Columbia Case
Case Study: Columbia Company
Evaluate the two methods identified- predetermined rate versus actual cost- that the firm could use to charge the individual stores the costs of Columbia Company’s new collections department in terms of (1.) Practicality of application and ease of use (2.) cost control. Also, indicate whether a centralized or decentralized organization structure would be more conducive for each charging method.
Predetermined rates are used in applying overhead costs to products or departments developed at the start of a period. Whereas, actual costing is a method of allocating costs to products using actual direct materials, actual direct labor, and actual factory overhead. Generally, these results would be averaged over several units of output. Considering this, predetermined rates would be the easiest to use. Because, the numbers have already been determined, the stats can conveniently just be allocated. The costs are already understood and just have to be distributed among the various stores or departments. The information is also easily stored, tracked, and traced electronically. The actual cost method would be the most effective though. This method makes it easier to determine exactly where the strengths and weaknesses are. Managers are able to pinpoint a particular department when costs are up or down and more accurately assess the situation.
A centralized organization would be more conducive to a predetermined rate method. With this method, management will decide how costs are disbursed. They would also allocate the usage of all funds. However, a decentralized organization is one that would want to be more precise and have more accurate costs showing. Management does not have to be as involved as they do in centralized because the costs are going to be actual. Each department will know exactly where it stands. Many incidents that would involve upper management, would not be need because nothing is assumed.
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Evaluate the two methods identified- predetermined rate versus actual cost- that the firm could use to charge the individual stores the costs of Columbia Company’s new collections department in terms of (1.) Practicality of application and ease of use (2.) cost control. Also, indicate whether a centralized or decentralized organization structure would be more conducive for each charging method.
Predetermined rates are used in applying overhead costs to products or departments developed at the start of a period. Whereas, actual costing is a method of allocating costs to products using actual direct materials, actual direct labor, and actual factory overhead. Generally, these results would be averaged over several units of output. Considering this, predetermined rates would be the easiest to use. Because, the numbers have already been determined, the stats can conveniently just be allocated. The costs are already understood and just have to be distributed among the various stores or departments. The information is also easily stored, tracked, and traced electronically. The actual cost method would be the most effective though. This method makes it easier to determine exactly where the strengths and weaknesses are. Managers are able to pinpoint a particular department when costs are up or down and more accurately assess the situation.
A centralized organization would be more conducive to a predetermined rate method. With this method, management will decide how costs are disbursed. They would also allocate the usage of all funds. However, a decentralized organization is one that would want to be more precise and have more accurate costs showing. Management does not have to be as involved as they do in centralized because the costs are going to be actual. Each department will know exactly where it stands. Many incidents that would involve upper management, would not be need because nothing is assumed.
For each of