Three secondary cost objects are (1) cap costs, (2) advertising costs, and (3) labor costs. The costs of the secondary cost units are combined to determine the costs of the primary cost unit. Cost of goods sold is not only easily traceable, but also very useful information.
Companies need cost of goods sold information for financial reporting (income statement and balance sheet) and for management decisions (setting inventory reorder points, pricing strategies, and cost control). In contrast, the costs of supplies (shopping bags, sales slips, pens, staples, price tags) used by each department are much more difficult to track. Even if Item 9 could be traced to specific departments, the costs of doing so would exceed the benefits.
In the case of In Style, Inc., store rental costs (total costs) support the women's, men's, and children's departments (cost facilities). Some of these include the cost of aircraft, fuel, pilots, office buildings and ground staff. Multiply the allocation rate by the cost driver weight (base weight) to determine the allocation per cost object as follows.
Multiply the allocation rate by the cost driver weight to determine the allocation per cost object.
EFFECTS OF COST BEHAVIOR ON SELECTING THE MOST APPROPRIATE COST DRIVER
He believed the children's department was losing sales because it did not have enough floor space to display a competitive assortment of merchandise. Customers came to the store to shop the women's department, but they didn't come specifically for children's wear. With additional space, the children's department could carry items that will draw customers to the store specifically to buy children's clothing.
He believed the additional space would increase sales enough to cover the additional rent and utility cost allocations. The store manager was pleased with the emphasis on profitability that resulted from tracking and assigning costs to individual departments.
Using Volume Measures to Allocate Variable Overhead Costs
Compute the allocation rate
Multiply the allocation rate by the weight of the cost driver to determine the allocation per cost object
A significant part of the labor is then not related to the consumption of indirect materials (glue, staples, screws, nails and paint). It would therefore be inappropriate to allocate indirect material costs on the basis of direct labor hours. If labor hours are an inappropriate allocation basis, Filmier may consider direct material use, measured in material dollars, as the allocation basis.
It is likely that the more wood (direct material) Filmier uses, the more glue, nails, etc. (indirect material) it uses. Using direct materials dollars as the cost driver for indirect materials yields the following allocation. Which of the three volume-based cost drivers (units, labor hours, or direct material dollars) results in the most accurate allocation of overhead costs.
In this case, direct materials dollars appear to have the most compelling relationship to indirect materials usage. However, if the costs Filmier allocated were fringe benefits, direct labor hours would be a more appropriate cost driver. If the cost Filmier assigned was machine maintenance cost, another volume-based cost driver, machine hours, would be an appropriate basis.
Allocating Fixed Overhead Costs
Multiply the allocation rate by the weight of the cost driver
CHECK YOURSELF 12.2
For example, if some bottles are significantly larger than others, Lednicky may find that using some physical measure, such as liters of directly used material, is a more appropriate basis for allocation. Regardless of whether indirect costs are fixed or variable, choosing the most appropriate allocation base requires good thought and judgment.
ALLOCATING COSTS TO SOLVE TIMING PROBLEMS
Multiply the rate by the weight of the base (number of units per month) to determine how much of the salary cost to allocate to each month’s production
Grave Manufacturing will add these indirect cost allocations to other product costs to determine total estimated product costs to use in cost-plus pricing or other management decisions. Companies use predetermined overhead rates for product cost estimates and pricing decisions during a year, but they must use actual costs in published year-end financial statements. If necessary, companies adjust their accounting records at year-end when they have used estimated data on an interim basis.
AGGREGATING AND DISAGGREGATING INDIVIDUAL COSTS INTO COST POOLS
COST ALLOCATION: THE HUMAN FACTOR
Using Cost Allocations in a Budgeting Decision
Using Cost Drivers to Make Allocations
Multiply the rate by the weight of the driver (the number of faculty per de- partment) to determine the allocation per object (department)
Bob Smethers, chairman of the accounting department, questioned the accuracy of using the number of faculty members as a cost driver. Smethers suggested the number of students rather than the number of faculty members drives the cost of copying. The accounting department teaches mass sections of introductory accounting that have extremely high student/teacher ratios.
Because his department teaches more students, he spends more on copying costs even though he has fewer faculty members.
Compute the allocation rate based on number of students. University records indicate that the School of Business taught 1,200 students during the most
Multiply the rate by the weight of the driver (number of students taught by each department) to determine the allocation per object (department)
Choosing the Best Cost Driver
Controlling Emotions
- Why are some manufacturing costs not directly traceable to products?
- What is the objective of allocating indi- rect manufacturing overhead costs to the
- Respond to the following statement: “The allocation base chosen is unimportant
- Larry Kwang insists that the costs of his school’s fund-raising project should be de-
- Defi ne the term cost pool. How are cost pools important in allocating costs?
Determine the amount of inventory cost to allocate to each of the three departments. Identify two cost drivers other than your choice for requirement b that could be used to allocate administrative salary costs to the three departments. Using the number of staff as the allocation base instead of the number of instructors reduces the amount of overhead allocated to the Spinning Department from $12,000 to $9,600.
Determine the amount of benefits costs to be allocated to Division A and Division B. Choose an appropriate cost driver for each of the overhead costs and determine the total cost of each property. This information determines how much of the rental cost should be allocated to products created in January versus products created in February.
This information determines how much of the insurance cost should be allocated to products created in January versus products created in February. Explain why allocating the customer relationship representative's costs would or would not be relevant to decision making. Calculate a predetermined overhead rate based on the number of product units expected to be made in the first four months of the year.
Which of the allocation bases mentioned in the Request is the OB manager most likely to recommend? What argument can the OB manager use to justify his choice of allocation base. Which of the allocation bases would result in the fairest allocation of overhead cost from the perspective of the company president.
Explain how classifying overhead costs into separate pools can improve the fairness of the distribution of overhead costs. The school's owner, Wilma Vest, wants to know how much it costs to run each of the three departments. Determine the amount of telephone expenses to be allocated to each of the three departments.
Identify two cost drivers not listed here that can be used to allocate the cost of the dean's salary to the three departments. How much of the expert's salary should be allocated to tents produced in January and February.
- Business Applications Case Allocating fixed costs at Porsche
- Group Assignment Selection of the cost driver
- Research Assignment Using real-world data from Pepsi Bottling Group
- Writing Assignment Selection of the appropriate cost driver
- Ethical Dilemma Allocation to achieve fairness
Explain why the unit cost values calculated in requirement a differ from the amounts calculated in requirement b. For the purposes of this problem, assume that all depreciation is related to production activities. Explain the advantage of using this amount to determine the cost of manufacturing the car in February and March compared to the amounts you calculated in requirement b.
Assume that the school dean intends to allocate an equal amount of faculty overhead to each department. The instructor should lead a discussion designed to evaluate the appropriateness of the dean's proposed distribution plan. Each group should select a cost driver (allocation base) that best serves the self-interest of the department it represents.
Each group must determine the amount of indirect costs to be allocated to each department using the cost driver that best serves the self-interest of the department it represents. In the footnotes section of the report, under "Note 2—Summary of Significant Accounting Policies," read the subsections titled "Advertising and Marketing Costs" and "Shipping and Handling Costs." PBG considers shipping and handling costs and advertising and marketing costs to be direct or indirect costs related to the manufacture of its products.
If PBG wanted to divide the shipping costs among the different products, what would be an appropriate cost factor? Based on PBG's discussion of the seasonality of its operations, should the depreciation of production equipment recorded in a given month be based on the volume of beverages produced that month, or should the depreciation be one-twelfth of the estimated annual depreciation that PBG expects? increase. BEI currently uses the number of units as a cost driver for overhead allocation.
The president of the company questioned the advisability of allocating the same amount of overhead to each type of medal. He believes that overhead costs should be allocated on the basis of the cost of producing the medals. Heidi McCarl, who taught one of the courses, received the following statement by check as payment for her instructional services.