Question

Why is it important to continue to allocate costs? Would you recommend that Anthony's Orchards continue to allocate costs? Why or why not? How would you recommend allocating the purchasing department to the three cost centers? What is the basis for your decision, i.e., number of apples used, etc.?

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Answer 1

Solution:-

Anthony's Orchard must allocate costs. The reason for this is that direct costs can be attributed to each cost center. On the other hand indirect costs cannot be traced easily to each cost center. When some purchasing costs can be directly attributed to a particular cost center, this must be done through the process of cost tracing. For instance, the purchase of sugar for the Apple Products department can be traced. On the other hand most of the indirect purchasing costs cannot be traced to a cost center. Because these purchases are common to each of the cost centers and cannot be traced to each cost center.

I would recommend allocating the purchasing department costs to each cost center based on the number of apples used. There is logic in allocating based on the number of applies used. The cost ofthe purchase department at Anthony's Orchard represents the resources that have been sacrificed to attain a particular objective. Now the purchase department cost must be allocated based on benefit each cost center receives from the purchase department. Now, these cost centers do not receive direct benefits from the purchase department. However, they receive benefits in the form of apples they receive from the orchard. Therefore, the number of apples used represents the benefits that each cost center receive from the Purchasing Department. So, the number of apples should be used to allocate the cost of the Purchasing Department among the three cost centers.