Question

discuss analyzing cost allocation methods?

Explain the importance of computing ratios and their significance to investors ?

Answer 1

Costs incurred are to be allocated to the respective cost centres on some reasonable basis.

allocation of costs ensures proper cost ascertainment

Cost ascertainment is required to identify the product /department cost and the profit earned by them

How to analyse

Find the common costs, which are not directly attributable and pool them together

find the unit/object where the cost analysed in the previous step to be allocated

Find the right method to apply the common costs to the identified objects

Cost units /object can be a branch/ a segment/ a deparment etc.,

There wil be various common costs which needs to be assigned, and all of them are brought together under the common cost pool

Cost allocation may be on the basis of the space occupied, no of units produced , sold, units consumed, etc., Ratios help in understanding the financial health of the entity. It’s the qualitative technique to understand the financial performance of the company naturally the investors, would like to know the financial health of the company they have already invested, or would want to invest The ratios also help in comparing the performance of various companies to understand and decide the health Just numbers may not be relavant for comparison, there the ratios help This could only help to compare an apple with an apple, and not an apple with an orange