...Cost Allocation Methods Don Lowery University of Phoenix The focus of this paper is to identify the basic aspects of the direct and step-down methods of cost allocation. Included will be a comparison of the two methods and their strengths and weaknesses. Direct Method Horngren defines the direct method of cost allocation as “a method for allocating service department costs that ignores other service departments when any given service department’s costs are allocated to the operating departments” (2008, p. 531). This method does not take into account the services provided between departments and allocates costs of those departments directly to operating departments. If a service department, for example, a facilities department, provides a significant amount of service to another service department, perhaps a production floor, cost allocations are not made between the two departments (Unknown, 2009, p. 1). All costs are directly allocated to the operating departments, bypassing the other service departments. The direct method is useful for simple understanding of costs directly accountable to a specific determinant such as square footage of a plant or labor hours of personnel. Step-Down Method The step-down method of cost allocation is defined by Horngren as “A method for allocating service department costs that recognizes that some service departments support the activities in other service departments as well as those in operating departments” (2008, p. 531). The...
Words: 388 - Pages: 2
...Geoffrey Doll cost $19.19 to produce, and the #106 doll $23.74. To access in a study of their overhead cost for both of their plants, research showed that: 1. A setup was performed in the Chicago facility each time a modification to the dolls was made. Additionally, each time a specialty-branded doll was produced, a separate setup was required to process the raw materials to the required specifications. 2. Workers in the Chicago facility often operated several machines simultaneously once they were set up. Thus, machine-related expenses might relate more to the machine hours of a product than to its production-run labor hours. Because each retailer required slight alterations to the Geoffrey doll's overall appearance, a new setup and production run was required for each design change. Retailers were found to be conservative in their ordering patterns, ordering fewer units more frequently. Thus increasing the number of setups required, causing increased labor and material cost. The research done by the external group did show an area of opportunity. Because setup is time consuming, labor intensive, and costly, it would be within reason (at least with the information provided in the article) to offset some of this cost and put any additional setup cost back on the responsibility of the customer/ retailer requesting the modifications. If set-up cost were put back on the retailer debit could turn into a profitable gain on a per unit basis. |Cost (labor+ material)...
Words: 429 - Pages: 2
...PRINCIPLES OF COST ACCOUNTING This page intentionally left blank PRINCIPLES OF COST ACCOUNTING 15E E D W A R D J. V A N D E R B E C K Professor Emeritus Department of Accountancy Xavier University Principles of Cost Accounting, 15th Edition Edward J. VanDerbeck ª 2010, 2008 South-Western, Cengage Learning ALL RIGHTS RESERVED. No part of this work covered by the copyright herein may be reproduced, transmitted, stored or used in any form or by any means graphic, electronic, or mechanical, including but not limited to photocopying, recording, scanning, digitizing, taping, Web distribution, information networks, or information storage and retrieval systems, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of the publisher. Vice President of Editorial, Business: Jack W. Calhoun Acquisitions Editor: Matt Filimonov Developmental Editor: Lauren Athmer Marketing Manager: Kristen Hurd Marketing Coordinator: Heather McAuliffe Content Project Manager: Corey Geissler Production Technology Analyst: Starratt Alexander Media Editor: Scott Fidler Sr. Manufacturing Coordinator: Doug Wilke Production Service: Cadmus Sr. Art Director: Stacy Shirley Internal Designer: Jennifer Lambert, Jen2Design, LLC Cover Designer: cmiller design Cover Image: ªGetty Images For product information and technology assistance, contact us at Cengage Learning Customer & Sales Support, 1-800-354-9706 For permission...
Words: 191216 - Pages: 765
...CHAPTER 1 QUESTIONS 1. The function of cost accounting is to provide the cost accounting information that is the basis for planning and controlling current and future operations. It provides the cost figures and analyses that management needs in order to find the most efficient methods of operating, achieving control of costs, and determining selling prices. 2. Originally issued for companies marketing products in Europe, a set of international standards for quality management, known as the ISO 9000 family, was designed by the International Organization for Standardization. Obtaining ISO 9000 is important because many companies will only contract with ISO 9000 suppliers. 3. Manufacturers convert purchased materials into finished goods by using labor, technology, and facilities. Merchandisers purchase completed products for resale. Service businesses or agencies sell or provide services rather than products. 4. A manufacturer differs from a merchandiser in these ways: a. The merchandiser buys items to sell while the manufacturing business must make the items it markets. b. Usually the manufacturer has a greater investment in physical facilities. c. The manufacturer will incur some costs peculiar to this type of industry, such as machine maintenance, materials handling, and inspection of manufactured goods. The two types of operations are similar in that they are both concerned with purchasing, storing, and selling goods;...
Words: 5822 - Pages: 24
...standard motors accounted for large proportion of annual volume, and it was extremely competitive in the relevant market. Its production process was manufacturing a single type of motor in a long run. The problem for Siemens to operate during the initial period was high costs of their products against lower labour rates of its competitors, but the firm still made profit under pressure of reduce costs. After expanding its program, EMW found that it could be more profitable if it produced low volume customized alternating current motors in small production runs. Thus, the firm changed its strategy to mainly manufacture A/C motors and created a relative good production environment to support its new strategy. The new production process for the manufacture of A/C motors was costly and automated by dedicated automated machines. According to the new strategy, the cost allocation system was changed as well. In addition, the new cost system made the firm more profitable and competitive than old one. 2. Describe in detail how the old cost system operates. Your answer should include a detailed description of how all costs are treated. The old cost system was only fit for standard motors other than customized motors. Within old cost system, the direct material and direct labour were distributed to the products directly and...
Words: 1682 - Pages: 7
...Letter of Transmittal Audit & EDP Accounting Institute of Business Management Karachi Dear Sir, As per your instructions, I am hereby submitting my first report on the required topic. The report shall continue containing all the essential elements and required information which were listed briefly by you in the class. Although the task was relatively easier for me as the chosen company had its Branch Manager, a very close relative to me. I have put our whole efforts in making this report, and I am fully satisfied with it. I hope you would be happy to see my performance because I did worked a lot for it. Incase of any assistance or interpretation in this regard, you can always contact me anytime. I would be glad to be of any help. Regards, Contents Page History 5 Management Flow Chart Error! Bookmark not defined. Cost Accounting Flow Chart Error! Bookmark not defined. Process Costing: Error! Bookmark not defined. Accounting System Flow Chart Error! Bookmark not defined. Berger † Departments Error! Bookmark not defined. Types of Products Manufactured By the Company Error! Bookmark not defined. Recording Procedures Error! Bookmark not defined. Recording The Purchases & Return Of Raw Materials: Error! Bookmark not defined. Direct Labour Cost: Error! Bookmark not defined. Manufacturing Overhead Cost: Error! Bookmark not defined. Budgets Error! Bookmark not defined. Sales Budget: Error! Bookmark not defined. Production Budget: Error! Bookmark...
Words: 1714 - Pages: 7
...the mangers agree on. According to Fundamentals of Cost Accounting, “Activity-based costing (ABC) is a two-stage product costing method that assigns costs first to activities and then to the products based on each product’s use of activities”(Lanen, Anderson, Maher. 2011. P 319). While Traditional costing, is "often allocate costs based on single-volume measures such as direct-labor hours, direct- labor costs, or machine hours. While using a single volume measure as an overall cost driver seldom meets the cause-and-effect criterion desired in cost allocation, it provides a relatively cheap and convenient means of complying with financial reporting requirements"(Luehlfing). The first reason I believe that the Activity-Based Costing(ABC) is superior is because it has "the inherent flexibility to provide special reports to facilitate management decisions regarding the costs of activities undertaken to design, produce, sell, and deliver a company’s products or services. At the heart of this flexibility is the fact that ABC systems focus on accumulating costs via several key activities"(Luehlfing). The benefits that I believe that ABC has for mangers in setting goals include, "assesses costs of individual activities, based on their use of resources"(Patrick). It also "enables accurate costing of all activities to be obtained throughout an organization"(Patrick). It also makes it "easy to identify where high (and low) costs are being incurred and the cause"(Patrick). It is really...
Words: 418 - Pages: 2
...* CHAPTER 1: COST MANAGEMENT AND STRATEGY * QUESTIONS 1-1 Firms Using Cost Management. Here are some examples; there are many possible answers. 1. Wal-Mart: to keep costs low by streamlining restocking and sales 2. Dell: to keep costs low by improving manufacturing performance and by using target costing and other management techniques 3. Citicorp: to keep costs low by using activity analysis (see exercise1-31) to identify key operations and to find those that add little or no value 4. A local school district or public agency: to keep costs low in order to provide the best possible service given available funds 5. Procter & Gamble: to assess the profitability of its different products 6. Any other large, diversified manufacturer, like Procter & Gamble: which needs to be able to analyze the relative profitability of its different products, using cost management 7. A small machine shop: which needs cost management to determine whether it should repair or replace a machine 8. A dance studio: to analyze and choose between different compensation plans for its teachers; and to determine whether it should open a new studio 1-2 Firms not expected to be significant users of cost management information: 1. Microsoft: here the focus is on forming strategic alliances, innovation and competition; cost management is more important for other firms in the information technology business, such as Hewlett-Packard, and IBM that compete in part on innovation...
Words: 9648 - Pages: 39
...$25 for up to 1,000 texts per month and $0.05 for each text over the 1,000. Requirements a. Draw a graph of the total monthly cost of the three plans for different levels of texting. b. Which plan should you choose if you expect to make: i. 240 texts per month? ii. 780 texts per month? iii. 1,250 texts per month? a. Number of Texts | Plan A: $0.10/text | Plan B: $15 for 500 texts and $0.08 for each text over 500 | Plan C: $25 for 1000 texts and $0.05 for each text 1000 | 240 | $24.00 | $15.00 | $25.00 | 780 | $78.00 | $37.40 | $25.00 | 1250 | $125.00 | $75.00 | $37.50 | b. i. 240 texts per months Plan A: $0.10 x 240 = $24.00 Plan B: $15.00 I would choose plan b because its less expensive than plan a or c. ii. 780 texts per month Plan A: $0.10 x 780 = $78.00 Plan B: 15 + ((780-500) x $0.08) 15 + $22.40 = $37.40 Plan C: $25.00 I would choose plan c because its less expensive than the other 2. iii. 1,250 texts per month Plan A: $0.10 x 1250 = $125.00 Plan B: 15 + ((1250-500) x $0.08) 15 + $60 = $75.00 Plan C: 25 + ((1250 – 1000) x $0.05 25 + $12.50 = $37.50 I would choose plan c because its less expensive than the other 2. 2. In 3–4 sentences, define the following terms and give two examples of each: c. Direct Materials Cost The direct materials and the materials that can be traced...
Words: 650 - Pages: 3
...Question 1 CCS manufactures pencils. All direct materials are added at the beginning of the production process. During January, the accounting department noted that there was no beginning inventory. Direct materials purchases totaled $30863 during the month. Work in process records revealed that 1047 units were started in January, 464 units were completed, and 36 units were spoiled as expected. Ending work in process units are complete with respect to direct materials costs. Spoilage is not detected until the process is complete. What is the direct material cost assigned to good units completed? Select one: a. $13678 b. $30863 c. $14739 d. $33258 e. None of the other options is correct Feedback Your answer is incorrect. The correct answer is: $14739 Question 2 Which of the following correctly reflects what units passed inspection this period? Assume beginning work in process was completed and ending work in process was started during the period Select one: a. | INSPECTION POINT | | 10% | 50% | 100% | BWIP (30% complete) | No | No | Yes | b. | INSPECTION POINT | | 10% | 50% | 100% | BWIP (5% completed) | Yes | Yes | Yes | c. | INSPECTION POINT | | 10% | 50% | 100% | Started and completed | No | Yes | Yes | d. | INSPECTION POINT | | 10% | 50% | 100% | EWIP ( 40% completed) | Yes | No | Yes | e. None of the other options is correct Feedback Your answer is incorrect. The correct answer is: | INSPECTION POINT...
Words: 2920 - Pages: 12
...Cost Accounting Instructions: * Each section is divided into 10 groups. Groups are formed on the basis of roll nos. like, 1-6, 7-12, 13-18 and so on till 55-60. The submissions are to be done as a group. * All students in each section are required to participate and solve the questions asked. One or two students in each group will be asked to come up and solve the problem on the board and he/she has to clarify doubts in class. Marks are assigned accordingly. * Answer all the questions below. * Assignment submission date: 7th Dec 2015. All are required to abide by the date and there will be no extension of time whatsoever the reasons may be. Questions 1. A manufacturing co uses 2 identical large and 4 identical small machines. Each large machine occupies a quarter of the workshop and employs 3 workers, each small machine occupies half the space of the large machine and employs 2 workers. The workers are paid by piece work. Each of the 6 machines is estimated to work 1440 hours pa. The effective working hours for life is 12000 hours for each large machine and 9000 hours for each small machine. Large machines cost 20 L each and small ones cost 4L each. Scrap values are 1L and 10000 respectively. Repairs and maintenance are estimated to cost 2L for each large machine and 12000 for each small machine during its effective life. Power consumption costs 5 per unit and amounts to 20 units per hour for large and 5 units for small machine. The manager is...
Words: 1626 - Pages: 7
...Cost Accounting Tabitha Smith ACC 310 Christine Errico January 12, 2011 Cost Accounting What is cost accounting? Cost accounting as referred to as managerial accounting is a system of accounting used specifically by managers (Lanen, Anderson, & Maher, 2011, p. 6). Cost accounting measures, records and reports information about costs to help managers to form a well informed decisions for an organization (Lanen, Anderson, & Maher, 2011, p. 6). Cost accounting methods and their use, budgets including discipline, construction, and elements, and variance analysis are important aspects of cost accounting as a whole, which is an important tool for a successful organization. The main goal of cost accounting is to help managers to maximize value within their organization (Lanen, Anderson, & Maher, 2011, p. 3). One of the fundamental services of cost accounting is to provide information to the manager to guide them to make effective valuable decisions (Lanen, Anderson, & Maher, 2011, p. 3). An essential objective of cost accounting is to create an effective value chain (Lanen, Anderson, & Maher, 2011, p. 4). A value chain is a set of activities in which raw materials are converted into goods and services for consumers to purchase (Lanen, Anderson, & Maher, 2011, p. 4). An organization is responsible to coordinate with their vendors and suppliers along with their distributors and customers to accomplish their objective (Lanen, Anderson...
Words: 1684 - Pages: 7
...Cost Accounting David Norris Western Governors University Accounting doesn’t have the best reputation but for as long as there has been money, there has been a need for accounting. Long gone are the days of the smoke filled room piled floor to ceiling with the leger books of the entrepreneur. Using state of the art technology and creative techniques, today’s accounting is a vital component of the corporate world helping to build financial foundations that encourage long term growth and profitability. Cost accounting is the managerial financial budgeting tool of the accounting domain that deals specifically with cost and production. Cost accounting assists companies to understand the cost of product versus service and this helps to prepare bids and proposals and assembles information for planning and control which are needed to evaluate performance. Any business can use cost accounting but it is most effective with corporations that manufacture mass produced products and have a large employee base. Cost accounting is also becoming a valuable asset within the medical industry. In the ultra-competitive market of health care, hospitals are using price strategies, one of the new methods used in accounting, to entice customers and keep patients happy. Cost accounting techniques have developed as quickly as industry has in the 21st century. Basic accounting has become antiquated as new, creative approaches to financial stability emerge. Methods such...
Words: 2800 - Pages: 12
...1. What is Cost Accounting and how it is related to Management and Financial Accounting? Cost accounting is a process of collecting, analyzing, summarizing and evaluating various alternative courses of action. Its goal is to advise the management on the most appropriate course of action based on the cost efficiency and capability. Cost accounting provides the detailed cost information that management needs to control current operations and plan for the future. COST VS. FINANCIAL ACCOUNTINGFinancial accounting aims at finding out results of accounting year in the form of Profit and Loss Account and Balance Sheet while Cost accounting aims at computing cost of production/service in a scientific manner and facilitate cost control and cost reduction. Financial accounting reports the results and position of business to government, creditors, investors, and external parties while Cost Accounting is an internal reporting system for an organization’s own management for decision making.In financial accounting, cost classification based on type of transactions, e.g. salaries, repairs, insurance, stores etc. In Cost accounting, classification is basically on the basis of functions, activities, products, process and on internal planning and control and information needs of the organization while Financial accounting aims at presenting ‘true and fair’ view of transactions, profit and loss for a period and Statement of financial position (Balance Sheet) on a given date. It aims at computing...
Words: 587 - Pages: 3
...COST ACCOUNTING VS FINANCIAL ACCOUNTING http://www.tutorialspoint.com/accounting_basics/cost_accounting_vs_financial_accounting.htm Copyright © tutorialspoint.com Both cost accounting and financial accounting help the management formulate and control organization policies. Financial management gives an overall picture of profit or loss and costing provides detailed product-wise analysis. No doubt, the purpose of both is same; but still there is a lot of difference in financial accounting and cost accounting. For example, if a company is dealing in 10 types of products, financial accounting provides information of all the products in totality under different categories of expense heads such as cost of material, cost of labor, freight charges, direct expenses, and indirect expenses. In contrast, cost accounting gives details of each overhead product-wise, such as much material, labor, direct and indirect expenses are consumed in each unit. With the help of costing, we get product-wise cost, selling price, and profitability. The following table broadly covers the most important differences between financial accounting and cost accounting. Point of Differences Financial Accounting Cost Accounting Meaning Recoding of transactions is part of financial accounting. We make financial statements through these transactions. With the help of financial statements, we analyze the profitability and financial position of a company. Cost accounting is used to calculate cost of the product...
Words: 502 - Pages: 3
