Assume you are allocating indirect costs for the purchasing office in the Department of Public Works...

Assume you are allocating indirect costs for the purchasing office in the Department of Public Works to two mission centers, street paving and snow removal. What are two allocation bases (not allocation methods!) that could be used to distribute indirect costs from the director’s office to the mission centers? Which of your two is a better base and why? (6 points)

Expert Solution

The Different methods used for the allocation of indirect cost by the purchasing office in the Department of Public works are: -

a) Target Costing: - In today’s perfect competition market, it is not possible to increase selling price to earn desired profit. Hence, we should concentrate on reducing cost per unit.

Target costing = Target selling Price – Target Profit

b) Total Quality Management (TQM):- It is a policy in which companies maintain and improve the quality product to increase the selling price. Further companies also reduce non-value added activities to reduce its cost.

c) Just-IN-time (JIT): - It is a time management technique that seeks to utilize the most important resources. Example: Stock is also not maintained to reduce the carrying cost.

d) Process Costing: - This method of accounting in cost is used where we charged the processor operations over the final output processed. The account for the very process would be open and each expenditure for a process pertaining would be charged to that amount in the process.

In my opinion, I would recommend the process costing method. This method of costing is used in the industry where the material procured has to complete or would pass through many processes to get converted into a product produced finally.

This method is used when there is production in a mass of similar products, the associated cost with the units individually of the output cannot be differentiated from each other. This is the only approach that is considered reasonable for the product in determining the cost of products of varied industries.

The second Method I would prefer recommend would be Total Quality Management (TQM) as this ensure the quality of the goods that are to be produced. The quality should be maintained with the number of units produced.

jeff jeffy answered 2 years ago

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