Cost Allocation

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Cost Allocation
University of Phoenix
Accounting in Healthcare
ACC561
December 12, 2010

Cost Allocation

Transfer Pricing

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Transfer pricing is a value attached to the output of a department to measure the value of the trade with other departments within the organization. Transfer prices will not affect the organization’s profit results. This contributes directly to the process of departmental performance measurement and indirectly to the measurement of a product performance (Finkler, Ward, & Baker, 2007). If Western Hospital purchases from an outside laboratory the Academic Hospital division will stop, and the combined profit will increase from $4,500 to $39,000. Methods of Allocation

Allocation of cost is a term used where the cost of an item is charged to a specific cost center without the need for any estimation procedure. For example, the salary of a sales manager will be allocated to the selling overhead cost center. The methods include direct method, elimination, method, and repeated distribution method. 1. Direct method – a cost is allocated to the concerned cost center directly. The approach may be implemented using two methods. a. The repeated distribution method taking into account the reciprocal nature of the service costs. b. An algebraic approach is used as an alternative to the repeated distribution method. This method requires that the reciprocal nature of the service costs is expressed in a set of simultaneous equations that are solved using matrix algebra. 2. Elimination method – the cost of each service cost centers are re-apportioned in turn. The costs of the first service center will be reapportioned to all user centers including other service centers. The first service center however, is eliminated for furher reapportionment. The cost of the second service center, including any costs already reapportioned from the first service center, is then reapportioned to all user...
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