Int. Acc. MA LECT 3: Cost allocation part 1: Chapter 5 allocation for…
Int. Acc. MA LECT 3: Cost allocation part 1: Chapter 5 allocation for indirect costs
Recap lect1: costs and cost terms
Recap lect2: income effects of stock-costing methods
often comprise a sizable percentage of the costs assigned to cost objects.
describes the assigning of indirect costs to the particular cost object.
are related to the particular cost object but cannot be traced to it in an economically feasible way.
Emphasis allocation of costs
1. purposes for allocating indirect costs to cost objects
Importance of cost allocation
If costs are
not accurately calculated, a business might never know which products are making money
and which ones are losing money.
important because it is the
through which costs incurred in producing a certain product or rendering a certain service is calculated.
cost are misallocated
, a business may be
charging wrong price
to its customers and/or it might be wasting resources on products that are wrongly categorized as profitable.
Allocating indirect costs from one department to another (I)
the costs of a department will include costs allocated from other departments
when allocating costs from one department to another
1. Single-rate cost allocation method:
No distinction between fixed and variable costs
: Pooling all costs in one cost pool
Allocate them to cost objects using the same rate per unit of the single allocation base
2. Dual-rate cost allocation method:
Distinction between fixed and variable costs
: Classifying costs in one cost pool into two subpools: variable and fixed
Different allocation rate/ base for each subpool
Discussion :SINGLE- AND DUAL RATE
low cost of implementation, no
differentiation between fixed and variable costs
a less precise cost allocation
: precise cost allocation
: costly implementation