Which of the following is not a criterion for choosing the cost allocation method
How to Allocate CostsVarious cost allocation methods are used to allocate factory overhead costs to units of production. Allocations are performed in order to create financial statements that are in compliance with the applicable accounting framework. The most common allocation methods are noted in the following bullet points, along with commentary about their advantages and disadvantages. Show
Cost Allocation Based on Direct LaborOverhead is applied based on the amount of direct labor consumed by a unit of production. This is an easy calculation, for there is usually an industrial engineering standard already in place that documents the amount of direct labor associated with a product. However, the amount of direct labor consumed may be far smaller than the amount of factory overhead, which can result in large allocations based on small amounts of direct labor cost. This can cause large swings in cost allocations if direct labor totals change by only a small amount. Cost Allocation Based on Machine TimeAnother favorite is cost allocations based on the amount of machine time used by a product. As was the case for direct labor, the reason for this popularity is that the standard amount of machine time used is already available in the form of industrial engineering documentation. Cost Allocation Based on Square FootageIt may be useful to separate out those overhead costs related to inventory storage, and allocate these costs based on the number of square feet of storage space used by each product. While this is a more accurate way to associate certain overhead costs with products, it can be difficult to track, especially when inventory levels are constantly changing. Another concern is that square footage is only two dimensional. A more accurate approach would be to allocate costs based on cubic feet of storage space consumed. Allocation of Corporate CostsIt is also possible that corporate headquarters costs are to be allocated to the subsidiaries of a multi-division company. If so, a number of possible allocation methods have been used, including the following: Cost Allocation Based on SalesCosts are apportioned based on the net sales reported by each entity. Since high sales volume does not necessarily equate to high profits, this approach can result in a low-profit entity being burdened with a substantial corporate allocation. Cost Allocation Based on ProfitsCosts are allocated based on the profits generated by each subsidiary. A problem is that high-profit entities will be charged with the bulk of all corporate expenses, so their inherent profitability will not be overly apparent when their results are viewed on a fully-burdened basis. Cost Allocation Based on HeadcountThis is the most specious basis of allocation, for some entities can generate sales and profits with few staff, while others require massive numbers of employees. Also, a large number of low-paid employees might attract a large cost allocation, while another subsidiary with a much smaller number of higher-paid employees would attract a comparatively smaller charge. When deciding upon which cost allocation method to use, keep in mind that none of these methods will achieve a close relationship between the allocated costs and the cost objects to which they have been applied. Consequently, it is best to use the simplest method available, and not worry about a high level of allocation precision. journal article An Analysis of Two Cost Allocation CasesThe Accounting Review Vol. 57, No. 3 (Jul., 1982) , pp. 579-593 (15 pages) Published By: American Accounting Association https://www.jstor.org/stable/246879 This is a preview. Log in to get access Abstract Since cost allocation has been widely viewed as an arbitrary process, the theory of choice among allocation alternatives is little advanced. This paper illustrates some practical problems that result in the absence of well-established guidelines for choosing among cost allocation alternatives. Spedifically, two appeals before the Armed Services Board of Contracts Appeals involving the issue of cost allocation are discussed and analyzed. Journal Information The Accounting Review is the premier journal for publishing articles reporting the results of accounting research and explaining and illustrating related research methodology. The scope of acceptable articles embraces any research methodology and any accounting-related subject. The primary criterion for publication in The Accounting Review is the significance of the contribution an article makes to the literature. Publisher Information The American Accounting Association is the world's largest association of accounting and business educators, researchers, and interested practitioners. A worldwide organization, the AAA promotes education, research, service, and interaction between education and practice. Formed in 1916 as the American Association of University Instructors in Accounting, the association began publishing the first of its ten journals, The Accounting Review, in 1925. Ten years later, in 1935, the association changed its name to become the American Accounting Association. The AAA now extends far beyond accounting, with 14 Sections addressing such issues as Information Systems, Artificial Intelligence/Expert Systems, Public Interest, Auditing, taxation (the American Taxation Association is a Section of the AAA), International Accounting, and Teaching and Curriculum. About 30% of AAA members live and work outside the United States. Rights & Usage This item is part of a JSTOR Collection. What is cost allocation?Cost allocation is the process of identifying, accumulating, and assigning costs to costs objects such as departments, products, programs, or a branch of a company. It involves identifying the cost objects in a company, identifying the costs incurred by the cost objects, and then assigning the costs to the cost objects based on specific criteria.
How are costs apportioned in an organization?1 Sales. Costs are apportioned based on the net sales reported by each entity. ... 2 Profits. Costs are allocated based on the profits generated by each subsidiary. ... 3 Headcount. This is the most specious basis of allocation, for some entities can generate sales and profits with few staff, while others require massive numbers of employees. ...
What happens when costs are allocated in the right way?When costs are allocated in the right way, the business is able to trace the specific cost objects that are making profits or losses for the company. If costs are allocated to the wrong cost objects, the company may be assigning resources to cost objects that do not yield as much profits as expected.
What are the most common allocation methods of production?The most common allocation methods are noted in the following bullet points, along with commentary about their advantages and disadvantages: Direct labor. Overhead is applied based on the amount of direct labor consumed by a unit of production.
What are the four cost allocation methods?When allocating costs, there are four allocation methods to choose from.. Direct labor.. Machine time used.. Square footage.. Units produced.. What are the 3 allocation methods?There are three methods for allocating service department costs: direct, sequential, and reciprocal. The first step of each method is to classify each organizational unit as either an operating or service department.
What criteria might be used to guide cost allocation decisions?Exhibit 14-8 lists four criteria used to guide cost allocation decisions:. Cause and effect.. Benefits received.. Fairness or equity.. Ability to bear.. What are the three purposes of cost allocation?A cost allocation is a good tool to use on an annual basis to track changes in costs. Allocating costs serves three main purposes. These are to: 1) make decisions, 2) reduce waste, and 3) determine pricing.
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