In: Accounting
1.Explain why it is necessary to distribute indirect costs to products or services. 2. Mention which are the most used methods to assign indirect costs of manufacturing to a product or service. 1. Describe, in your own words, how the cost of a product is determined or service in a company. 2. Explain, in your own words, how the selling price of a product or servic
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It is necessary to allocate indirect costs to products or services because these costs are needed for the company's operations and health . the business is able to trace the costs objects and increase its profits only when the costs are assigned in the right way . As Indirect costs are costs that are not directly related to a specific cost. For example: security costs , administration costs etc . further we can divide them into fixed costs and variable costs . Fixed costs are fixed for specific product or department whereas variable costs vary with the level of output . it is important to distribute indirect costs to products or services to identify cost objects and to accumulate cost. Also the fixed costs does not vary according to the level of output produced but the variable costs vary with each unit of output produced extra. identifying cost is important because the organisation cannot allocate cost to anything . After identifying the cost objects, the company accumulate the costs into a cost pool, pending allocation to the cost objects. Some examples of cost pools include electricity usage, water usage, square footage, insurance, rent expenses, fuel consumption, and motor vehicle maintenance.