Cost allocation is the distribution of one cost across multiple entities, business units, or cost centers. An example is when health insurance premiums are paid by the main corporate office but allocated to different branches or departments.
The four main purposes for allocating costs are to predict the economic effects of planning and control decisions, to motivate managers and employees, to measure the costs of inventory and cost of goods sold, and to justify costs for pricing or reimbursement.
Step 1: Identify Shared Facilities or Support Services. Your jurisdiction should allocate costs for any services, staff, facilities, or equipment that benefit other funds or departments. Step 2: Identify Costs. Step 3: Determine Allocation Factors. Step 4: Allocate Costs. Step 5: Update and Monitor the Data and Methodology.
There are three methods commonly used to allocate support costs: (1) the direct method; (2) the sequential (or step) method; and (3) the reciprocal method.
When allocating costs, there are four allocation methods to choose from. Direct labor. Machine time used. Square footage. Units produced.
Compute the overhead allocation rate by dividing total overhead by the number of direct labor hours. For every hour needed to make a product, you need to apply $2.50 worth of overhead to that product.
What is the goal of cost allocation? The goal of cost allocation is to evenly and fairly distribute costs out to each department. Also it is to allow managers to make better decisions regarding costs.
Answer: The major influences are customers, competitors, and costs.
Overhead costs are allocated to products to provide information for internal decision making, to promote the efficient use of resources, and to comply with U.S. Generally Accepted Accounting Principles.
Four Steps to Calculating Process Costs Step 1 – Collect Direct Spending. In order to calculate a process cost, the first thing you need is to collect the pools of direct spending at the account or sub-account level. Step 2 – Allocate Indirect Spending. Step 3 – Calculate Cost Center Rates. Step 4 – Proper Assignment of Process Rates to Products.
In this paper allocation is defined as determining the location, number, and capacity of manufacturing and/or distribution facilities of multinationals. The focus is on strategic decisions concerning the (re)design of international networks, for example by establishing new plants abroad.
Common allocation bases are direct labor hours, direct labor costs, and machine hours.
If the direct method of cost allocation is used, the cost incurred by department A and department B would be allocated to department C and department D only. The cost of department A and department B would not be allocated to each other even if the two departments provide a significant amount of service to each other.
Understanding some of the major methods for calculating and assigning overhead costs to products can help you choose the right method for your company. Job-order Costing. Process Costing. Activity-based Costing. Variable Costing.
What is Traditional Costing? Traditional costing is the allocation of factory overhead to products based on the volume of production resources consumed. Under this method, overhead is usually applied based on either the amount of direct labor hours consumed or machine hours used.