Management Accounting chapter 12

The goal of an organization is:

Achieve the objectives that prompted the creation of the organization

Cost allocation

Process of assigning indirect costs to cost objects

Indirect costs

Common costs of shared facilities or services

Cost objects

(Can be) departments benefiting from services or time periods when services were provided

Cost allocation process steps

Cost pool identification, choose a cost allocation base and rate, select the cost-allocation method, and determine if the cost allocations achieve the desired results - if not, start again

Cost pools

Actual or budgeted spending amounts for distinct sets of resources

Direct method (cost-allocation)

Costs of services between the service departments are ignored and all costs are allocated directly to production departments

Step method (cost-allocation)

Considers some interactions among service departments, from highest to lowest amount of service delivered, without allocating costs back

Reciprocal method (cost-allocation)

More torough in considering interactions among service departments

Which methods are most accurate

ABC and reciprocal methods, but they are more complex and costly

What factors should be considered when deciding to outsource or not:

Cost, quality, timeliness, reliability, security of sensitive information, knowledge required

What are costs of the allocation process itself?

Additional bookkeeping and management costs, and costs of making the wrong decision