Primary allocation concerns include identification of the user of the service and purpose of that use. Table 22-2 lists service pool examples. Table 22-2: Service Pool Examples Copy center Business data processing Photographic services Reproduction services Art services Technical data processing services Communication services Facility services Motor pool services Company aircraft services Wind tunnels Scientific computer operations Figure 22-2 shows the secondary pool distribution of a service center, whose costs may be allocated based on the number of copies reproduced. Figure 22-2: Example of Secondary Pool Distribution The cost of a copy center are allocated based on the number of copies reproduced. A copy of a manufacturing drawing might be charged to manufacturing overhead. A deliverable copy of a research report prepared for the government might be charged as a direct cost. Remember that the firm must clearly define how service center costs will be allocated. Defining the circumstances related to each different type of ac- counting treatment is particularly important. Clear definition will help avoid double charging that occurs when the firm charges a service center cost as a direct cost while charging the same or similar cost as an indirect cost. CON 170: FUNDAMENTALS OF COST AND PRICE ANALYSIS 22-8 © Management Concepts. See inside front cover for additional information.
126.96.36.199.2 Indirect Allocation Base An indirect cost allocation base is some measure of direct contractor effort that can be used to allocate pool costs based on benefits accrued by several cost objectives. It is used to spread the indirect pool costs across all of the items or services the company sells. Examples of typical bases are: production costs; direct labor hours; direct labor dollars; number of units produced; and number of machine hours. 188.8.131.52.2.1 Analyzing Possible Allocation Bases The type of base determines whether the indirect cost rate will take the form of a percentage or a dollar rate per unit of measure. The following are some common bases that could be used in manufacturing indirect cost allocation: Dollars per Direct Labor Hour = Pool Dollars Direct Labor Hours Percent of Direct Labor Hours = Pool Dollars Direct Labor Hours × 100 Dollars per Unit of Production = Pool Dollars # of Production Units Dollars per Machine Hour = Pool Dollars Machine Hours The pool is always going to be dollars, but base can be dollars, hours, etc. If both pool and base are dollars, you will need to multiple by 100 to get a percentage. Whatever the allocation base, the larger a contract’s share of the allocation base for the accounting period, the larger the contract’s share of the related indirect cost. 184.108.40.206.2.2 Selecting an Allocation Base When selecting an allocation base for the indirect cost pool, firms consider the type of indirect costs in the pool and whether the base will provide a reasonable representation of the relative consumption of pooled indirect costs by direct cost activities. Each allocation base should be representative of the breadth of
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