Chapter 14Cost Allocation.ppt

Chapter 14Cost Allocation Cost Allocation Cost allocation is the process of assigning indirect costs to cost objects Four Purposes of Cost Allocation 1. To provide information for economic decisions 2. To motivate managers and employees 3. To justify costs or compute reimbursement 4. To measure income and assets for reporting to external parties Pages 529 - 530 Criteria for Guiding Cost Allocation Decisions Cause and effect allocate based on the variable or variables that cause cost to be incurred Benefits received allocate costs among the beneficiaries in proportion to the benefits each receives Fairness or equity allocate costs in such a manner as to be 揻air?or 搑easonable?for both parties Ability to bear allocate costs based on who can best absorb them Pages 530 - 532 Methods of Cost Allocation Single rate allocate costs to cost objects using a single rate rate = manufacturing overhead costs / labour hours Dual-rate separate costs into cost variable and fixed cost pools allocate fixed costs as lump sums based on long-term usage allocate variable costs based on a single variable cost rate Budgeted versus actual allocations most firms allocate at budgeted rates based on actual usage Pages 536 - 539 Allocating Support Department Costs Direct approach allocate support costs directly to operating departments Step-down approach recognize some of the work support departments do for each other allocate support costs to other support departments and operating departments in a pre-determined order Reciprocal approach recognize all of the work support departments do for each other allocate support costs among all departments using their services Pages 539 - 545 Direct Approach to Cost Allocation Support Departments Production Departments Machinery Department Direct costs $400,000 Assembly Department Direct costs $200,000 Plant Maintenance Direct costs $600,000 Information Systems Direct costs $116,000 Page 541 $225,000 $375,000 $10