Question

Why do companies allocate costs? What are some of the advantages and disadvantages to doing so?  

What are the similarities and differences among the direct method, the step method and the reciprocal method of allocating costs?

Accounting is objective and precise. Therefore, performance measures based on accounting numbers must be objective and precise. Do you agree? Why or why not?

Answer 1

The four main purposes for allocating costs are to predict the economic effects of planning and control decisions, to motivate managers and employees, to measure the costs of inventory and cost of goods sold, and to justify costs for pricing or reimbursement. Some costs remain unallocated because the accountants can determine no plausible and reliable relationship between resource costs and cost objects

Advantage and disadvantages of cost allocation :

It is relatively easy to implement and provides flexibility to account for the changing needs of particular business.

It makes labor costs easier to monitor and control. Managers can pick and choose how to determine productivity, and efficiency.

Managers are able to identify if resources are essential and not-essential.

The disadvantage of cost allocation systems is that they are complicated and require more work than traditional systems and constant refinements as the business expands and/or changes. Maintaining, operating, and examining this data can be expensive and time consuming.

Differences among methods of cost allocation

Direct method: A cost allocation method in which all overhead costs are allocated directly to the patient services departments with no recognition that overhead services are provided to other support departments.

Reciprocalmethod: Reciprocal method is a method of allocating service department costs to other departments that gives full recognition to interdepartmental services.

Step down method: This method allocates the costs of some service departments to other service departments, but once a service department’s costs have been allocated, no subsequent costs are allocated back to it.

The similarity among them was all the builder presents The cost allocation among the product.

I agree with the statement accounting is objective and precise therefore performance measures based on accounting number must be objective andsand precise side a path the quality among the performance should also reviewed by time to time