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In: Accounting

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

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

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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 2 years ago
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