Question

What are insurance premium and depreciation of machinery generally considered to be related to？

What steps are needed to apply the two-stage allocation process of the traditional cost accounting system?

Answer 1

Insurance premium and depreciation of machinery are both generally related to the costs of the machinery. In fact insurance premium and depreciation are both directly related to the cost of the machinery. So higher the cost of the machinery the higher will be the amount of insurance premium and the amount of annual depreciation. Conversely the lower the cost of the machinery the lower will be the amount of insurance premium and the amount of annual depreciation.

The steps that are needed to apply the two-stage allocation process of the traditional cost accounting system starts with the step of identification of indirect costs incurred by support departments like the purchasing department or the maintenance department etc. The support costs are then allocated to production departments. The next step is to combine the accumulated indirect costs with production department costs. This is done using direct labor hours or machine hours as the basis. The result is that a predetermined department overhead application rate is arrived at. The last step is to allocate the overhead costs to products as per the predetermined rates.