Question

Scarborough Sales, a real estate company specializing in apartment rentals and home sales, is having difficulty in gathering appropriate cost information for evaluating its operations. It owns several large apartment complexes and sells homes owned by builders or existing homeowners. As the company's new accountant, you define cost by major activity. You use this information for allocating costs to cost objects. In addition, cost pools are created for appropriate cost allocations. The owner of the company is interested in exactly what you have done, and why it appears to be working so smoothly.

State the four purposes for allocating costs to cost objects and give two examples of how each can be used for the real estate company

Answer 1

solution :

Cost Allocation is when an cost manager/ accountant identifies , classified ,summarizes and asign cost to cost object .cost object are those items that you want to track the costs of individually . Cost object may be internal or external .Allocating cost have following purpose

1. To make decision ]

2. To Reduce waste

3. To Determine price

4.To Predict the economic effect

1. To make decision : one of the main purpose of allocation of costs is to make decision making process easy by providing information relating to Decision making . it provide which department or segment is taking large proportion of fund is important for weighing alternatives in both short and long run.

2. To Reduce waste : this is the second best reason to investing the time in cost alloaction due to it helps is reducing waste .for example if a department consume more supplies it helps to identfiy that whether it is necesary for that department or it waste some supplies.

3. To Determine Price : businessn have a main objective is to sell its product so that it make profit . to sell a prodcut cost allocation helps to determine the price of product by telling which material consume more or less etc.

4.To Predict the economic effect of planning and control decisons of an organisation.

examples how cost alloaction is used in real state company.

1. Decision making : by cost alloaction we have identify which segment give real state company more profit or which segment give losses for example Scarborough Sales have 2 segments a. apartment rentals b.home sales so by cost allocation we idetify which take large portion of organisation resources etc.

2. To reduce waste :  Scarborough Sales have 2 segments a. apartment rentals b.home sales by cost alloaction we identify which of the segment consume more resources so we identify it and motivate them to reduce the wastes.