ADMS 3510 Lecture Notes - Cost Driver, Cost Accounting, Fixed Cost

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Support department cost allocation is treated separately in part because most period costs are excluded from inventoriable costs by accounting standards. But prices of the finished output must recover all manufacturing and non-manufacturing costs for corporation to remain profitable. Task of the management is to select the best method of cost assignment that most accurately includes the value added. Management team must select an observable and countable input to signal different levels of value added. The goal is to allocate period costs of non manufacturing activities proportional to the different levels of benefit provided to each of the users. Upstream and downstream costs are often interdependent: eg. r+d and customer service. If outputs are homogenous, simple average is appropriate , if not homogenous, then runs the risk of inadvertent over and under costing and pricing decisions. Discipline of the market: consumers rule when competition is intense.

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