After studying this chapter you should be able to: Identify the strategic role of cost allocation, explain the ethical issues of cost allocation, use three methods for allocating service department costs to production departments, explain the implementation issues of the three departmental cost allocation methods,. | Cost Allocation: Departments, Joint Products, and By-Products Chapter Seven 7-2 Identify the strategic role of cost allocation Explain the ethical issues of cost allocation Use three methods for allocating service department costs to production departments Explain the implementation issues of the three departmental cost allocation methods Learning Objectives 7-3 Learning Objectives (continued) Explain the use of cost allocation in service firms Use the three methods for allocating joint product costs Use the four by-product costing methods 7-4 The Strategic Role of Cost Allocation Determine accurate departmental and product costs as a basis for evaluating the cost efficiency of departments and the profitability of different products Motivate managers to exert a high level of effort to achieve the goals of top management Provide the right incentive for managers to make decisions that are consistent with the goals of top management Fairly determine the rewards earned by managers for their effort and skill and for the effectiveness of their decision-making 7-5 Cost Allocation Bases The most objective basis for cost allocation exists when a cause-and-effect relationship can be determined, such as the relationship between machine breakdowns and maintenance costs Other alternatives exist in the absence of cause-and-effect relationships, such as ability-to-bear and benefit received 7-6 Ethical Issues in Cost Allocation An ethical issue arises when costs are allocated to products or services that are produced for both a competitive market and a public or governmental entity The latter often purchases on a cost-plus basis creating an incentive to shift costs from the competitive products to cost-plus-based products and contracts An equity or fair-share issue arises when a governmental unit reimburses the costs of a private institution or when it provides a service to the public for a fee–no single measure of equity exists 7-7 Ethical Issues in Cost Allocation (continued) | Cost Allocation: Departments, Joint Products, and By-Products Chapter Seven 7-2 Identify the strategic role of cost allocation Explain the ethical issues of cost allocation Use three methods for allocating service department costs to production departments Explain the implementation issues of the three departmental cost allocation methods Learning Objectives 7-3 Learning Objectives (continued) Explain the use of cost allocation in service firms Use the three methods for allocating joint product costs Use the four by-product costing methods 7-4 The Strategic Role of Cost Allocation Determine accurate departmental and product costs as a basis for evaluating the cost efficiency of departments and the profitability of different products Motivate managers to exert a high level of effort to achieve the goals of top management Provide the right incentive for managers to make decisions that are consistent with the goals of top management Fairly determine the rewards earned by managers for .
