MANAGEMENT
ACCOUNTING
Lecture 5: Cost allocation
DEPARTMENT OF
AARHUS UNIVERSITY
MANAGEMENT
Management Accounting
Stefan Schaper
Associate Professor, Ph.D.
JOURNAL ENTRIES (…)
Direct
Accounts •payable
(materials material
• Direct
84,050labour
WIP (Assembly dep.)
• Indirect man.
costs
84,050
Various accounts (conv.
Costs)
62,000
WIP Finishing
62,000
Department
Assembly
14,007
Finished Goods
Finished goods
XYZ,000
DEPARTMENT OF
AARHUS UNIVERSITY
MANAGEMENT
132,043
Department
132,043 XYZ,000
Finishing
Cost of Goods Sold
Cost of(COGS)
goods sold
XYZ,000
XYZ,000
Management Accounting
Stefan Schaper
Associate Professor, Ph.D.
PROCESS COSTING: FIVE-STEP
APPROACH
Step 1
Summaris
e the
flow of
physical
units of
output.
DEPARTMENT OF
AARHUS UNIVERSITY
MANAGEMENT
Step 2
Step 3
Compute
output in
terms of
equival
ent
units.
Step 4
Compute
equival
ent unit
costs
Management Accounting
Stefan
Stefan
Schaper
Schaper
Associate
Professor,
Ph.D.
Associate
Professor,
Ph.D.
Summaris
e total
costs to
account
for
Step 5
Assign
total
costs to
units
complet
ed and
to units
in
ending
work-inprogress
stock.
EQUIVALENT UNITS
• Two semi-finished goods are equivalent to one finished
goods.
• Hence, 10,000 units of 70% finished work equals
7,000 finished units
+
DEPARTMENT OF
AARHUS UNIVERSITY
MANAGEMENT
=
Management Accounting
Stefan Schaper
Associate Professor, Ph.D.
STANDARD COSTING
• Setting standards for quantities of inputs needed to produce output in
companies
that use process costing is often relatively straightforward.
• Standard costs per input unit may then be assigned to these physical
standards to
develop standard costs per output unit.
DEPARTMENT OF
AARHUS UNIVERSITY
MANAGEMENT
Management Accounting
Stefan Schaper
Associate Professor, Ph.D.
TODAY’S CONTENT
​During this lecture we will:
 Single and dual rate
 Service allocation methods:
 direct
 step-down and
 reciprocal method
 Stand-alone and incremental cost methods
DEPARTMENT OF
AARHUS UNIVERSITY
MANAGEMENT
Management Accounting
Stefan
Stefan
Schaper
Schaper
Associate
Professor,
Ph.D.
Associate
Professor,
Ph.D.
GETTING STARTED
​To prepare for this lecture, please:
• Read chapter 5
• Have a look at exercise 5.14
Alnoor Bhimani; Charles. T. Horngren, Srikant M. Datar and Madhav
Rajan. Management and Cost Accounting. Pearson; Seventh edition.
DEPARTMENT OF
AARHUS UNIVERSITY
MANAGEMENT
Management Accounting
Stefan
Stefan
Schaper
Schaper
Associate
Professor,
Ph.D.
Associate
Professor,
Ph.D.
LEARNING OBJECTIVES
1. Describe how a costing system can have multiple cost objects
2. Outline four purposes for allocating costs to cost objects
3. Discuss problems faced when collecting costs in indirect cost
pools
4. Describe single-rate and dual-rate cost-allocation method
5. Explain changes in risks at budgeted versus actual allocation rates
6. Learn direct, step-down and reciprocal methods of
allocating costs
7. See differences in incremental and stand-alone cost-allocation
method
8. Outline consequences of the inappropriate use of an allocation
base
9.OF Describe why managers
may Accounting
find cost
hierarchy-based
reports
DEPARTMENT
Management
Stefan
Schaper
AARHUS UNIVERSITY
MANAGEMENT
Associate Professor, Ph.D.
useful
LEARNING OBJECTIVES
1. Describe how a costing system can have multiple cost objects
2. Outline four purposes for allocating costs to cost objects
3. Discuss problems faced when collecting costs in indirect cost
pools
4. Describe single-rate and dual-rate cost-allocation method
5. Explain changes in risks at budgeted versus actual allocation rates
6. Learn direct, step-down and reciprocal methods of
allocating costs
7. See differences in incremental and stand-alone cost-allocation
method
8. Outline consequences of the inappropriate use of an allocation
base
9.OF Describe why managers
may Accounting
find cost
hierarchy-based
reports
DEPARTMENT
Management
Stefan
Schaper
AARHUS UNIVERSITY
MANAGEMENT
Associate Professor, Ph.D.
useful
REMEMBER?
​What if we are a multi-product company?
DEPARTMENT OF
AARHUS UNIVERSITY
MANAGEMENT
Management Accounting
Process costing:
“…each unit is assumed to
receive the same amount
of direct material costs,
direct manufacturing labour
costs and indirect
manufacturing costs.”
Stefan Schaper
Associate Professor, Ph.D.
PICTURE IT:
DEPARTMENT OF
AARHUS UNIVERSITY
MANAGEMENT
Management Accounting
Stefan Schaper
Associate Professor, Ph.D.
FOCUS ON INDIRECT COSTS!
DEPARTMENT OF
AARHUS UNIVERSITY
MANAGEMENT
Management Accounting
Stefan Schaper
Associate Professor, Ph.D.
MULTIPLE COST OBJECTS
Cause-andeffect
Benefits
received
Fairness or
equity
Ability to bear
DEPARTMENT OF
AARHUS UNIVERSITY
MANAGEMENT
• Identify the variable or variables that
cause resources to be consumed
• Logical link!
• Identify the beneficiaries of the outputs of
the cost object.
• e.g. the department that “benefit” from
costs
• Typical in contracts with public
organizations
• Cost allocations are the basis for
establishing a satisfactory price
• Allocating costs in proportion to the cost
object’s ability to bear them
Management Accounting
Stefan
Stefan
Schaper
Schaper
Associate
Professor,
Ph.D.
Associate
Professor,
Ph.D.
DOMINANT CRITERIA
​The cause-and-effect and the benefits-received criteria guide most
decisions related to cost allocations.
Cost-benefit Approch
Great emphasis on the cost–benefit approach when designing and
implementing their cost-allocation system, but:
• Costs are generally highly visible
• Benefits are more difficult to measure
DEPARTMENT OF
AARHUS UNIVERSITY
MANAGEMENT
Management Accounting
Stefan
Stefan
Schaper
Schaper
Associate
Professor,
Ph.D.
Associate
Professor,
Ph.D.
LEARNING OBJECTIVES
1. Describe how a costing system can have multiple cost objects
2. Outline four purposes for allocating costs to cost objects
3. Discuss problems faced when collecting costs in indirect cost
pools
4. Describe single-rate and dual-rate cost-allocation method
5. Explain changes in risks at budgeted versus actual allocation rates
6. Learn direct, step-down and reciprocal methods of
allocating costs
7. See differences in incremental and stand-alone cost-allocation
method
8. Outline consequences of the inappropriate use of an allocation
base
9.OF Describe why managers
may Accounting
find cost
hierarchy-based
reports
DEPARTMENT
Management
Stefan
Schaper
AARHUS UNIVERSITY
MANAGEMENT
Associate Professor, Ph.D.
useful
Exh. 5.1
PURPOSES OF COST ALLOCTION
1
Provide information for economic decisions
• e.g.: should a new product line be introduced? do we have
to produce or outsource ourselves?
2
Motivate managers and other employees
• e.g.: simplify processes, selling high-profit products.
3
Justify costs or compute reimbursement
• e.g.: consulting fees in relation to the expected cost
reductions.
4
Measure income and assets for reporting to external
parties.
• e.g.: to determine the cost of stock, etc.
DEPARTMENT OF
AARHUS UNIVERSITY
MANAGEMENT
Management Accounting
Stefan
Stefan
Schaper
Schaper
Associate
Professor,
Ph.D.
Associate
Professor,
Ph.D.
LEARNING OBJECTIVES
1. Describe how a costing system can have multiple cost objects
2. Outline four purposes for allocating costs to cost objects
3. Discuss problems faced when collecting costs in indirect cost
pools
4. Describe single-rate and dual-rate cost-allocation method
5. Explain changes in risks at budgeted versus actual allocation rates
6. Learn direct, step-down and reciprocal methods of
allocating costs
7. See differences in incremental and stand-alone cost-allocation
method
8. Outline consequences of the inappropriate use of an allocation
base
9.OF Describe why managers
may Accounting
find cost
hierarchy-based
reports
DEPARTMENT
Management
Stefan
Schaper
AARHUS UNIVERSITY
MANAGEMENT
Associate Professor, Ph.D.
useful
DECISIONS REGARDING COST
POOLS
Exh. 5.3
Costs incurred in different parts of an organisation
Corporate
(headquarter)
level
can be assigned, and then reassigned, when
costing products, services, customers or contracts.
Production
(plant) level
Homogeneous cost pool:
All costs have the same or a
similar cause-and-effect or
benefits-received relationship
with the cost-allocation base.
Individual
product level
DEPARTMENT OF
AARHUS UNIVERSITY
MANAGEMENT
Management Accounting
Stefan
Stefan
Schaper
Schaper
Associate
Professor,
Ph.D.
Associate
Professor,
Ph.D.
ALLOCATING CORPORATE COSTS
Example: Sandy Corporation manufactures clothes washers and
dryers in two international divisions:
• Clothes Washer Division in Paris (CWD)
• Clothes Dryer Division in Prague (CDD)
See Excel
file on BB
Sandy Corporation collects costs at the following levels in its organisation:
Financial costs: £600,000
• interest on debt used to finance the construction of new assembly
equipment which cost: £4,000,000 in the Paris Division and £2,000,000 in
the Prague Division.
Human resources costs: £1,200,000
• recruitment and ongoing employee training and development.
DEPARTMENT OF
AARHUS UNIVERSITY
MANAGEMENT
Management Accounting
Stefan
Stefan
Schaper
Schaper
Associate
Professor,
Ph.D.
Associate
Professor,
Ph.D.
ALLOCATING CORPORATE COSTS
See Excel
file on BB
Example: Division costs:
Paris
Prague
Direct labour
1,200,000
1,800,000
Other direct costs1,000,000
2,200,000
Indirect costs
1,980,000
2,500,000
Total
4,180,000
6,500,000
Sandy Corporation’s analysis indicates that the demand for corporate human
resource management costs for recruitment and training varies with direct
labour costs.
These costs are allocated to divisions on the basis of the total direct labour
costs incurred in each division.
DEPARTMENT OF
AARHUS UNIVERSITY
MANAGEMENT
Management Accounting
Stefan
Stefan
Schaper
Schaper
Associate
Professor,
Ph.D.
Associate
Professor,
Ph.D.
Cause-andeffect
ALLOCATING CORPORATE COSTS
Example:
Suppose direct labour costs in the
Paris Division
£1,200,000 (40%)
Prague Division
£1,800,000 (60%)
£3,000,000
How should the £1,200,000 of HRM resources be allocated?
• Paris Division: £1,200,000 × (40%) = £480,000
• Prague Division: £1,200,000 × (60%) = £720,000
DEPARTMENT OF
AARHUS UNIVERSITY
MANAGEMENT
Management Accounting
Stefan
Stefan
Schaper
Schaper
Associate
Professor,
Ph.D.
Associate
Professor,
Ph.D.
See Excel
file on BB
ALLOCATING CORPORATE COSTS
Paris
See Excel
file on BB
Prague
Financial costs: £600,000
(2/3) and (1/3)
400,000
200,000
Human resources costs: £1,200,000
(40%) and (60%)
480,000
Total allocated to divisions
DEPARTMENT OF
AARHUS UNIVERSITY
MANAGEMENT
720,000
880,000
Management Accounting
920,000
Stefan
Stefan
Schaper
Schaper
Associate
Professor,
Ph.D.
Associate
Professor,
Ph.D.
ALLOCATING CORPORATE COSTS
Division costs are reallocated to the departments within the
division.
The Paris Division has two operating departments:
• Assembly and Finishing
plus two support departments:
• Maintenance and Human Resources.
The Paris Division management decided to reallocate:
• 400,000 financial costs to the Assembly Department,
• 480,000 human resources costs to its HRM Department
DEPARTMENT OF
AARHUS UNIVERSITY
MANAGEMENT
Management Accounting
Stefan
Stefan
Schaper
Schaper
Associate
Professor,
Ph.D.
Associate
Professor,
Ph.D.
See Excel
file on BB
LEARNING OBJECTIVES
1. Describe how a costing system can have multiple cost objects
2. Outline four purposes for allocating costs to cost objects
3. Discuss problems faced when collecting costs in indirect cost
pools
4. Describe single-rate and dual-rate cost-allocation method
5. Explain changes in risks at budgeted versus actual allocation rates
6. Learn direct, step-down and reciprocal methods of
allocating costs
7. See differences in incremental and stand-alone cost-allocation
method
8. Outline consequences of the inappropriate use of an allocation
base
9.OF Describe why managers
may Accounting
find cost
hierarchy-based
reports
DEPARTMENT
Management
Stefan
Schaper
AARHUS UNIVERSITY
MANAGEMENT
Associate Professor, Ph.D.
useful
Example
p. 129
(Exh. 5.3)
SINGLE- AND DUAL-RATE METHOD
• The single-rate method uses one cost pool (for fixed and variable costs)
• Dual-rate cost allocation method classifies costs in each cost pool into two
cost pools – a variable-cost cost pool and a fixed-cost cost pool.
Exampl
e:
Fixed operating costs
€300.000
Total capacity available
1500 h
Budgeted long-term use (in hours)
Microcomputer division
800 h
Peripheral Equipment division
400 h
Total
1200 h
Budgeted variable costs per hour*
€200
* within the 1000-1500 hour relevant range
DEPARTMENT OF
AARHUS UNIVERSITY
MANAGEMENT
Management Accounting
Stefan
Stefan
Schaper
Schaper
Associate
Professor,
Ph.D.
Associate
Professor,
Ph.D.
Example
p. 129
(Exh. 5.3)
SINGLE-RATE METHOD
The single-rate method uses one cost pool (for fixed and
variable costs)
• Uses the same allocation rate:
Total cost pool: €300.000 + (1.200 budgeted
hours x €200)
€540.000
1 cost pool
Budgeted long-term use (in hours)
1.200 h
1 allocation
base
Budgeted total rate per hour: €540.000 / 1.200h
€450 per hour
Allocation rate for Microcomputer division
€450 per hour
Allocation rate for Peripheral Equipment division
€450 per hour
Cost allocated to Microcomputer division (900
h*)
€405.000
Cost allocated to Peripheral Equipment
division (300 h*)
€135.000
DEPARTMENT OF
AARHUS UNIVERSITY
MANAGEMENT
Management Accounting
Stefan
Stefan
Schaper
Schaper
Associate
Professor,
Ph.D.
Associate
Professor,
Ph.D.
* assumed usage
What if
computer
hours would
be only 600?
Example
p. 129130
(Exh. 5.3)
DUAL-RATE METHOD
Dual-rate cost allocation method classifies costs in each cost pool into two
cost pools – a variable-cost cost pool and a fixed-cost cost pool.
• Each of these pools uses a different cost-allocation base.
Microcomputer division
Fixed costs function (800/1200) x €300.000
€200.000 per
year
Variable cost function
€200 per hour
Cost allocated to Microcomputer division €200.000 +
(900x€200)
€380.000
Peripherical equipment division
Fixed costs function (400/1200) x €300.000
€100.000 per
year
Variable cost function
€200 per hour
DEPARTMENT OF
AARHUS UNIVERSITY
MANAGEMENT
Management Accounting
Stefan
Stefan
Schaper
Schaper
Associate
Professor,
Ph.D.
Associate
Professor,
Ph.D.
Cost allocated to Peripheral Equipment division €100.000
€160.000
Fixed
Variabl
e
EXERCISE 5.14
• Fixed costs: € 1,000,000
• Variable costs: € 2,000,000
Factory
Usage in KWh
Budget
Actual
Kifisia
100.000
80.000
Iraklion
60.000
120.000
Chalandri
40.000
40.000
DEPARTMENT OF
AARHUS UNIVERSITY
MANAGEMENT
Management Accounting
Stefan
Stefan
Schaper
Schaper
Associate
Professor,
Ph.D.
Associate
Professor,
Ph.D.
LEARNING OBJECTIVES
1. Describe how a costing system can have multiple cost objects
2. Outline four purposes for allocating costs to cost objects
3. Discuss problems faced when collecting costs in indirect cost
pools
4. Describe single-rate and dual-rate cost-allocation method
5. Explain changes in risks at budgeted versus actual allocation rates
6. Learn direct, step-down and reciprocal methods of
allocating costs
7. See differences in incremental and stand-alone cost-allocation
method
8. Outline consequences of the inappropriate use of an allocation
base
9.OF Describe why managers
may Accounting
find cost
hierarchy-based
reports
DEPARTMENT
Management
Stefan
Schaper
AARHUS UNIVERSITY
MANAGEMENT
Associate Professor, Ph.D.
useful
SUPPORT DEPARTMENT COSTS
Operating
Department(s)
(a production department in
manufacturing companies) adds
value to a product or service
DEPARTMENT OF
AARHUS UNIVERSITY
MANAGEMENT
Management Accounting
Support Department(s)
provides services that assist
operating and support departments
in the organisation
Stefan Schaper
Associate Professor, Ph.D.
SUPPORT DEPARTMENT COSTS
Direct
method
• Allocates support department costs to
operating departments only
Step-down
method
• Allocates support department costs to
other support departments and to
operating department.
• aka as sequential allocation
Reciprocal
method
• Allocates costs by including the mutual
services provided among all support
departments.
DEPARTMENT OF
AARHUS UNIVERSITY
MANAGEMENT
Management Accounting
Stefan Schaper
Associate Professor, Ph.D.
Exh. 5.5. &
5.6
DIRECT METHOD
• The direct method is the simplest
method.
• Here we ignore the mutual
exchange between support
departments and pretend that the
entire resource consumption is used
by the operating departments only.
Plant
maintena
nce
S
1
S
2
Informatio
n Systems
DEPARTMENT OF
AARHUS UNIVERSITY
MANAGEMENT
Management Accounting
Stefan Schaper
Associate Professor, Ph.D.
Machine
Departme
nt
P1
P2
Assembly
Departme
nt
Exh. 5.7
STEP-DOWN METHOD
• Allows a partial recognition of
services rendered by support
departments
• Requires to rank the support
departments (to determine the
sequence)
 % or
 € amount
of total service provided to other
sup. deps.
DEPARTMENT OF
AARHUS UNIVERSITY
MANAGEMENT
Management Accounting
Plant
maintena
nce
S
1
S
2
Informatio
n Systems
Stefan Schaper
Associate Professor, Ph.D.
Machine
Departme
nt
Step 1
Step
2
P1
P2
Assembly
Departme
nt
Exh. 5.8
RECIPROCAL METHOD
 Explicit inclusion of mutual services
provided among sup. deps.
Plant
maintena
nce
S
1
Three steps:
1.
For the distribution of each sup.
dep.’s costs an equation is
formulated
2.
Calculate the complete reciprocated
costs for each sup. dep.
3.
Allocate these complete reciprocated
costs to all other departments (both
operating and support)
DEPARTMENT OF
AARHUS UNIVERSITY
MANAGEMENT
Management Accounting
S
2
Informatio
n Systems
Stefan Schaper
Associate Professor, Ph.D.
Machine
Departme
nt
P1
P2
Assembly
Departme
nt
RECIPROCAL METHOD
Calculation of
reciprocated
costs
Exh. 5.8
p. 138
Plant
maintena
nce
Machine
Departme
nt
S
2
P2
S
1
P1
Distribution of the support
department's resource
Informatio
Assembly
n Systems
Departme
consumption to
operational departments. nt
DEPARTMENT OF
AARHUS UNIVERSITY
MANAGEMENT
Management Accounting
Stefan Schaper
Associate Professor, Ph.D.
RECIPROCAL METHOD
Example – Step 1:
• "Plant Maintenance" uses 10% of Information
Systems service.
• ”Information Systems” uses 20% of ‘Plant
Maintenance’ services
• We illustrate this mathematically by adding
reciprocal resource consumption to the
department's costs:
PM = € 600,000 + 0,1IS
IS = € 116,000 + 0.2PM
DEPARTMENT OF
AARHUS UNIVERSITY
MANAGEMENT
Management Accounting
Exh. 5.8
p. 138
Plant
maintena
nce
P
M
IS
Informatio
n Systems
Stefan Schaper
Associate Professor, Ph.D.
Machine
Departme
nt
P
1
P
2
Assembly
Departme
nt
RECIPROCAL METHOD
Exh. 5.8
p. 138
Example - Step 2:
PM = €600.000 +
We first solve for ”Plant Maintanence” (PM):
0,1IS
IS = €116.000 +
PM
= € 600,000 + (0.1 (€ 116,000 + 0,2PM
0.2PM))
= € 600,000 + € 11,600 + 0.02PM
We plug IS’ equation
into the PM equation
0.98PM = € 611.600
where we have
PM = € 611.600 / 0.98 = € 624.082
indicated IS
DEPARTMENT OF
AARHUS UNIVERSITY
MANAGEMENT
Management Accounting
Stefan Schaper
Associate Professor, Ph.D.
Exh. 5.8
p. 138
RECIPROCAL METHOD
(…) Step 2:
Now we have a value for PM and can
therefore solve IS’ equation:
IS = € 116,000 + 0.2 (€ 624,082)
IS = € 240,816
Step 3:
Calculate the amounts to be allocated:
• From IS to PM (10%): 0.1x € 240.816 = €
24.082
• From PM to IS (20%): 0.2x € 624,082 = €
124,816
DEPARTMENT OF
AARHUS UNIVERSITY
MANAGEMENT
Management Accounting
€
124.816
P
M
€
24.082
Plant
maintena
nce
IS
Informatio
n Systems
Stefan Schaper
Associate Professor, Ph.D.
Machine
Departme
nt
P
1
P
2
Assembly
Departme
nt
RECIPROCAL
METHOD
​Careful: do not dublicate
costs allocated to the
operation departments!
• not all complete
reciprocated costs are
allocated to op. dep.
• some are allocated to the
other supp. Dep.
​What do thes
calculations show us?
DEPARTMENT OF
AARHUS UNIVERSITY
MANAGEMENT
Management Accounting
Stefan Schaper
Associate Professor, Ph.D.
STILL NOT CLEAR WHY?
​Exh. 5.9 shows the effect that the different
calculations will eventually have on a productcosting level in each department
DEPARTMENT OF
AARHUS UNIVERSITY
MANAGEMENT
Management Accounting
Stefan Schaper
Associate Professor, Ph.D.
Exh. 5.9
p. 138
LEARNING OBJECTIVES
1. Describe how a costing system can have multiple cost objects
2. Outline four purposes for allocating costs to cost objects
3. Discuss problems faced when collecting costs in indirect cost
pools
4. Describe single-rate and dual-rate cost-allocation method
5. Explain changes in risks at budgeted versus actual allocation rates
6. Learn direct, step-down and reciprocal methods of
allocating costs
7. See differences in incremental and stand-alone cost-allocation
method
8. Outline consequences of the inappropriate use of an allocation
base
9.OF Describe why managers
may Accounting
find cost
hierarchy-based
reports
DEPARTMENT
Management
Stefan
Schaper
AARHUS UNIVERSITY
MANAGEMENT
Associate Professor, Ph.D.
useful
ALLOCATING COMMON COSTS
​By optimizing / rationalising an organisation, some costs are added
together and then are difficult to be assigned separatelty.
​If we then want to distinguish these costs because it is essential to
our cost object, then there are two methods:
1. Stand alone: Individual equal assessment - weighted
distribution
2. Incremental: additional cost of activity
​Basic assumption: We know the two individual costs before
DEPARTMENT OF
AARHUS UNIVERSITY
MANAGEMENT
Management Accounting
Stefan Schaper
Associate Professor, Ph.D.
ALLOCATING COMMON COSTS
See on pp.
139-40
The example of two flights:
• Two-way ticket to Moscow: € 1200
• Two-way ticket to Prague: € 800
• Common trip to Moscow and Prague: € 1500 - we save € 500
Stand alone (weighted
distribution):
Incremental (additional cost
assessment):
Allocation of costs to Moscow:
€ 1200 / (€ 800 + € 1200) = 0.6
60% of € 1500 = € 900
Moscow as the primary tour and thus
the cost is € 1200
Allocation of costs to Prague:
€ 800 / (€ 800 + € 1200) = 0.4
40% of € 1500 = € 600
Management Accounting
Prague as an additional cost
€ 1500- € 1200 = € 300
DEPARTMENT OF
AARHUS UNIVERSITY
MANAGEMENT
Stefan Schaper
Associate Professor, Ph.D.
CONSEQUENCES OF
INAPPROPRIATE USE OF
ALLOCATION BASE
• Many commercial contracts include clauses that require cost accounting
information.
•
These can provide incorrect information for decision making and distort the cost
information
•
Give a wrong basis for bonus payout etc.
•
Provide the wrong basis for future prioritization of cost objects as well as incorrect
prioritization regarding service departments' functions
•
In the worst case, provide the wrong information base for pricing and market strategies.
• Contract disputes can often be reduced by making the cost assignment rules
as explicit as possible.
• These rules should include details such as cost item, cost-allocation base
and how differences between budgeted and actual costs are to be handled.
DEPARTMENT OF
AARHUS UNIVERSITY
MANAGEMENT
Management Accounting
Stefan Schaper
Associate Professor, Ph.D.
DEPARTMENT OF MANAGEMENT
A ARHUS UNIVERSITY
Management Accounting
Stefan Schaper
Associate Professor, Ph.D.