Why might it be a mistake to allocate fixed costs to different products or segments?

Solutions

Expert Solution

Fixed cost are those cost which do not vary with changes in volume of output over a given period of time and within a relevant range of activity .But it should be observed that while fixed costs remains the same in total when the volume of output changes,fixed cost per unit of production decreases with increase in volume of output or vice- vsrsa.

Usually these cost are decided based on their direct relationship between fixed cost and product .It is not easy to derive the relationship between two.Fixed cost can be based on unit's potential to bear cost or cistcmay be allocated based on the ability of the department .

There is a chance that company may give large portion of fixed cost to the division which is more profitable and small proportion to that division which earns marginal profit.So,unless the fixed cost is allocated properly ,the final result can be misleading to the management and can create further problems while taking business related decisions.

ekkarill92 answered 1 year ago

Next > < Previous

Related Solutions

Why is it important that we allocate overhead costs to products? What might we use this...

Why is it important that we allocate overhead costs to products? What might we use this information for? How do you think a company chooses an overhead allocation method? While not mandatory for credit, I highly encourage you to read your classmates thoughts and comment on their reflections. You may be able to help each other! I will be reading your discussions and commenting both on the board itself and on the grading screen.'

Why is it important that we allocate overhead costs to products? What might we use this...

Why is it important that we allocate overhead costs to products? What might we use this information for? How do you think a company chooses an overhead allocation method?

1.What is the danger in allocating common fixed costs among products or others segments of an...

1.What is the danger in allocating common fixed costs among products or others segments of an organization? 2.From a decision-making point of view, should joint costs be allocated among joint products 3.What is a relevant cost?

Why might variable costs be considered less risky than fixed costs? (Fixed costs don’t change in...

Why might variable costs be considered less risky than fixed costs? (Fixed costs don’t change in relation to sales, so they still have to be paid, even if there is no income.) What happens if you don’t sell any cookies one month or sell only a hundred? The riskiness of fixed costs demonstrates why it’s a good idea for entrepreneurs to have a cash reserve in the bank equal to three months of fixed costs.

What are "common" fixed costs not allocated to segments? Can you think of any segments that...

What are "common" fixed costs not allocated to segments? Can you think of any segments that have been eliminated from companies that you are familiar with (products, etc.). I was shopping for a small truck recently and noticed that Mazda had eliminated economy trucks from their product line. Their small truck product line must have had a negative 'segment margin".

Why might a company sell its products for different prices in different markets even if the...

Why might a company sell its products for different prices in different markets even if the income levels of its target consumers were the same in all cases?

List three reasons why we allocate joint costs to individual products or services. Give an example...

List three reasons why we allocate joint costs to individual products or services. Give an example of when the particular cost allocation reason would come into use.

a- Free markets might fail to allocate resources efficiently. Discuss, and provide EXAMPLES, why markets might...

a- Free markets might fail to allocate resources efficiently. Discuss, and provide EXAMPLES, why markets might fail to allocate resources efficeintly. b- Externalities are a major cause of market failure. Using a supply and demand diagram, with an example, illustrate an analysis of positive externality in consumption and explain how governments could internalise the effects of a positive externality.

What are the drawbacks for a company who does not allocate overhead costs to its products?...

What are the drawbacks for a company who does not allocate overhead costs to its products? Why might a company do this and what other controls would they have to implement to insure optimal performance?

Choose a company. Break that company into two separate segments. What are three common fixed costs...

Choose a company. Break that company into two separate segments. What are three common fixed costs of the company? What are three traceable fixed costs to each segment

Subjects