Cost Allocation Flashcards
Costs should be allocated to each product line based on the costing information
Also known as…
Cost drivers
If a product line has a loss it indicates that the product line does not…
Cover their full costs
What types of items should be excluded from cost allocations?
Taxes, administration, gain/loss on investment, anything that doesn’t relate to the division or product line
Because they are irrelevant - but you must support why they are excluded
What are some qualitative considerations regarding cost allocations?
- problems with allocation formulas
- when the cost allocations were last updated
- appropriateness of allocation base used
- fairness of allocation
What are the steps for performing a cost allocation?
1 - determine basis to analyze (such as certain divisions or product lines)
2 - calculate/ recalculate cost allocations by applying appropriate cost drivers
3 - interpret the results (consider qualitative points and compare to target profit, required return, etc.)
4 - conclude on the analysis (consider impact on company, customers, future earnings, fixed costs, etc.)
Activity-Based Costing
Used to allocate overhead costs to products, focusing on major production activities
Create an overhead cost pool for each activity, which is then assigned to cost objects based on the number of activities that the cost objects require for completion
Cost drivers used to allocate
If you are asked to determine the impact on the company’s profitability from removing a product line which tool should you use?
Consider variable (avoidable) and fixed (unavoidable) costs by calculating contribution margin per product line or division
What are the 6 possible costing methods?
1 - joint product (by-product) costing
2 - process costing
3 - job order costing
4 - service department cost allocations
5 - direct (variable) costing
6 - full (absorption) costing
When is joint product (by-product) costing used?
Arises when two or more products are produced from common inputs or processes
Manufacturing costs are common to the split-off point
Can be allocated based on
- physical output method
- sales value at split-off
- NRV
- constant growth margin net realizable (based on each product’s share of the final sales value where GM % across products is the same)
When is process costing used?
Used when manufacturing involves a single, homogenous product that is produced for long periods at a time
Materials and conversion costs (labour and OH) are accumulated and divided by the equivalent units produced to get a cost per equivalent unit
WIP and equivalent units calcs are required
Use FIFO or weighted averagge method to incorporate costs
Normal spoilage recognized as part of goods sold
Abnormal spoilage expensed as a separate “loss from abnormal spoilage”
When is job order costing used?
When manufacturing involves many different products or jobs being produced
Also used in service industries
Costs (materials, labour and OH) tracked on a job cost sheet
Normal spoilage is recognized as part of goods sold
Abnormal spoilage that is unique to a particular job is part of the cost of the job and remains as part of WIP for the job whereas abnormal spoilage from out-of-control operations are expensed as a separate “loss from abnormal spoilage”
What are the methods used to allocate costs based on service departments?
- Direct - directly to operating departments
- Step - start with the service department that provides the most services and then operating departments
- Reciprocal - simultaneously
What is direct (variable) costing?
Only variable costs (DM, DL and VOH) are treated as product costs and included in inventory
Fixed MOH is treated as a period cost and expensed as incurred
What is full (absorption) costing?
All costs of production are treated as product costs and included in inventory
What are the steps for costing?
1 - determine which costing method to apply using case facts
2 - apply appropriate costing method to determine cost (showing calculations and assumptions clearly)
3 - conclude on the analysis (consider the impact of results on company)
