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Lecture 9

ADM 3346 Lecture Notes - Lecture 9: Variable Cost, Fixed Cost, Opportunity Cost

Course Code
ADM 3346
Tiemei L I

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Chapter 14 - Period Cost Application
Learning Objectives
Q1: Criterion of period cost application?
Q2: What process is used to allocate support department costs?
Direct Method
Step-down method
Reciprocal method
Q3: Single and Dual Rate allocations?
Q4: Analyze cost-allocation procedures to apply common costs and justify contractual reimbursement
Q4: terms
The Relevance Criterion
Provide information for economic decisions
Motivate managers and other employees
Justify costs or reimbursement amounts internally or externally
Measure GAAP-compliant income and assets for reports to external parties
Justification of Relevance
A direct cause-and-effect relationship of one business function cost driver to the
quantities consumed by user business functions
Benefits Received
The beneficiaries of the services provided are charged with costs in proportion to the
benefits received
if the parties believe the process is undertaken in good faith among all who may be
affected and they have equal access to relevant information, the outcome will be
perceived as fair.
Ability to Bear
Costs are allocated in proportion to the cost object’s ability to bear them
Generally, larger or more profitable objects receive proportionally more of the allocated
Allocating Support Costs to Operating Departments
Direct Method
The most widely used method of allocating support department costs
Allocates support costs directly to the operating departments
Service provided by one support department to another support department is ignored
Step-Down Method
Recognizes the cost of services provided by one support department to another
Allocate support costs to other support departments and operating departments in a
ranked order
Can be ranked by percentage of service or the dollar value of service provided to other
Lacks simplicity, economic plausibility
Reciprocal Method
Explicitly includes costs of mutual services between support areas
Uses simultaneous equations to obtain reciprocated (artificial) costs
Using linear equations, matrix algebra or Excel Solver
Highlights the complete reciprocated costs of support departments
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