Describe why the allocation of indirect costs is such a critical topic in cost accounting. Be...

Describe why the allocation of indirect costs is such a critical topic in cost accounting. Be specific and provide a comprehensive answer (do not describe the methods). Provide reasons for cost allocation.

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Expert Solution

Allocation of indirect costs is such a critical topic in cost accounting because indirect costs are such costs which are not directly allocated to the products.
These costs cannot be charged to products at any specific rate. These can be either fixed or variable.
Indirect costs are not directly related to production.

So, due to the above mentioned reasons indirect costs becomes such a critical topic in cost accounting as the cost allocations of indirect costs is not easy.

There are various reasons for cost allocation. These are as follows :

It helps in determining the actual costs of the products.
Proper accounting and management of the income statement can be done.
Helps in various decision makings like whether to accept or reject a special order.
Helps in evaluation of various departments and their employees.
Helps in budgeting process.

ekkarill92 answered 2 years ago

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