Cost Accounting notes
Chapter 14 - cost allocation, customer-profitability analyses, sales-variance analysis
Purpose of allocating indirect costs: 1. To provide information for economic decisions 2. To motivate managers and other employees 3. To justify costs or compute
reimbursement amounts 4. To measure income and assets.
Criteria to guide cost- allocation decisions:
1. Cause and effect - managers identify the variables that cause resources to be consumed.
2. Benefits received - mangers identify the beneficiaries of the outputs of the cost object. The costs of the cost object are allocated among the beneficiaries in proportion to
the benefits each receives.
3. Fairness or equity - often cited in government contracts when cost allocations are the basis for establishing a price satisfactory to the government and its suppliers.
4. Ability to bear - allocating costs in proportion to the cost object's ability to bear cost allocated to it
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