Bài giảng môn Kế toán, kiểm toán - Chapter seven: Cost allocation: theory

Cost Allocation: TheoryChapter SevenCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinConnection of Cost Allocation to Other Chapters in this BookChapter 2 (costing for decision making): Cost allocations might be used as proxies for opportunity costs.Chapter 4 (organizational architecture): Cost allocations are a form of transfer pricing and are useful for control.Chapter 5 (responsibility centers): Cost allocations influence decision rights and performance measurement.Chapter 6 (budgeting): Cost allocations influence how resources are allocated within the firm.Chapter 8 discusses practical problems of cost allocation.Chapters 9 through 13 (product costing): Indirect manufacturing costs are allocated to products.7-2Definitions and GlossaryCost object is a product, process, department, or program that managers wish to cost.Common cost is a cost shared by two or more cost objects.Examples: Accounting, building maintenance, supervisors.Cost allocation is the assignment of indirect, common, or joint costs to cost objects.Allocation base is the measure of activity used to allocate costs. Examples: hours, floor space, sales dollars.7-3Steps of Cost Allocation1. Defining the cost objects. Decide what departments, products, or processes to cost.2. Accumulating the common costs to be assigned to the cost objects. (Also known as indirect cost pools.)3. Allocating the accumulated costs to cost objects using an allocation base. (Also known as cost assignment, apportionment, or distribution.) Usually the allocation base approximates how the cost objects consume common resources.See Self-Study Problem.7-4External Cost-based ContractsUsage: Some organizations purchased goods and services with cost-based contracts. Suppliers were paid for their reported costs plus a stated profit percentage.Examples: Military aircraft, hospital services, university research grants.Incentives: Contractors maximize the indirect costs allocated to cost-based contracts.Responses:Tighter regulation of cost allocation practices.Abandon cost-based contracts in favor of fixed-price contracts.7-5External Reasons for Cost AllocationExternal financial reports:Allocate production costs between expenses (expired costs, such as cost of goods sold) and assets (unexpired costs, such as ending inventory).Income taxes:Uniform capitalization (“Unicap”) rules of the tax law prescribe when product costs can be deducted.Cost-based reimbursement:Some government contracts and regulated industries use cost-plus contracts.Bookkeeping costs are reduced if the same costs are used for external and internal reporting.7-6Internal Reasons for Cost AllocationDecision MakingManagers will try to reduce their use of common resources that have relatively high cost allocation ratesDecision ControlCentral executives can control behavior of operating managers with cost allocation policyAllocating more costs to a center constrains that center from using other resources7-7Cost Allocations are a Tax SystemCost allocations are economically equivalent to taxes on resource factors.Increasing cost allocation rates (or taxes) decrease profits reported by the center bearing the allocated costs.Increasing the cost allocation rate (or taxes) motivates profit-maximizing managers to use less of the cost allocation base.Example shows imposing an overhead rate R on salespersons decreases the number of salespersons. This is economically equivalent to a payroll tax on salesperson compensation.7-8Study Table 7-3Manager’s decision problem:Minimize cost to produce a $10 million sales by choosing two inputs: advertising and salespersons.With no cost allocation:Lowest cost combination to produce $10 million of sales per month is 40 salespeople and 158.11 adsWith cost allocation, overhead rate is $1000 per salesperson: Now the lowest cost combination consists of 34 salespeople and 171.5 adsSince $1000 makes sales persons more expensive, the optimum level of salespersons decreases from 40 to 34.Some advertising is substituted for salespersons, and the optimum level of advertising increases from 158.11 ads to 171.5 ads.7-9Allocation Proxies for ExternalitiesPositive externalities are benefits imposed on other individuals without their participation in the decision and without compensation for the benefits imposed on them.Negative externalities are costs imposed on other individuals without their participation in the decision and without compensation for the costs imposed on them.When costs are allocated, the overhead rate is a proxy for externalities that are hard to measure.7-10Average Overhead Rate as a Proxy for Marginal Opportunity CostsExternality: Adding more salespersons degrades human resource department services for all users.Marginal cost (MC): Slope of smooth opportunity cost. MC is constantly increasing along the curve. MC is hard to measure.Overhead rate (R): The average cost approximated by dividing total accounting cost by the number of salespersons. R is the slope of the dashed line in Figures 7-2, 7-3, and 7-4.Allocation is better for decision making when R>MC. (Case 1 and 2).Allocation might or might not be better when R>MC. (Case 3).7-11Multiproduct Firm CaveatIn multiproduct firms, the average cost curve for each product might not be well-behaved.Thus, applying the preceding analysis may be problematic.However, if most externalities arise due to additional employees then the text’s analysis continues to hold as long as the total cost (including externalities) as a function of the number of employees is well-behaved.7-12Choice of Allocation BaseThe measurable activity in the allocation base often is closely related to the hard-to-measure opportunity cost.Allocation Bases:Time spent or personnel costsSquare footage or personnel costsTime spent or number of customersTime spent or number of accounting transactions7-13Insulating vs. Noninsulating: DefinedInsulating allocation scheme: The allocation base is chosen so that the costs allocated to one division do not depend on the operating performance of some other division. Example: Floor area or a fixed pre-determined rate.Noninsulating allocation scheme: The allocation base is chosen so that the costs allocated to one division does depend on the operating performance of some other division. Example: Fixed percentage to each division.Both schemes motivate mangers to reduce waste of common resources, but they differ in other incentives.7-14Insulating vs. Noninsulating: IncentivesInsulating cost allocation:Performance of a division does not influence rewards for others.Each division bears its own risk of events outside its control.Noninsulating allocation:Creates incentives for mutual monitoring and cooperation because rewards depend on each otherReduce risk to managers of events outside their control. If random events are uncorrelated across divisions, then when one division is doing poorly, the others are probably doing well and bear more of the costs.7-15