Question

One topic I have had trouble with is allocated fixed cost. How would you know when you have it and where would you put it into the reports?

Answer 1

fixed cost is the cost that has to be bourne by company and which doesnot change with the increse or decrease in the amount of goods produced or sold. fixed cost is one the two parts of the total cost of a running buisness.

for example the factory rent or office rent is a fixed cost for the buisness. it wont change with the production output or sales. company has to pay it which is fixed the owner doesnot matter what the output of the company is.

another examples of fixed cost are insurance, office expenses, depreciation, salaries etc....

fixed cost can be aallocated on different basis. it can be allocated on the basis of space occupied by the different departements or on the basis of production or machine hours or to particular period etc....

Fixed overhead costs are allocated to products using the following steps:

> Assign all the fixed expenses incurred in the period to a cost pool.

> select a basis of allocation for applying the fixed cost to products, such as the number of direct labor hours incurred per product, or the number of machine hours used.

> Divide the total fixed cost in the cost pool by the total units of the basis of allocation used in the period. For example, if the fixed overhead cost pool was $10000 and 200 hours of machine time were used in the period, then the fixed cost to apply to a product for each hour of machine time used is $50

> Apply the fixed cost in the cost pool to products at the standard allocation rate. this means that some of the allocated fixed cost is charged to the cost of goods sold (for goods produced and sold within the period) and some is recorded in the inventory (asset) account (for goods produced and not sold within the period).

fixed costs are reported into the income statements of the company.