Question

Please describe the 4 steps associated with the Cost Allocation process.

Also provide and comment on a illustration of a Cost Allocation method.

Answer 1

The cost to an cost object is assinged, aggregated and identified by the process of cost allocation. The examples for the cost objects are a product, a research project, a customer, a sales region or may be a department. For the financial reporting purposes also we are using the cost allocations to expand costs between inventory products or departments.

There will be having 4-Steps related to the cost allocation process.

​​​​​​Step 1 :- Collection of direct spending

​​​​​​In the account and sub account level, we have to collect the pool of direct spending for calculating the process cost. The labor, energy, information and the depreciation are the typical pools.

​​​​​​Step 2 :- ​​​​​ Allocation of indirect spending

​​​​​​​​​​​​Next we have to aim the spending that happens outside the manufacturing area on the basis of proper drivers. Sometimes it seems to be difficult to find an appropriate driver, but our aim must want to lie on searching a driver that we can able to capture and measure.

​​​​​​Step 3 :- Calculating cost center rates

​​​​​​The dollars in the production area we pooled once, then we have to calculate rates on dollars per "something". This something will depend upon the rate that we calculated . Commonly rates are the states based on dollars per machine hour, dollars per unit produced or by the dollar per batch.

​​​​​​Step 4 :- ​​​​​​ Assigning proper process rates to products

Using the calculated rates in the previous step, we are assing the cost to the products. By using various driver to each of the pool, we can able to assign the costs at the cost pool level or at the natural cost element. We get the information about where and how to manufacture a product by comparing the various costs associated with a particular machine, location, department or the line.