chapter 3 cost center accounting Flashcards
task of cost center accounting
allocation of overhead costs
4 requirements when defining a cost center
- homogeneity of cost drivers
- matching cost center and the assignment of responsibility (energy center to electricity procurement)
- completeness and clarity (make it clear)
- cost benefit criterion ( benefits of center have to outweigh costs)
2 categorisation methods when defining cost centers
- define by fuction of department (admin, energy etc.)
- define by how costs are allocated ( indirect cost centers ( energy, maintenance ) direct cost centers ( material, manufacturng etc. ))
3 steps of cost center accounting
- primary cost allocation (allocate to indirect or direct cost center)
- interdepartmental cost allocation (allocate indirect costs from indirect cost centers to direct cost centers)
- allocation of overhead costs (allocate all final costs that are now in direct cost centers to cost objects
in the cost allocation sheet there are primary overhead cists with cost types what step does that refer to ?
first step allocate direct and overhead costs to cost centers
what does secondary overhead costs refer to ?
second step, interdepartmental cost allocation
tasks of primary cost allocation
allocate costs ACCURATELY to cost centers where the respective costs happened
why are there direct cost centers which exist because overhead costs need to be allocated ?
direct cost centers stem from overhead material costs (lubricants, paints)
an example of a direct cost center cost
salary of the head of material warehouse
can allocation of service department costs be synonymous with interdepartment cost allocation?
yes
2 types of cost center ALLOCATION method
direct and step ladder
3 types of cost center COMPENSATION method
credits /debits, (predefined TP, end up with levy) reciprocal iterations, reciprocal equatiosn
which is simpler, the allocation methods or compensation methods
allocation bc they just shove it all to direct centers
assign : pragmatic approach, heuristic approach (sufficient but not perfect) and mathematic (correct) approach to the three compensation methods
credit/debit pragmatic,
iterations heuristic,
equations mathematical
do TP be recalculated periodically for reciprocal method based in equations?
yes
equation for reciprocal method based on equations
total services x TP = primary cost + (services you use from others x their TP (cost of using other serices))
concept of reciprocal method on equations
find TP by solving system of equations
what three methods all do all internal internal exchanges of services (so direct and indirect)
all compensation methods
equation for interation method
sum of costs experienced by cost center divided by the services to all others ( thats why you minus your own consumption)
so sum of costs experiences by cost center include the primary costs (and in the next iteration only) the costs the first iteration has imposed on you
credits and debits method
TP already exist, accuracy based on how well TP are. then have a levy at the end.
when is step ladder exact?
when exchange of services go only in one direction
do TP have to be recalculated periodically for step ladder?
yes
what happens once you have found the TP of energy in step ladder?
once you have done energy, energy doest exist anymore so all the services energy used up have to be subtracted
how does step ladder relate to iterations method?
iterations spread it everywhere, step ladder spreads it only to the right, and then the center ceases to exist
so same equation: total costs (primary and costs you were given by previous center spreading its cost) / services you gave to others (minus your own obviously and minus cost centers that dont exist anymore)
direct method, how does it relate to exchanges of services betnwee indirect cost centers
no consideration at all, you find TP by doing primary cost / services given ONLY to direct cost centers
completely skip over indirect cost centers services given
recording effort if you use direct method
only recost intenal exchanges of services in direct cost centers, dont record indirect cost centers.
so all TP have to be recalulcuated periodically in all methods except ?
methods od credits and debits (bc they are predefined)
also iterations we dont really need T bc we just shove them around
2 only things you need for direct method
primary overhead costs of indirect cost centers, and services used in direct cost centers
when is direct method exact?
if no exchange of services exist in indirect cost centers
when do you find overhead rates for costing )
after you allocated overhead costs from indirect to direct cost centers
how do we find overhead rates
by choosing correct allocation base (normally a direct cost)
easy explanation of getting overhead rate (meaning how much
take final overhead for each direct cost center, choose a good allocation base (mostly a direct cost) then find how much overhead is in percentage to direct cost.
why do we need overhead rates ?
if we have a percentage of how much overhead is in comparison to real direct material costs, then for individual product costing, we can add overhead amount that is fair
so 15 materail cost, and 10% is usuallly overhead rate for material, then we add 1.5 $ for the overhead amount added.
