To perform the reciprocal allocation we must set up

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Unformatted text preview: the cost-accounting decisions discussed in the previous section have an impact on costs, they frequently will affect the pricing decision as well. This is especially true in those situations where prices are based almost exclusively on full costs. Of all the decisions discussed in the previous section, the two that typically require the most judgment from senior management are the definition of a cost object and the determination of cost centers. The distinction between direct and indirect costs is largely a matter for the accounting staff. The choice of allocation bases and the selection of an allocation method require some involvement by senior management, but largely with regard to the balance between the precision a particular basis or method provides and the cost of using that basis or method. This is an important decision since some bases require a costly compilation of data, and some methods are more costly to operate than others. Defining the Cost Object Defining an organization’s cost object requires senior management’s judgment about how a given cost object fits...
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