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Chapter 4

Managerial Accounting CH4.docx

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ACCT 2301
Ed Dinan

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Anna Wang Managerial Accounting 4 Chapter 4 CostAccumulation, Tracing, &Allocation - Cost object – things that we are trying to determine the cost of (products, processes, departments, activities, etc) Determine the Cost of Cost Objects - Cost accumulation – measuring the cost of a particular object by combining many individual costs into a single total cost Ex – want to promote a ball game by giving away free baseball caps to all the kids who attend Cost of caps Cost of advertising Promotion Cost of labor Secondary Primary Cost Cost Object - determining the cost of the secondary cost objects require identifying what drives those costs - Cost driver – any factor (usually a measure of volume) that causes costs to be incurred Aka activity base and allocation base -has a cause-and-effect relationship with the cost object - Cannot know the actual costs and revenue until after the promotion – use estimates Identifying Direct and Indirect Causes Store manager decides to give dept managers bonuses based on each’s contribution to profitability - requires cost tracing and allocation Direct Cost – can be easily traced to a cost object in a cost-effective manner Indirect Cost – cannot be easily traced to a cost object in a cost-effective manner (based on cost/benefit analysis) Cost Classifications – Independent and Context Sensitive - Whether a cost is direct or indirect is independent of whether it is fixed or variable Cost of Goods Sold = direct and variable Cost of Supplies =indirect and variable 1 Anna Wang Managerial Accounting 4 Cost of Rent = indirect and fixed Cost of Depreciation = direct and fixed - The same cost can be either direct or indirect depending on the cost object - Astore manager’s salary is not directly traceable to a specific dept, but it is to a particular store Allocating Indirect Costs to Objects - Common costs – support multiple cost objects, but cannot be directly traced to a specific object - Dept managers may shirk responsibility and claim that others higher up the chain of command are responsible for costs such as rent - Responsibility many be motivated by allocating a portion of the common cost and giving them authority /control over it - Controllable costs – can be influenced by manager’s decision and action - Cost allocation – divide total costs into parts and assigning the parts to designated cost objects How to Allocate Cost Step 1 – Identify Cost Driver for each cost to be allocated Allocation Rate = Total Cost to beAllocated ÷ Cost Driver (Allocation Base) 2 2 $0.80/ ft = $18,400 Rental Fee ÷ 23,000 ft Step 2 – Multiply theAllocation Rate by the Weight of the Cost Driver to determine allocation per cost object 2 Cost Object has 10,000 ft of space 10,000 ft x $0.80/ ft = $8,000 Selecting a Cost Driver Ex –Allocate the cost of shopping bags # Dept Children Men of transactions has a greater cause-and-effect #Transactions 120 92 relationship b/c a bag is used with every Vol of SalesDollars $1,440 $1,612 transaction If there is no strong cause-and-effect relationship, must allocate costs arbitrarily (equally, etc) Effects of Cost Behavior on Selecting the Most Appropriate Cost Driver 2 Anna Wang Managerial Accounting 4 Using Volume Measures to Allocate Variable Overhead Costs Causal relationship exists btw variable overhead costs and volume of production Possible Cost Drivers - Units produced - Direct labor hours - Direct material dollars Allocating Fixed Overhead Costs Volume of production does not drive cost - can still use a volume-based cost driver to distribute a rational share pf the cost to each product - Since # of units used to allocate cost doesn’t drive the cost, it is sometimes called the allocation base Allocation Rate = Total Cost ÷ Allocation Base Allocating Costs to Solve Timing Problem Products may be made before or after costs are incurred Ex – premium for an annual insurance policy are paid in March, but benefits extend before and after March. Allocation can be used to spread the cost over the products made during the year - need an allocation base that will spread cost evenly over annual production so that prices can remain the same for companies using cost-plus pricing Aggregating and Disaggregating Individual Costs into Cost Pools - pool individual costs into cost pools and allocate them to objects - should be limited to costs with common cost drivers - Sometimes need to disaggregate total overhead costs into smaller pools with common cost drivers Allocating Joint Costs
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