Cost Alocation
Join now to read essay Cost Alocation
1. Introduction
Purpose of cost allocation
To predict the economic effects of
Strategic and operational control decisions
To obtain the desired motivation and to provide
Feedback for performance evaluation
To compute income and asset valuations
To justify costs or obtain reimbursements
Types of costs
4. Allocation of Service Department costs
Allocating costs to final product
The Traditional Approach
ABC Costing
6. ABC vs. Traditional costing
Conclusion
Bibliography
1. Introduction
The purpose of this paper is two answer two important questions: Why do companies allocate costs? How do companies allocate costs? It is important for the companies to find the proper method to allocate the costs. Cost allocation is an important issue in many companies because many of the costs associated with designing, producing and distributing products and services are not easily identified with the products and services that are created. It would have been easier for companies to allocate cost if costs were directly traceable with the products and the cost allocation would have been minor issue for the company.
Purpose of cost allocation
In the past and some even today believed that costs are allocated only for accounting purposes. On the other hand many believe that cost allocation is an important segment in the accounting system of the company since it can help companies to value inventory for external reporting purposes, for planning and monitoring the cost of activities and processes, and for various short term and long term strategic decisions. According to the authors of the text book there are four majr reasons why company should allocate costs (Horngem et all, 522-523)
To predict the economic effects of
Strategic and operational control decisions
By having proper cost allocation a company will be able