
Total Costs in the Service Center to be Allocated ÷ Total Units of Allocation Basis in Receiving Cost Centers The important point to note here is that the denominator of the formula does not include the units of the allocation basis in the cost center from which the allocation is taking place. Nor, in the stepdown method, does it include
any units from cost centers that already have been allocated. It includes only the units in receiving cost centers. The
reason for this will become clear in the next few examples.
Precision of Allocation Bases. In the context of deciding on allocation bases, it should be noted that increased precision generally requires greater measurement efforts and hence higher accounting costs. For example,
rather than using number of machines to allocate maintenance costs, we could allocate them on the basis of hours
of service. Clearly, while hours of service is a more accurate basis, and would give us a more accurate cost figure,
its use requires a possibly costly compilation...
View Full Document
- Spring '14
- ........., Boston University School of Management, Crimson Press Curriculum Center, Professor of Accounting and Control