Notesale: Turn your study into money

Document Preview

Extracts from the notes are below, to see the PDF you'll receive please use the links above

---

Cost Objects

• A cost object is any activity for which a separate
measurement of cost is required (e
...
cost of making a
product or providing a service)
...
Accumulates costs by classifying them into certain
categories (e
...
labour,materials and overheads)
...
Assigns costs to cost objects
...

• Indirect costs cannot be specifically and exclusively
identified with a given cost object
...
e
...


2

Direct and Indirect Costs

• Cost allocations = process of assigning costs to cost
objects that involve the use of surrogate, rather than
direct measures
...


3

Assignment of direct and indirect costs
• Direct costs can be specifically and exclusively identified with a given cost
object – Hence they can be accurately traced to cost objects
...

• Cost allocations = process of assigning costs to cost objects
that involve the use of surrogate rather than direct
measures
...

• For accurate cost assignment, allocation bases should be significant
determinants of the costs (i
...
cause-and-effect allocations)
...

Allocation bases that are not significant determinants of
the costs are called arbitrary allocations (result in
inaccurate cost assignment)
...


5

Different costs for different purposes
Manufacturing organizations assign costs to products for:
1
...

2
...

For inventory valuation and profit measurement the aim is
to allocate costs between cost of goods sold (COGS) and
inventories:
Accurate individual product costs are not required – only an
accurate allocation at the aggregate level between inventories and
COGS
...
e
...

Example
Total overheads
Direct labour (or machine hours)
Overhead rate

= £900,000
= 60,000
= £15 per hour

9

Assume that the company has 3 separate
departments and costs and hours are
analysed as follows:
Dept
...
B
£600,000

Overheads
Direct labour
hours
20,000
20,000
Overhead rate
per labour hour
£10
£30
Product Z requires 20 hours (all in department C)
Blanket overhead rate charge
Separate departmental overhead rate
charge

Dept
...


10

When to use a blanket overhead rate
A blanket overhead rate can only be justified if all products
consume departmental overheads in approximately the
same proportions:

If a diverse range of products are produced consuming
departmental resources in different proportions separate
Departmental rates should be established
...

Stage 2 – Allocate departmental overheads to products
using second stage allocation bases/cost drivers
...


12

A two-stage allocation process
(traditional costing system)

13

An illustration of the two-stage process
for a traditional costing system
Applying the two-stage allocation process requires the following 4 steps:
1
...

2
...

3
...

4
...

14



---