Fifth edition Alnoor Bhimani Charles T. Horngren Srikant M. Datar Madhav V. Rajan Farah Ahamed

Cost allocation and costing systems

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Cost allocation and costing systems
Managers find it difficult to decide how much to spend on cost-allocation systems because it is difficult to quantify the costs and benefits. Benefits of more accurate cost-allocation systems generally increase as (1) the variety of outputs increases (if different outputs make different demands on resources (2) indirect costs increase (greater potential for material misallocation) and (3) competition increases in the output market (profit margins narrow, so there is less room for error. Costs of more accurate systems decline as information processing costs decline (e.g. bar-coding and metering technologies. For the many companies facing product proliferation, rising indirect costs, increasing competition and decreasing information costs, cost–benefit analysis is shifting in favour of more accurate allocation systems.

Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5
th
Edition, Instructor’s Manual
© Pearson Education Limited 2012 Emphasise that a cost can be direct with respect to one cost object, but indirect with respect to a different cost object. Consider a plant that produces several varieties of spaghetti sauce. Depreciation on the plant is direct with respect to the plant cost object but is indirect with respect to (i.e. cannot be traced directly to) the different sauce products. Depreciation on a machine used solely to make a particular type of spaghetti sauce is direct with respect to that of product line, but indirect with respect to individual jars of sauce.

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