In: Accounting
1 Please briefly discuss: a. methods of dealing with the allocation problem. b. the general rules related to revenue recognition. c. the general rules for allocating tax expenses between periods.
a.
Resources (like land, labor, capital, and organization) are allocated to different units or production levels. Basically fixed costs out of the utilization of those factors (like interest on capital, rent for the land, etc) are allocated; and this removes allocation problem.
Methods are as below:
No. 1) Direct method: Under this method a base of allocation is chosen, like floor space occupied by various units, and then the related cost, like rent for the land, should be allocated.
No. 2) Step method: This is the process of allocating service department cost with the help of predetermined rates, like 30% and 70% to two different units.
No. 3) Reciprocal method: In this case relationship of units with cost should be established first and then the required allocation should be done; suppose a service department (ABC) uses more power than other departments; therefore, electricity cost for the whole factory should be allocated more in ABC.
b.
Revenue of a firm must be recognized if its required performance obligation is complete, such as delivery of goods to the buyer’s place.
Revenue of a firm is realized if goods are delivered and cash is collected by seller.
Revenue is earned if goods are delivered but cash is not yet received.
Advance payment of cash must not be considered as revenue unless the required work is done.
c.
This is the intraperiod tax allocation, which indicates charging taxes on different fields and should be recorded the taxable amount as net of tax.
The rules are applicable to the following:
No. 1) continuous operating
No. 2) Discounted operation
No. 3) Adjustments of earlier periods
No. 4) Amount of effect for principle changes