Question

What are the differences between single charging rate and multiple charging rates? What factors might a company consider when determining how to allocate support department costs to a producing department? Give some examples of a type of support department costs and why it might be reasonably allocated to a producing department or departments.

What are the three methods of allocation and what are the differences between them? Why might a company choose one method over another?

Answer 1

Answer:

1. Single charging rate is rate determined on the basis of single cost allocation method. For example all the overheads are allocated on the basis of direct labour hours or Machine hrs or any other allocation basis. Multiple charging rates is rates determined on the basis of multiple cost allocation methods. For example Overheads are first divided into various activities and then cost related to those activities are allocated on the basis of levels of those activities in various departments or different products.

This is Activity Based Costing method. Factors which company should consider for determining the allocation basis of cost includes the usage of services of support departments by the producing departments.

This can be on the basis of no. of employees or area occupied by the producing departments or No.of types of products made by the producing departments etc. Example of support department costs includes Maintenance Cost, Human Resources costs etc.

2. Different cost assignment techniques are utilized to distribute processing plant overhead expenses to units of generation. Distributions are performed with the end goal to make money related explanations that are in consistence with the material bookkeeping structure. The most widely recognized allotment strategies are noted in the accompanying visual cues, alongside analysis about their favorable circumstances and burdens:

Direct labor:

Overhead is connected dependent on the measure of direct work devoured by a unit of generation. This is a simple computation, for there is generally a mechanical building standard as of now set up that reports the measure of direct work related with an item. Nonetheless, the measure of direct work expended might be far littler than the measure of manufacturing plant overhead, which can result in extensive assignments dependent on little measures of direct work cost.

Machine time:

Another most loved is cost portions dependent on the measure of machine time utilized by an item. Similar to the case for direct work, the explanation behind this prevalence is that the standard measure of machine time utilized is now accessible as mechanical building documentation.

Square footage:

It might be valuable to isolate out those overhead costs identified with stock stockpiling, and apportion these costs dependent on the quantity of square feet of storage room utilized by every item. While this is a more precise approach to connect certain overhead expenses with items, it tends to be hard to track, particularly when stock levels are always showing signs of change. Another worry is that area is just two dimensional. A more precise methodology is designate costs dependent on cubic feet of storage room expended.

When settling on which cost designation technique to utilize, remember that none of these strategies will accomplish a cozy connection between the allotted expenses and the cost articles to which they have been connected. Subsequently, it is best to utilize the easiest strategy accessible, and not stress over an abnormal state of designation accuracy.