After you have mastered the material in this chapter, you will be able to: Identify cost objects and distinguish between direct costs versus indirect costs, allocate indirect costs to cost objects, identify the most appropriate cost driver, recognize the effects of cost allocation on employee motivation. | Chapter Twelve Cost Accumulation, Tracing, and Allocation © 2015 McGraw-Hill Education. 1 Chapter Opening Managers must have reliable cost estimates to: Price products. Evaluate performance. Control operations. Prepare financial statements. What does it cost? 12-2 2 Determine the Cost of Cost Objects Cost accumulation begins with identifying: Cost objects Cost drivers A cost object is any activity, product, or service to which accountants wish to trace costs. 12-3 3 Use of Cost Drivers to Accumulate Costs Machine hours Miles driven Labor hours Units produced A cost driver is any factor that causes or “drives” an activity’s costs 12-4 4 Estimated Versus Actual Cost Potential Inaccuracies Timely Relevant Estimated Costs Managers use estimated costs to make decisions about the future. 12-5 5 The first step in the development of the new bonus strategy is to determine the costs of each department. Costs that can be traced to departments in a cost-effective manner are called direct costs. | Chapter Twelve Cost Accumulation, Tracing, and Allocation © 2015 McGraw-Hill Education. 1 Chapter Opening Managers must have reliable cost estimates to: Price products. Evaluate performance. Control operations. Prepare financial statements. What does it cost? 12-2 2 Determine the Cost of Cost Objects Cost accumulation begins with identifying: Cost objects Cost drivers A cost object is any activity, product, or service to which accountants wish to trace costs. 12-3 3 Use of Cost Drivers to Accumulate Costs Machine hours Miles driven Labor hours Units produced A cost driver is any factor that causes or “drives” an activity’s costs 12-4 4 Estimated Versus Actual Cost Potential Inaccuracies Timely Relevant Estimated Costs Managers use estimated costs to make decisions about the future. 12-5 5 The first step in the development of the new bonus strategy is to determine the costs of each department. Costs that can be traced to departments in a cost-effective manner are called direct costs. Costs that cannot be traced to departments in a cost-effective manner are called indirect costs. Identifying Direct and Indirect Costs 12-6 6 Identifying Direct and Indirect Costs 12-7 7 Aggregating and Disaggregating Individual Costs into Cost Pools Frequently, companies accumulate many individual costs into a single cost pool. Pooling should be limited to costs with common cost drivers. 12-8 8 Selecting the Best Cost Driver So which volume measure should I use? Judgment and reasoning are necessary. Considerations Relationship between cost driver activity and use of resources. Availability of information. 12-9 9 Allocating Indirect Costs to Departments Identify the most appropriate cost driver for each indirect cost. Indirect costs should be allocated to reflect how the departments consume resources. The cost drivers of In Style, Inc. are: 12-10 10 Allocating Indirect Costs to Departments Use a two-step process to allocate indirect costs: Allocation rate = total cost ÷ cost driver .
