Chapter 10- Process Costing and Cost Allocation Flashcards
Cost Based management approach
- charge internal customers nothing for support services and recover the costs of the services from general revenues.
- Charge the costs of support services provided to using departments and possibly recover the costs from these internal customers. a user department or internal department would accept support services only if the value of those services meets or exceeds their cost to the department.
Production departments
Provide services directly to customers or the public.
Support-service departments
Provide support services to each other and to the production departments.
Support-service costs
Costs of the resources supplied by an organization to provide the support services. This costs include the costs of personnel and the equipment, facilities, and supplies these personnel need to provide the types and levels of support services that the organization desires.
Cost allocation
Measure the charges from support-service departments to production departments.
use of Cost Allocations
- Required Reporting: Tax regulations and external financial reporting require allocating manufacturing overhead to the units produced.
- Cost-based Contract: Obtaining complete and proper levels of reimbursement requires allocating all allowed costs to the government contract, research work, or training activity.
- Behavior Influence: Managers often allocate costs to influence behavior. Allocating services costs to other departments for services provided gives managers of these other departments incentives to control their use of support services.
Process of Allocating services costs systematically
- Identify the costs to be allocated to internal customers.
- Choose the appropriate cost-allocation base and rates
- Select and use a cost-allocation method
- Determine whether the cost allocations achieve the desired results.
1- Identify the Costs to be allocated to internal customers
Organizations separate support-service costs by department into separate cost pools, which are the budgeted or actual spending amounts for distinct sets of resources.
Purpose of Cost Allocation
allocate support-service department costs to user departments based on some measure of the user department’s use of resources.
Only resources used should be allocated to user departments because users should be charged for services that they use.
2- Choose the appropriate cost-allocation base and rates
Cost allocation bases are factors that cost-management analysts use to assign indirect costs to cost objects.
Activity-based costing approach
an effective way to generate accurate cost-allocation bases.
1- Identifying and measuring the activities demanded by internal customers that require support-service spending to obtain cost-driver bases.
2- Measuring each support-service department’s resource spending by level.
3- Dividing support-service resources spending by appropriate cost-driver bases to derive cost-driver rates.
Cost Allocation- Methods
1- Direct method
2- Step Method
3- Reciprocal method
Direct Method
Charges the costs of support-services departments to internal customers without making allocations among support-service departments. All support-service cost allocations go directly to production departments.
Limitations of the Direct Method
criticized because it ignores the services that one support-service department provides to another.
Step Method
allocates costs in steps:
- Allocates costs from the support-service department with the largest proportion of its total allocation base in other support-service departments to other support-service or production departments.
- it allocates costs from other support-services departments.
- Allocations from support-service departments are made in only one direction: from more general support services to less general support services and production departments.
