Professional Documents
Culture Documents
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Outline
Australian organisations in the 21st century
What is management accounting?
Management accounting and financial accounting
information
Management accountants within organisations
Management accounting processes and techniques
Planning and control
Important considerations in the design of management
accounting systems
Management accounting and the changing business
environment
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(Cont.)
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What is management
accounting?
the processes and techniques that focus on the
effective and efficient use of organisational
resources to support managers in their tasks of
enhancing both customer value and shareholder
value
(cont.)
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What is management
accounting? (cont.)
Customer value
The value that a customer places on particular features
of a product or service
Shareholder value
The value that shareholders or owners place on a
business
Resources
Financial and non-financial, including information, work
processes, employees, committed customers and
suppliers
Determine the capabilities and competencies of the
organisation
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Management accounting
systems
Systems that produce the information required by
managers to create value and manage resources
Include estimates of the costs of producing goods
and services, information for planning and
controlling operations and information for
measuring performance
Ad-hoc information to satisfy managers short term
and long term decision-making needs
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Management accounting
information
Focus is on the needs of managers within the organisation
Flexibility in the nature of information supplied
Influences
Managers information needs, nature of the resources they manage
Production and service technologies, organisational structure,
organisational size, the external environment, level of sophistication
of computer systems
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Management accounting
processes and techniques
Support the organisations formulation and
implementation of strategy
Contribute to improving the organisations
competitive advantage in terms of quality, delivery,
time, flexibility, innovation and cost, through
modern process improvement and cost
management techniques
(cont.)
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Management accounting
processes and techniques (cont.)
Provide information to help manage resources,
through systems of planning and control
Provide estimates of the costs of an organisations
outputs, to support the strategic and operational
decision needs of managers
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Mission statement
Defines the purpose and boundaries of the organisation
(cont.)
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Strategies
The direction that the organisation intends to take over
the long term to meet its mission and achieve its
objectives
Focus on ways to manage the organisation's resources
to create value for customers and shareholders
(cont.)
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Corporate strategy
Making choices about the types of businesses to operate in, which
businesses to acquire and divest, and how best to structure and finance
the organisation
In publicly listed companies, the choice of corporate strategy is influenced
by the expectations of major shareholders and securities market
(cont.)
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Strategy implementation
Putting plans into place to implement and support a
chosen business strategy
New structures, new systems, new production processes,
new marketing approaches, new HRM policies
(cont.)
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Product differentiation
Superior quality, customer service, delivery performance,
product features
(cont.)
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Implementing strategies
Managers at all levels share the responsibility for
implementation
Long-term plans linked to budgeting systems
Performance measurement systems compare actual
outcomes to targets
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Planning
A broad concept that is concerned with formulating
the direction for future operations
Allows an organisation to consider and specify all
resources needed in the future
Occurs at all levels of the organisation
A budget is an example of a short-term plan that
summarises the consequences of an organisations
operating activities for a specified time period
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Controlling
Involves putting mechanisms in place to ensure
that operations proceed according to plan and that
objectives are achieved
Management accounting information provides
information for control by comparing actual
performance with plans, targets or budgets
Control systems are the systems and procedures
that provide regular information to assist in control
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(cont.)
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Management accounting
responses to the changing
By the 1990s,
many organisations realised that
business
environment
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Management accounting
responses to the changing
business
Conventional environment
management accounting
systems
(cont.)
Includes budgeting, costing systems and financial
performance measurement systems
In wide use for many decades and still used in many
organisations
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Management accounting
responses to the changing
(cont.)
business
Contemporaryenvironment
management accounting
techniques have developed to support the
adoption of new structures, systems and practices
Some organisations continue to use conventional
management accounting systems, while others are
in the midst of implementing contemporary
systems
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Summary
Management accounting supports managers in enhancing
customer value and shareholder value
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Chapter 2
Management accounting: cost terms
and concepts
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Outline
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Costing
Budgeting
Performance measurement
Cost management
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Emphasis on costs
Why do management accountants pay so much attention to
costs?
Historic focus on production coststo value inventory and cost of goods
sold for external reporting
Ready availability of cost data within the transaction-based accounting
system
Importance of cost information in managers decisions
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(cont.)
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Variable costs
Change in total in direct proportion to a change in the
level of activity
Fixed costs
Remain unchanged in total despite changes in the level
of activity
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(cont.)
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(cont.)
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(cont.)
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(cont.)
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Downstream costs
Marketing costs are the costs of selling products and the costs of
advertising and promotion
Distribution costs are the costs of storing, handling and shipping
finished products
Customer service costs are the costs of serving customers,
including after-sales service
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Manufacturing costs
Manufacturing costs are incurred within the factory area
Upstream and downstream costs are non-manufacturing
costs
Manufacturing costs include three categories: direct
material, direct labour and manufacturing overhead
This classification as direct or indirect cost assumes that products
are the relevant cost objects
(cont.)
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Direct labour
The cost of wages and labour on-costs for personnel who work directly on
the manufacture of a product
Usually treated as variable costs, however contractual arrangements
sometimes mean that such labour is a committed cost and so does not
vary with the level of production
(cont.)
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(cont.)
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Prime costs
The total of direct material cost and direct labour cost
The major cost associated with producing a product
(cont.)
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Product costs
Managers need estimates of product costs for different
purposes
In financial accounting reports
Product costs determine cost of goods sold
Product costs help value inventory on hand
All costs that are not product costs are called period costs
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(cont.)
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(cont.)
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Summary
Management accounting systems are tailored to
an organisations needs
Costing systems focus on the cost of products and
organisational units and are a component of
management accounting systems
We can distinguish between conventional and
contemporary management accounting systems
There may be different costs for different purposes
Costs may be classified by behaviour, traceability,
controllability and function
(cont.)
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Summary (cont.)
In manufacturing businesses, production costs
typically consist of direct materials, direct labour
and manufacturing overhead, in line with external
reporting requirements
The definition of product costs needed to support
management decision making may be broader
than that used for external reporting purposes
Product costing systems track the manufacturing
costs from the beginning of production to finished
goods and link the product costing system to the
financial accounting reports
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Chapter 3
Cost behaviour, cost drivers and
cost estimation
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Outline
What are cost behaviour, cost estimation and cost
prediction?
Cost drivers
Cost behaviour patterns
The relevant range
Engineered, committed and discretionary costs
Cost structures in modern business environments
Cost estimation
Practical issues in cost estimation
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Cost estimation
The process of determining the cost behaviour of a
particular cost item
Cost prediction
Using knowledge of cost behaviour to forecast the level
of cost at a particular level of activity
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Cost drivers
A cost driver
An activity or factor that causes costs to be incurred
Conventional approaches to understanding cost behaviour
assume that production or sales are the only cost driver
Variable costs are assumed to vary in proportion to the level of
production volume
Fixed costs remain unchanged as production costs increase or
decrease
Volume-based cost drivers include units produced, direct labour
hours, direct labour cost and machine hours
(cont.)
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Unit
Batch
Product
Facility
(cont.)
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Facility level
Costs incurred to run the business, not caused by any particular product
(cont.)
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(cont.)
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(cont.)
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Variable costs
Fixed costs
Step-fixed costs
Semivariable costs
Curvilinear costs
(cont.)
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(cont.)
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(cont.)
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Curvilinear cost
Has a curved cost line but is often approximated as a semivariable
cost function
At lower levels of activity there is decreasing marginal cost
At higher levels of activity there is increasing marginal cost
(cont.)
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purposes
Engineered costs
Bear a defined physical relationship to the level of output
If we know the level of activity, we can predict total cost
Committed costs
Arise from an organisations basic structure and facilities, and are difficult to change in
the short term
Discretionary costs
Are the result of a management decision to spend a particular amount of money for
some purpose
Can be changed easily
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Cost estimation
Approaches to cost estimation
Managerial judgment
Engineering approach
Quantitative analysis
Managerial judgment
Using experience and knowledge rather than formal analysis to classify
costs as variable, fixed or semivariable
Future costs are estimated by examining past costs and identifying
factors that might affect future costs
Reliability of cost estimates is dependent upon the ability of the manager
(cont.)
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(cont.)
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(cont.)
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(cont.)
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Cost estimation
Regression analysis
Multiple regression estimates a linear relationship
between one dependent variable and two or more
independent variables
Y = a + b1X1 + b2X2
The regression line can be evaluated using several
criteria:
Economic plausibilitydoes the regression line make
sense?
Goodness of fithow well does the line fit the data points?
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(cont.)
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(cont.)
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(cont.)
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Summary
Understanding cost behaviour allows cost prediction for
planning and control
Conventional cost drivers are volume-based, but more
recently may be non-volume related
Cost behaviours range from variable to fixed
Costs can be estimated using managerial judgment,
engineering approaches and quantitative techniques
Cost estimation is fraught with a range of practical difficulties,
and the choice of technique involves a cost-benefit trade-off
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Chapter 4
Product costing systems
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Outline
Product costing
Different costs for different purposes
Designing product costing systems
Flow of costs in manufacturing businesses
Allocating overhead costs to products
Accounting for manufacturing overheads
Types of product costing systems
Job costing
Process costing
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Product costing
Product costing systems
Accumulate product-related costs and use procedures to assign
them to the final products
In some businesses upstream and downstream costs are
regarded as product related
Upstream costsresearch and development, product design,
supply
Downstream costsmarketing, distribution, customer service
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(cont.)
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(cont.)
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(cont.)
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(cont.)
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(cont.)
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(cont.)
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(cont.)
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(cont.)
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Job costing
Bill of materialslists all the materials required for
a job
Material requisition formsauthorises the
movement of raw materials from the warehouse to
the production department
Job cost sheetsummarises the costs of direct
material, direct labour and manufacturing
overhead for a particular job
(cont.)
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xxxx
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(cont.)
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(cont.)
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(cont.)
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(cont.)
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(cont.)
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Process costing
The approach taken in process costing depends on
The existence of work in process (WIP) inventory at the end of
the accounting period
The degree to which products are identical in their consumption
of direct material and specific production processes
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Summary
Different measures of product costs are appropriate for
different purposes
Past costs for inventory valuation
Current and future costs for decision-making, which may include nonmanufacturing costs
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Chapter 5
Process costing and operation
costing
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Outline
Process costing
Process costing with work in process inventory
Calculation of equivalent units
The effects of beginning and ending work in process inventories
Process costing using the weighted average method
Process costing using the first-in, first-out (FIFO) method
Comparison of weighted average and FIFO
Process costing and spoilage
Operation costing
Other issues in process costing
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Process costing
Job costing and process costing are two extremes of the
continuum of conventional product costing systems
Job costing systems accumulate the costs of
each job
Process costing systems accumulate the cost of each
process then average these costs across all units produced
Many businesses use a combination of job and process
costing; this is called hybrid costing
(cont.)
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(cont.)
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Equivalent units
Equivalent units are used to calculated unit costs
when there is WIP
If WIP is 50% complete for 10 000 litres on hand at
the end of the month, it is
100% complete for direct materials, which are added at the
start of the process 10 000 equivalent units of material
50% complete for conversion costs, assuming that
conversion costs occur uniformly across the production
process 5000 equivalent units of conversion cost
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Physical units
completed
and
transferred
out
Physical
units in
ending WIP
(cont.)
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Equivalent
units in ending
WIP
= Total equivalent
units
(cont.)
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The cost per equivalent unit for direct material is the total direct material
costs divided by the total equivalent units
The cost per equivalent unit for conversion cost is the total conversion
cost divided by the total equivalent units
Under the weighted average method the cost per equivalent unit is based
on the total costs incurred including the cost of beginning WIP
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(cont.)
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Cost per equivalent unit is calculated for direct material (or conversion
cost) by dividing the direct material cost (or conversion cost) incurred
during the current month by the new equivalent units added during the
current month
Costs of opening inventory are not used in this calculation
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(cont.)
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Operation costing
Some businesses have repetitive production processes
but produce a narrow range of products that differ in
some significant aspects
Different material inputs
Different combinations of specific production processes
(cont.)
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(cont.)
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Summary
Process costing suits businesses that mass-produce a small
range of products
Weighted average or FIFO methods may be used to assign
costs to products and inventory
The presence of WIP inventory requires calculation of
equivalent units
Simple forms of process costing do not entail the costing of WIP
inventory
Operation costing is a hybrid of job costing and process costing
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Chapter 6
Service costing
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Outline
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(cont.)
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(cont.)
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service entities
Varying degrees of customisation, standardisation
of processes and traceability of costs
Costing systems will vary on a continuum from job
costing to process costing
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Overhead costs
Includes upstream and downstream costs
Identify the overhead cost driver, often professional labour
Predetermined overhead rate per dollar of professional
labour
(cont.)
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To set fees
Assess the profit or loss associated with each transaction
Information for control
(cont.)
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(cont.)
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Summary
Most service outputs are intangible, heterogeneous,
consumed as produced, perishable and cannot be stored
The type of service costing system may depend on the service
environment
Job costing may suit professional services
Process costing may suit mass services
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Chapter 7
A closer look at
overhead costs
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Outline
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(cont.)
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(cont.)
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(cont.)
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Three steps
Identify the overhead cost driver
Calculate the overhead rate per unit of cost driver
Apply the manufacturing overhead cost to the product
based on the predetermined overhead rate and the
products consumption of the cost driver
(cont.)
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(cont.)
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Budgeted manufacturing
overhead
Budgeted level of cost driver
by the product
(cont.)
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Activity-based costing
Focuses on the costs of activities
Has many activity cost pools and cost drivers which may
be volume or non-volume related
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(cont.)
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(cont.)
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Corporate level: some head office costs are allocated to business units
Within business units: administrative costs of business units may be
allocated to operating units
Manufacturing plant: indirect manufacturing costs may be allocated to
production departments
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General principles
Allocation bases should be cost drivers, where there is a clear and direct
relationship between the amount of cost driver and the level of cost.
Other criteria include
Benefits received
Ability to bear additional costs
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Summary
Overhead cost can be allocated to products using a plantwide
rate, department rates or activity-based costing methods
Ideally, cost drivers should be used as allocation bases
As the number of overhead rates increases the accuracy of the
product cost is likely to increase
Cost benefit considerations are relevant when choosing a
method for overhead allocation
Indirect costs can be allocated to user departments to
encourage users to manage their resources
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