Question

1. Discuss the arguments for and against cost allocation

2. What are the differences between revenue and capital expenditures? In your explanation, discuss the accounting procedures for each type of expenditure.

Answer 1

Ans 1

The allocation means that cost which is directly added to a cost object . Cost allocation means allocating all relating overheads directly to the various departments. The estimated amount of items/products of manufacturing overheads should be allocated to various departments.

Arguments for Cost allocation

1.Provides accurate cost- Allocation deals with the whole items of cost, which are related with any one department. For example, indirect wages of three departments are separately calculated and now each department can charged indirect wages individually in their departments respectively.

2.Accurate Profitabilty -Allocation of cost helps you to find out correct/accurate profitabilty of the product that you are manufacturing.

3. Activity Advantages-When you allocate costs to activities within your company such as selling eapenses you can see what activities are contributing to the costs. This can help you evaluate that activity to see if you can find ways to reduce the expenses associated with it.

Arguments against Cost allocation

1.Finding Actual Cost- The biggest disadvantages of cost allocation is the tracing the actual cost allocated to the particular Department.

2.Lack of Uniformity-It lacks uniform procedure. It is possible that two equally competent cost accountants can arrive at different results from the same information provided.

3.Costly- There are many procedures which need to be observed by a small and medium size concerned due to which the establishment and running costs are so much that it becomes difficult. Thus it can be used only by big concerned.

Ans 2

Difference between Revenue and Capital Expenditure are as follows:

1.The nature of Capital expenditure is of non recurring nature(means it is not regular) while revenue expenditure is recurring in nature(occurs regularly)

2.The purpose of Capital expenditure is to acquire fixed assets for future use in business(increases the future economy benefit from the business.) while revenue expenditure is done to maintain the fixed assets in business efficiently.

3.The benefit of Capital expenditure is more than one accounting year while of revenue is expenditure is used for one accounting year.

4.Capital expenditure lead to increase earning capacity of business and revenue expenditure is to maintain the earning capacity of business.

5.Incurring Capital expenditure lead to increase in value of assets.Incurring revenue expenditure lead to decrease in value of assets(For eg Depreciation on assets.)

Accounting procedures for Capital and Revenue expenditure

Capital expenditure is recorded as an asset . It is classified as a fixed asset, which is then charged to expense over the useful life of the asset, using depreciation (added to that class of assets for which capital expenditure is done.)

Revenue expenditure is recorded as an expense and directly charged to profit or loss statement(or Income Statement).