FARM FINANCIAL STANDARDS COUNCIL CASE STUDY

Farm Financial Standards Council case study

Farm Financial Standards Council case study

Ways to Use Traditional Cost Allocation

Cost allocation is a significant theme because numerous of the costs affiliated with conceiving, making and circulating goods and services are not effortlessly recognized with the goods and services that are created. Although an introduction to overhead cost allocations is supplied in Chapter 4, the general theme is much broader than utilizing a fixed overhead rate (Abarbanell 2009). The reason of this section is to continue the Chapter 4 consideration to encompass the notions underlying cost allocations as well as a kind of procedures for assigning costs to the diverse goods and services produced.

 

Purposes of Cost Allocations

The reasons of cost allocations are nearly associated to the reasons of data schemes delineated in Chapter 2 (See Exhibit 2-4 for a review). Cost allocations are required to worth inventory for external describing reasons, for designing and supervising the cost of undertakings and methods, and for diverse short period and long period strategic decisions (Airey 2009). Some demonstrations encompass conclusions to "make or buy" sub-components and services, how to cost goods and services, when to add or cease diverse goods and services and when to elaborate or agreement the dimensions of a segment of the company. Cost allocations are furthermore required to support a cost when "cost-plus" charge is utilized, as in government contracting, and in positions where costs should be supported before reimbursement can be got, as in Medicare reimbursements to health facilities (Adams 2000). In supplement, since cost allocation procedures are constituents of the general presentation evaluation scheme, cost allocations are inclined to leverage the demeanor of the participants inside the system. Therefore, scheme designers should furthermore mindfully address the motivational or behavioral facets of alternate cost allocation methods.

 

The Supporting Logic of Cost Allocation Methods

 From the viewpoint of the equivalent notion, (i.e., equivalent cost and benefits) it is ordered to assign a cost to the object (e.g., client, undertaking, department, product) founded on a "cause and effect" relationship. The concept is to assign the cost to anything determinants, or drives the cost. If the person going by car for a cost will not be recognized, or recognized effortlessly, then an allocation design seen to be "fair and equitable" might be used (Achter 2001). A seek for a "fair and equitable" allocation procedure often directs the scheme designer to the "ability to ...