ALLOCATING FIXED COSTS
In module one we treated the company as if it only had one product. This is probably not a realistic assumption. Some or all of the fixed costs may be used for multiple products, so how do we much each product consumes of common (overhead) resources.
We are referring to cost of equipment, building, supervisors and other resources that cannot be specifically attributed (directly traced) to one product. If we don’t know, we have to estimate or allocated these costs to the various products to estimate the unit cost of a product. We’ll never know the exact cost, but having a reasonable estimate is useful for many types of decisions.
Control and quality are other factors related to the allocations process and we’ll examine these aspects too in this module.
Required Material
Madegowda, J. (2007). Management Accounting, Global Media (read chapter 9), from library portal.
Martin, J.R. (n.d.) Management Accounting: Concepts, Techniques, and Controversial Issues – Chapter 8: Introduction. Management And Accounting Web Home Page. Retrieved from http://maaw.info/Chapter8.htm
Walther, L.M. (2010). Principles of Accounting: A Complete Online Text, chapter 19 (the section titled Modern management of costs and quality) and 20 (the section titled Activity based costing). Retrieved from http://www.principlesofaccounting.com/
Hermanson, R.H., Edwards, J.D., &Invacevich, S.D. (2011).Accounting Principles: A Business Perspective.First Global Text Edition, Volume 2 Managerial Accounting, 37-73. http://textbookequity.com/oct/Textbooks/TBQ_PA_Accounting_managerial.pdf
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