Cost Allocation by pptfiles

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									                By
Abdullah AlOraini & Radhi AlHamad
   Why do companies allocate costs?

   How do companies allocate costs?
-   Many decisions are based on costs data.

-   If 90% of the costs are physically traceable,
    cost allocation would be minor issue.

-   Practically. For most of the companies less
    than 50% of the costs are traceable.
   Cost allocation support company’s CMS.

   CMS provides cost measurements for:
   - Strategic decision making.
   - Operation control.
   - External reporting.
   1. To predict economic effects of strategic
    and operational control decisions.

   2. To obtain desired motivation and to
    provide feedback for performance evaluation.

   3. To compute income and asset valuation.

   4. To justify costs or obtain reimbursement.
   Cost allocation is the important part of
    CAS.

   The importance of all organizations is the
    final cost objectives.
   Cost objective:
   - Service department.
    -Producing department.
   - Product or services.
   1- Establish the details regarding
        cost allocation in advance.

   2- Allocate variable- and fixed-
        cost pools separately.

   3- Evaluate performance using budgets for
      each production and service department.
   Include : Energy, labor cost, material.
   Cost Driver: Actual hours of computer
    used.

- variable costs should be allocated as
   following:

Budgeted unit rate X Actual hours of
  computer time used
 Why using budgeted rather than actual?
   Includes: Lease payment, salaries of
    managers, occupancy costs.
    Cost Driver: the amount of capacity required
    when the computer facilities were acquired.
   Fixed cost should be located as following
   - Budgeted percent of capacity available for
    use
     × Total budgeted fixed costs.

   Why using budgeted capacity, not actual?
         Lump-Sum Approach
                  Business   Engineering

Fixed costs per
month
210/700, or 30%   $30,000
of $100,000
490/700, or 70%               $70,000
of $100,000
Total fixed costs incurred, $100,000
Business: 200/600 X $100,000 =         $ 33,333
Engineering: 400/600 X $100.000 =       66,667
Total cost allocated                   $100,000

Total fixed costs incurred, $100,000
Business: 100/500 X $100,000 =         $ 20,000
Engineering: 400/500 X $100,000 =       80,000
Total cost allocated                   $100,000
- Service departments often support other
  service departments in addition to
  production departments.
- There are two popular methods for allocating
  service department costs:

 1- Direct Method.
 2- Step-Down Method.
   Facilities management cost = $1,260,000
   To processing department:
   Total square footage=
    15000+3000=18000.
   (15000/18000) X 1260000= $ 1050000.
   To assembly department:
   (3000/18000)X 1260000= 210,000 $
   Human resource department cost= $
    240000.
   Total employees= 16+64=80.
   To processing department:
   (16/80)X 240000= $ 48000.
   To assembly department:
   (64/80) X 240000 = $ 192,000.
                Facilities      Human         Processing     Assembly        Total
               Management      Resources



Direct
department
                $1,260,000     $ 240,000     $1,000,000     $1,600,000     $4,100,000
costs before
allocation
Step1
                                (9/27) X      (15/27) X       (3/27) X
Facilities
               $(1,260,000)   $1,260,000 =   $1,260,000 =   $1,260,000 =
management
                               $420,000       $700,000       $140,000

Step2                                         (16/80) X      (64/80) X
Human                          $(660,000)     $600,000        660,000
Resources                                    = $ 132,000    = $ 528,000
Total cost
after              $ 0            $ 0        $1,832,000     $2,268,000     $4,100,000
allocation
                       Processing             Assembly
                   Direct    Step-Down    Direct   Step-Down
Direct department $1,000,000 $1,000,000 $1,600,000 $1,600,000
costs
Allocated from
 Facilities        1,050,000  700,000    210,000    140,000
management
Allocated from
personnel           48,000    132,000    192,000    528,000

Total costs      $2,098,000 $1,832,000 $2,002,000 $2,268,000
   Two methods:
   1- A traditional approach.
   2- An ABC approach.
    1. Divide the costs in each producing
    departments.
   2. Assign direct costs to the appropriate
    products, services, or customers.
   3. Select one or more cost pools and
    related cost drivers in each production
    department.
   4. Allocate costs.
                            200 Custom Displays    1.200 Standard Displays
                             Total       Unit         Total       Unit
Parts                      $ 200,000   $1,000.00   $ 600,000    $ 500.00
Direct labor                50,000      250.00      150,000      125.00
Indirect costs ‫ـــــــــ‬
Processing                  312,000    1,560.00     720,000      600.00
department
Indirect costs ‫ـــــــــ‬
Assembly                    517,000    2,585.00    1,551,000    1,292.50
department
                           $1,079,000 $5,395,000 $3,021,000 $2,517,000
   1. Determine the key components of the
    system.
   2. Develop the relationships among
    resources, activities, and cost objectives.
    3. Collect relevant data concerning costs
    and the physical flow of the cost-driver
    units among resources and activities.
    4. Calculate and interpret the new activity-
    based cost information.
Resource Supporting the                                    Allocated
   Processing Activity        Allocation calculation          Cost
Facilities management     $1,000,000 X [15,000/(9,000 +
 department resources        3,000 + 15,000 + 3,000)]   $ 500,000
Human resources
department resources      $540,000 X [16/(10 + 16 + 64)]    69,000
Machines, tool,
mechanics                       $1,200,000 X 70%            840,000
and supplies
Supervisors and                  $400,000 X 10%             40,000
equipment
Total                                                      $1,476,000
                                  Allocated Cost
                       Custom Displays     Standard Displays
Traditional approach      $5,395.00            $2,517.50
ABC approach              $6,175.00            $2,387.50
   - Difficult to allocate.
   - Like: Public relations, President salary,
    Legal services.
   - Cost Driver, Usage , Revenue, Asset, Cost
    of goods sold.
   - Use budgeted sales for allocation.
           Allocation of $100,000 Central Advertising Budget
                                  Mexico                Canada
Forecast sales                   $500,000              $500,000
Allocation based on                50,000               50,000
forecast sales

Actual sales                      300,000               600,000
Allocation based on actual         33,333               67,667
sales
   Joint costs include all inputs of material,
    labor, and overhead costs that are incurred
    before the split-off point.
   Two Methods of allocating cost.
   1. Physical units.
   2. Relative Sales Values.
                                    Allocation    Sales Value
     Liters        Weighting       Of joint Costs at Split-Off
                                                     Point

X   1,000,000   10/15 X $100,000     $ 66,667       $ 90,000

Y   500,000     5/15 X $100,000       33,333        30,000

    1,500,000                        $100,000      $120,000
    Relative Sales
       Value at          Weighting         Allocation
    Split-Off Point                       Of joint Costs

X      $ 90,000       90/120 X $100,000     $ 75,000
Y      30,000         30/120 X $100,000      25,000
      $ 120,000                            $ 100,000
    - A by-product is not individually
     identifiable until manufacturing reaches a
     split-off point.
    They have relatively insignificant sales
     value.
     - Only separable costs are allocated to it.
     - Any revenues from by-products, less their
     separable costs, are deducted from the
     cost of the main products.
   -Sells sawdust from lumber company.
   - Sawdust sales= $ 30,000.
   -Separable cost = $ 20,000.
   -The difference between sawdust sales and
    separable cost (10,000), will be deduct
    from the cost of lumber produced.

								
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