Cost Allocation Flashcards
What is break even?
When sales/income cover what you have of expenses to produce these sales (“go to zero”)
What is a Cost-Volume-Profit (C-V-P) Analysis?
An analysis of breakeven point based on costs, volumes and profits.
Cost allocation is?
The assignment of indirect common or joint cost to different departments, processes or products.
What are the steps for cost allocation?
- Define cost object (e.g. intranet users)
- Accumulate common cost to be assigned to cost objects (e.g. cost of hardware & software, utilities, personnel,…)
- Choose a method (driver) for allocating common costs/overheads (we need to approximate the way in which cost objects consume common resources, f. ex. time spent using intranet)
What is overhead cost?
The indirect costs of an organization. Like all the costs off having an employee employed like rent, electricity, utilization of rooms, computers etc.
What is overhead cost?
The indirect costs of an organization. Like all the costs off having an employee employed like rent, electricity, utilization of rooms, computers etc.
What is overhead cost?
The indirect costs of an organization. Like all the costs off having an employee employed like rent, electricity, utilization of rooms, computers etc.
What is the break-even formula?
QBE = FC÷CM
FC: Fixed Cost
CM: Contribution Margin (that is: Selling price pr. Unit – Variable Cost pr. Unit)
What is ABC cost allocation?
Activity based costing (ABC) assigns manufacturing overhead costs to products in a more logical manner than the traditional approach of simply allocating costs on the basis of machine hours.
It allocates cost through estimations of cost drivers.
Expensive but precise.
What pitfalls can cost allocation have?
- Can affect external reporting
- May induce too high consumption of certain goods provided internally (if you know that something is nice and cheap, you might keep it running, increasing the overall cost)
- It’s hard to get very precise because these are very intangible.
- Can affect interactions in the firm.
What are 4 main reasons for doing cost allocation?
- External reporting requires allocation
- Reimbursement, royalties
- Decision making and control within the organization
- Act as proxies for externalities and long-run marginal cost (opportunity cost)
What does cost allocation work as?
A tax system.
* Increasing cost allocation rates (or taxes) decrease profits reported by the center bearing the allocated costs.
* Increasing the cost allocation rate (or taxes) motivates managers to use less of the resources.
* The overhead rate is a proxy for externalities that are hard to measure.
What are externalities?
An outside effect that we didn’t pay for or initiated can be negative and positive.
What types of cost allocation are there?
- Absorption costing (full costing)
- ABC (activity based costing)
What is absorption costing?
- Also called full costing
- Expenses are allocated to manufactured products/usage. Think: “The more you use this, the more it costs you” – this has some issues (think sales needs to send emails, but are priced for it as well – now they start calling instead and need the information in writing)
- Simple but dumb
- Cheap!
How is full costing/absorption costing calculated?
- Expenses are allocated to manufactured products/ direct labor hours, materials or machine hours.
An overhead rate is calculated at the beginning for the year based on total overhead cost and estimated volume (think use in the computer hard drive example))
