Chapter 12 video notes PDF

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Online accounting video (lecture) notes, Chapter 12...

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How much something costs  Will have to allocate the cost for each thing  First classify costs as o Direct costs: fixed or variable cost that is easily traceable (can easily tie cost to the specific department) (benefit exceeds cost)  Cost of goods sold (VC)  Sales commission (VC)  Department manager’s salary (FC)  Depreciation (FC) o Indirect costs: fixed or variable that is not easily traceable (cost exceeds benefit)  Store manager’s salary (FC)  Rental fee for store (FC)  Utilities (VC)  Advertising (FC)  Supplies (VC)  Need to allocate indirect costs across departments next  Questions: o Indirect costs are frequently called overhead costs o As a result of the cost/benefit concept, a cost that could be traced directly to a cost object may still be treated as an indirect cost. o The process of assigning costs to two or more cost objects requires cost tracing, cost allocation, and cost/benefit analysis o Costs that can be traced to objects in a cost-effective manner are called direct costs o True concerning indirect costs?  Indirect costs may also be called overhead costs.  An indirect cost is a cost that cannot easily be traced to a cost object.  A cost that could be directly traced may still be treated as an indirect cost.

Continuing with costs…  Allocating the indirect costs o 1) amount to be allocated= “what” o 2) cost object= “where” to allocate o 3) cost driver= “how” to allocate (what is driving the cost)  Allocation Rate= cost to be allocated / cost driver  Cost driver often called the base  Questions o The process of dividing a total cost into parts, and assigning the parts among relevant cost objects is called Allocation

o Logan Corporation has 30 employees, 10 in "A-line," and 20 in "B-line." Logan incurred $180,000 in fringe benefits costs last year. Assuming number of employees as the allocation base, how much in fringe benefits cost should be allocated to "A-line"? 

Cost to be allocated ÷ Allocation Base = Allocation rate × Weight of base = Amount to Allocate $180,000 fringe benefits cost / 30 employees = $6,000 per employee × 10 employees = $60,000

What cost driver do we use  How to select the best cost driver? o 1) have a strong cause and effect relationship= an increase in driver causes increase in cost or vice versa o 2) must be available o 3) cost must be controllable  Ex: o “what” is utility cost o Cost driver is square feet o The more square feet the department takes up the more they pay for utilities  Ex: o “what” is shopping bags o Cost driver can be sales volume=the more sales= the more bags used (not very accurate because clothes in men’s department can be more expensive making sales volume high but number of bags used low because they buy less items each time) o BUT number of transactions is better to use if this information is available to use  Ex: o “what” is store manager’s salary o Driver is number of departments (3 total in example) o This cost driver is used because there is no real perfect cost driver (because it is a fixed cost)- so split evenly between all department  Find a bonus by multiplying department profits by 0.10 (inn this ex)  Questions

o To identify the best cost driver for a particular allocation consideration should be given to : the strength of a cause and effect relationship, the availability of information, and the capacity to control the allocation base.

o Most logical cost driver for allocating the telephone bill among four departments is number is telephones

Example as to why it is important to choose the right cost driver  The cost driver changes the amount allocated

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Choosing may be based on what the focus of the company is (on teacher’s research is? Or on students?) o Base on mission (may be political) Questions o All are normally present during an allocation decision: political influence, human emotion, and differences of opinion...