Cost Allocation
Cost allocation for indirect costs
Cost Pool – Set of costs that are added together before being allocated to cost objects on some common basis
Cost Driver/ Allocation base
Cost Object
Cost Driver Rate = Total Costs in Pool/ Total Quantity of Driver
Where total quantity of driver = practical capacity of driver
Cost of excess capacity = Cost Driver Rate * Excess capacity
Predetermined overhead rate - cost per unit of the allocation base used to charge overhead to products.
Predetermined overhead rate=Estimated overhead/Estimated allocation base
One-stage allocation system
* Single cost pool – Entire manufacturing overhead * Single allocation base / cost driver-Direct materials cost/ Direct labor hours/ Direct labor cost/ Machine hours/ etc. * Predetermined Overhead Rate or Burden rate = Total manufacturing overhead / X * Where X = Total Direct materials cost or Total Direct labor hours or Total Direct labor cost or Total machine hours used * Total product costs of A = Direct materials cost + Direct labor cost + allocated overhead cost where allocated overhead = Burden rate * # of machine hours used by A
Disadvantage: Assumes that all products consume direct labor (or other driver) and overhead in the same proportion.
Two-stage allocation system and Product Costing
Overhead costs are divided into different cost pools. Each cost pool has a cost driver (allocation base). * Split manufacturing overhead into more than one cost pool (e.g. create 2 cost pools whose costs add up to total manufacturing overhead cost) * Calculate burden rate
Cost pools | Cost Drivers | Overhead related to direct materials | Direct materials Cost | Overhead related to direct labor hours | Direct labor hours | Overhead related to direct labor cost | Direct labor cost | Overhead related to machine-hours | Machine hours |
Advantage: * Provides most accurate cost information * Cost system captures differences
Cost Pool – Set of costs that are added together before being allocated to cost objects on some common basis
Cost Driver/ Allocation base
Cost Object
Cost Driver Rate = Total Costs in Pool/ Total Quantity of Driver
Where total quantity of driver = practical capacity of driver
Cost of excess capacity = Cost Driver Rate * Excess capacity
Predetermined overhead rate - cost per unit of the allocation base used to charge overhead to products.
Predetermined overhead rate=Estimated overhead/Estimated allocation base
One-stage allocation system
* Single cost pool – Entire manufacturing overhead * Single allocation base / cost driver-Direct materials cost/ Direct labor hours/ Direct labor cost/ Machine hours/ etc. * Predetermined Overhead Rate or Burden rate = Total manufacturing overhead / X * Where X = Total Direct materials cost or Total Direct labor hours or Total Direct labor cost or Total machine hours used * Total product costs of A = Direct materials cost + Direct labor cost + allocated overhead cost where allocated overhead = Burden rate * # of machine hours used by A
Disadvantage: Assumes that all products consume direct labor (or other driver) and overhead in the same proportion.
Two-stage allocation system and Product Costing
Overhead costs are divided into different cost pools. Each cost pool has a cost driver (allocation base). * Split manufacturing overhead into more than one cost pool (e.g. create 2 cost pools whose costs add up to total manufacturing overhead cost) * Calculate burden rate
Cost pools | Cost Drivers | Overhead related to direct materials | Direct materials Cost | Overhead related to direct labor hours | Direct labor hours | Overhead related to direct labor cost | Direct labor cost | Overhead related to machine-hours | Machine hours |
Advantage: * Provides most accurate cost information * Cost system captures differences