Cost Allocation Flashcards
Why is knowing accurate costs important?
Pricing Decisions Determining Profitability Reporting Profitability Internal decision such as if to continue Allocating Costs
Why would we want to allocate all costs?
External Reporting
Third Party Reinbursement (Cost-plus contracts)
Decision Making & Control (Determine true profit; Transfer Pricing)
Cost Center Control:
Labor
Materials
Supplies
Cost Center Goal:
Minimize cost and/or max output
Profit Center Control:
Pricing
Labor
Materials
Supplies
Profit Center Goal:
Profit
Investment Center Control:
Investment
Labor
Materials
Supplies
Investment Center Goal:
ROI
What ways could we allocate costs?
Number of orders Amount of products COGS of products Number of shipments All of the above, but based on activity
If you are allocating costs what don’t you allocate and why?
Fixed Overhead Costs; we will still incur the cost whether we cancel a product or not.
Transfer Pricing
The price that one internal unit pays another internal unit for a product or service.
Methods of Transfer Pricing
Average cost or projected average
Variable Cost
Market Price
A mix
Activity Based Costing
Attempts to identify the drivers of costs.
If implemented correctly, won’t be exact, but close…if so it’s a good resource.
Advantages of Activity Based Costing
Increases the percentage of costs that can be directly tied to individual products, individual suppliers, and individual customers.
Provides a better understanding of what drives costs so business can improve.
Disadvantages of Activity Based Costing
Costly to implement.
Accuracy often questioned.
Based on past so may not predict the future.
May be out of manager’s control.
