45 Comparison of Rates Assembly Finishing Direct method 471 7532 Step down

# 45 comparison of rates assembly finishing direct

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45 Comparison of Rates Assembly Finishing Direct method: 471% \$75.32 Step-down method: 472% \$75.06 Reciprocal method: 467% \$76.45
46 Allocating Common Costs Common Cost – the cost of operating a facility, activity, or like cost object that is shared by two or more users at a lower cost than the individual cost of the activity to each user Three methods for allocating common cost are: 1. Stand-alone cost-allocation method 2. Incremental cost-allocation method 3. Shapley value method
47 Methods of Allocating Common Costs Stand-alone cost-allocation method – uses information pertaining to each user of a cost object as a separate entity to determine the cost-allocation weights Individual costs are added together and allocation percentages are calculated from the whole, and applied to the common cost
48 Example A consultant in Tampa is planning to go to Chicago and meet with an international client. The round-trip Tampa/Chicago/Tampa airfare costs \$540. The consultant is also planning to attend a business meeting with a North Carolina client in Durham.
49 Example The round-trip Tampa/Durham/Tampa airfare costs \$360. The consultant decides to combine the two trips into a Tampa/Durham/Chicago/Tampa itinerary that will cost \$760.
50 Allocating Common Costs How much should the consultant charge to the North Carolina client? \$360 ÷ (\$360 + \$540) = 0.40 0.40 × \$760 = \$304 Therefore, the consultant should charge the international client \$760 – \$304 = \$456.
51 Methods of Allocating Common Costs Incremental cost-allocation method ranks the individual users of a cost object in the order of users most responsible for a common cost and then uses this ranking to allocate the cost among the users The first ranked user is the primary user and is allocated costs up to the costs of the primary user as a stand-alone user (typically gets the highest allocation of the common costs)
52 Methods of Allocating Common Costs The second ranked user is the first incremental user and is allocated the additional cost that arises from two users rather than one Subsequent users handled in the same manner as the second ranked user
53 Allocating Common Costs Assume that the business meeting in Chicago is viewed as the primary party. What would be the cost allocation? International client (primary) \$540 North Carolina client (incremental) \$760 – \$540 \$220
54 Methods of Allocating Common Costs Shapley Value Method  Consider each party as first the primary party and then the incremental party. Compute the average of the two to determine the allocation Primary Party Incremental Party International Client \$540 \$760-\$360=\$400 North Carolina Client \$360 \$760-\$540=\$220
55 Methods of Allocating Common Costs Allocation to the international client = (\$540+400)/2 = \$470 Allocation to the North Carolina client = (\$360+220)/2 = \$290
In the Real World Concern over 29% decline in Ford Sales The chief executive of Ford Motor said European market conditions were a ‘real concern” after the company recorded a 29% year-on-year fall in European vehicle sales and the market

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