Chapter 15

purpose of cost allocation:
1) Provide information for economic decisions
2) To motivate managers and other employees
3) Justify costs of compute reimbursement amounts
4) Measure income and assets
Criteria for Cost-Allocation Decisions
1)Cause-and-effect—variables are identified that cause resources to be consumed.
2)Benefits received—the beneficiaries of the outputs of the cost object are charged with costs in proportion to the benefits received.
3)Fairness (equity)—the basis for establishing a price satisfactory to the government and its suppliers.
4)Ability to bear—costs are allocated in proportion to the cost object's ability to bear them.
Single-rate method
allocates costs in each cost pool (service department) to cost objects (production departments) using the same rate per unit of a single allocation base
----No distinction is made between fixed and variable costs in this method
----- is simple to implement, but treats fixed costs in a manner similar to variable costs
Dual-Rate method
segregates costs within each cost pool into two segments: a variable-cost pool and a fixed-cost pool.
-----Each pool uses a different cost-allocation base
-----treats fixed and variable costs more realistically, but is more complex to implement
allocation of support costs can be based on one of the three following scenarios:
1)Budgeted overhead rate and budgeted hours
2)Budgeted overhead rate and actual hours
3)Actual overhead rate and actual hours
Direct Method
1)Allocates support costs only to Operating Departments
2)No Interaction between Support Departments prior to allocation

----widely used & simple to compute and understand
Step-Down Method
1)Allocates support costs to other support departments and to operating departments that partially recognizes the mutual services provided among all support departments
2)One-Way Interaction between Support Departments prior to allocation
------simple to compute and understand
Reciprocal Method
1)Allocates support department costs to operating departments by fully recognizing the mutual services provided among all support departments
2)Full Two-Way Interaction between Support Departments prior to allocation
-------most precise
Common Cost
the cost of operating a facility, activity, or like cost object that is shared by two or more users at a lower cost than the individual cost of the activity to each user
Stand-Alone Cost-Allocation Method
1)uses information pertaining to each user of a cost object as a separate entity to determine the cost-allocation weights
2)Individual costs are added together and allocation percentages are calculated from the whole, and applied to the common cost
Incremental Cost-Allocation Method
---ranks the individual users of a cost object in the order of users most responsible for a common cost and then uses this ranking to allocate the cost among the users
1)The first ranked user is the Primary User and is allocated costs up the cost as a stand-alone user (typically gets the highest allocation of the common costs)
2)The second ranked user is the First Incremental User and is allocated the additional cost that arises from two users rather than one
3)Subsequent users handled in the same manner as the second ranked user
The US government reimburses most contractors in either of two main ways:
1)The contractor is paid a set price without analysis of actual contract cost data.
2)The contractor is paid after an analysis of actual contract cost data. In some cases, the contract will state that the reimbursement amount is based on actual allowable costs plus a fixed fee (cost-plus contract)
Revenue Allocation
occurs when revenues are related to a particular revenue object but cannot be traced to it in an economically feasible manner
Revenue Object
anything for which a separate measurement of revenue is desired
Bundled Product
a package of two or more products or services that are sold for single price, but individual components of the bundle also may be sold as separate items at their own "stand-alone" prices
Stand-Alone (separate) Revenue Allocation Method
uses product-specific information on the products in the bundle as weights for allocating the bundled revenues to the individual products. Three types of weights may be used:
1)Selling Prices
2)Unit Costs
3)Physical Units
Incremental Revenue-Allocation Method
ranks individual products in a bundle according to criteria determined by management and then uses this ranking to allocate bundled revenues to individual products (similar to earlier discussed Incremental Cost-Allocation Method)
1)The first-ranked product is the primary product
2)The second-ranked product is the first incremental product
3)The third-ranked product is the second incremental product, etc