925 the charity might wish to choose procedure that

This preview shows page 3 - 5 out of 50 pages.

9.25The charity might wish to choose procedure that would allocate more costs against non-charity related taxable revenues so as to save on taxes, and use these tax savings for otherpresumably charitable causes.9.26Not really. Strictly speaking, in competitive markets the prices are set by the market forces. It is the firm’s overall profitability that matters. As long as the two products are earning positive contribution margins and more capacity is allocated to the product that makes the more profitable use of capacity, allocation of capacity costs is not necessary. 9.27In many firms (especially service and IT firms), people are the most valuable resource. Getting rid of good talent and people with valuable firm-specific experience just because of incentives arising from a cost allocation procedure can hurt the company in the long run. Should the need arise in the future for similar work force in the future it is a lot morecostly to recruit and train new people to the level where they become as efficient as those who occupied their jobs previously.9.28To avoid being allocated overhead costs based on labor consumption, the product line manager’s natural incentive would be to “outsource” labor intensive activities, even if outsourcing may be costlier from the firm’s perspective. For example, the manager might prefer outsourcing parts with high labor content. Outsourcing reduces labor costs as well as the overhead that is allocated based on labor costs, but it might increase “material” costs because of the higher prices to be paid for the parts. However, the net result on the line profit may be positive. 9.29Yes. From a performance evaluation perspective, the allocated costs will be treated by themanager as if they are variable costs. By finding ways in which to reduce the costs allocated to his/her unit, the manager can paint a better picture of his/her performance. Thus, in making short-term decisions, the manager’s natural incentive would be to not treat allocated costs as fixed costs even if they are truly fixed. 9.30Most governments permit some form of accelerated depreciation of long-term assets to allow higher tax deductions in the initial years of the assets’ lives to induce investment and growth in their economies. As we know, depreciation is, in essence, allocation of an Balakrishnan, Sivaramakrishnan, & Sprinkle – 2eFOR INSTRUCTOR USE ONLY9-3
assets cost over its useful life. Some governments levy taxes on imported foreign goods to protect local industries from foreign competition. This is much like taxing labor via cost allocation to promote automation. Even arbitrary allocations can induced desired behavior so long as these allocations are not used for planning and decision making.

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture