Cost Allocation

follow storage every last(predicate)ocation for indirect m unmatchedtary values Cost family Set of damages that ar appended together before being allocated to court objects on several(prenominal) common basis Cost Driver/ parcelling base Cost Object Cost Driver Rate = heart and soul Costs in Pool/ full(a) Quantity of Driver Where full(a) bill of number one wood = practical capacity of number one wood Cost of oversupply capacity = Cost Driver Rate * Excess capacity mold knock sum up make up per unit of the parceling base apply to charge knock to products. shape knock enumerate=Estimated strike/Estimated allocation base One-stage allocation system Single make up puddle inviolate manufacturing overhead * Single allocation base / salute driver- take up materials cost/ occupy grasp hours/ Direct labor cost/ Machine hours/ etc. * Predetermined viewgraph Rate or Burden rate = bring manufacturing overhead / X * Where X = Total Direct materials cost or Total Direct labor hours or Total Direct labor cost or Total weapon hours used * Total product be of A = Direct materials cost + Direct labor cost + allocated overhead cost where allocated overhead = Burden rate * of machine hours used by ADisadvantage Assumes that all products consume direct labor (or other driver) and overhead in the same proportion. Two-stage allocation system and Product Costing smasher be ar divided into unalike cost kitty-cats. Each cost family has a cost driver (allocation base). * Split manufacturing overhead into more(prenominal) than one cost pussy (e. g. create 2 cost pools whose cost add up to entirety manufacturing overhead cost) * Calculate burden rate Cost pools Cost Drivers command overhead link up to direct materials Direct materials Cost Overhead tie in to to direct labor hours Direct labor hours Overhead related to direct labor cost Direct labor cost Overhead related to machine-hours Machine hours Advantage * Provides most accurate cost development * Cost system captures differences in the way overhead is consumed in different parts of the production process Disadvantage * Cost of the system redesign may be high. The selection of an optimal cost system is ground on trade-offs between increased accuracy and the cost of system redesign.Predetermined Overhead Rate or Burden rate = Overhead cost related to direct materials/ Total Direct materials cost OR Overhead cost related to direct labor hours/ Total Direct labor hours OR Overhead cost related to direct labor cost/ Total Direct labor cost OR Overhead cost related to machine hours/ Total machine hours used Total product be of A = Direct materials cost + Direct labor cost + allocated overhead cost where allocated overhead = Burden rate per machine hour * of machine hours used by A + Burden rate per direct labor $ * direct labor cost of ADepartmental overhead rate Rates base on a departments direct and indirect overhead be and some measure of the departmen ts exercise, such as the departments machine hours. Departmental rates are more accurate than plant-wide rates when a company manufactures diverse products requiring a variety of processes. Allocate overhead on a plantwide basis victimisation machine hours Burden rate per machine hour = total overhead cost of all departments/ total machine hours used by all departmentsAllocate overhead using department rate with machine hours as the allocation base Burden rate per machine hour = Overhead costs of a department/ Machine hours used by that department activeness Based Costing 1. Identify activities, and identify overhead costs for each activity 2. Identify the cost drivers for each activity 3. Compute cost driver rates (cost per driver unit)= activity overhead cost/ total driver volume 4. Allocate costs to cost objects Overhead costs allocated to A = cost driver 1 rate * cost driver 1 volume for A + cost driver 2 rate * cost driver 2 volume for A first rudiment Costs and Benefits Costs are very high if You have a large number of activities, none of which dominate You do not know/understand your activities Your activities are ever-changing quickly and dramatically You do not have any signifier of ERP system in place Benefit * Detailed Cost break-down at activity level can manage costs at activity level, or charge customers for their activity use * More accurate development * Flexibility in Choice of Cost objects * Flexibility in Types of Companies/Organizations this whole works for such as Product companies, Services, Non-profitsSymptoms of faulty accounting system The subject of bids is difficult to justify Customers do not complain about charge increases Competitors prices appear unrealistically low Profit margins are hard to explain Products those are difficult to produce show high profits available mgrs want to drop products that appear profitable Some departments are using their own accounting system The accounting department spends a dance band of time on special projects Product costs change because of changes in financial reporting RegulationsCommon Cost Allocation Systems Plantwide/Company-wide Cost System (Peanut-Butter) typically 1 cost pool burden rate ground on 1 cost driver (1 stage) Department Allocation method acting Typically 1 cost pool per department cost driver for each department (testing rooms in Seligram) 2-stage Cost System with reproducible Cost Pools Typically at least 1 cost pool per department, yet might split more carefully (For example, what if Seligrams electronic and mechanical testing had all been in 1 room? ) Direct cost can be directly traced to specific cost objects, in an economically feasible way. Example direct materials, direct labor, etc. * One-stage cost system (Peanut butter) pool all indirect costs together, use a single cost driver. inaccurate. * The Seligram case in the first costing system, burden was grouped into a single cost pool, they use a single cost driv er testing and design labor dollars * Two-stage costing system first stage, costs are traced/allocated to cost pools (at least two).Second stage, costs are allocated from cost pools to cost objects using cost drivers. * The more cost pools, the more accurate your cost numbers, but the more costly to track. * The Seligram case the costing system proposed by the accounting managers is a two-stage system. * Stage 1 burden is traced to two pools (1) burden related to admin and proficient functions (2) all other burden costs * Stage 2 pool 1 will be charged on a rate per direct labor dollar. Pool 2 would be charged based on machine hours. Sometimes firms are already using two-stage costing, but they need to add immature cost pools. * Add a new category * Divide current pool into subcategories * The formula for cost driver rates total costs in pool / total quantity of driver * Activity-Based Costing system 1 cost pool for each major activity performed in the company. * Idea is that res ource usage is same within each activity, so the allocation is more accurate. * Disadvantage of ABC system costly. * When NOT to use ABC system when activities change quickly, when there is no ERP system in place