Submitted by: Submitted by getmewings
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Category: Business and Industry
Date Submitted: 12/20/2010 01:17 AM
A cost accounting system collects and classifies costs and assigns them to cost objects. The goal of a cost
accounting system is to measure the cost of designing, developing, producing (or
purchasing), selling, distributing, and servicing particular products or services.
Cost allocation is at the heart of most cost accounting systems.
cost allocation is fundamentally a problem of linking
(1) some cost or groups of costs with (2) one or more cost objectives, such as products,
departments, and divisions. Ideally, costs should be assigned to the cost
objective that caused it.
Linking costs with cost objectives is accomplished by selecting cost drivers.
Major costs, such as newsprint for a newspaper and direct professional
labour for a law firm, may each be allocated to departments, jobs, and projects on
an item-by-item basis, using obvious cost drivers such as tonnes of newsprint consumed
or direct-labour-hours used. Other costs, taken one at a time, are not
important enough to justify being allocated individually. These costs are pooled and
then allocated together. A cost pool is a group of individual costs that is allocated
to cost objectives using a single cost driver. For example, building rent, utilities cost,
and janitorial services may be in the same cost pool because all are allocated on
the basis of square metres of space occupied.
Allocating fixed costs usually causes the greatest
problems.
there are three basic types of cost allocations:
1. Allocation of joint costs to the appropriate responsibility centres. Costs that are
used jointly by more than one unit are allocated based on cost-driver
activity in the units. Examples are allocating rent to departments based
on floor space occupied, allocating amortization on jointly used
machinery based on machine-hours, and allocating general administrative
expense based on total direct cost.
2. Reallocation of costs from one responsibility centre to another. When one unit
provides...