But in recent environment where the overheads such as IT cost became a major portion in product cost. In advanced manufacturing technology overheads are likely to be more important and therefore it is difficult to justify the IT costs on the basis of absorption costing methodology. The problem arises when the company is not able to decide that on which basis the IT costs should allocate into company products. There are many different techniques can be used for allocation of IT costs. Some of them are mentioned below According to many successful financial advisors, the use of Activity Based Costing (ABC) methodology can be a best and beneficial technique for the allocation of IT costs. In addition, it is also proved by accounting practices of past few decades that activity based costing is absolutely a best technique for charging allocating the major complex overheads costs like IT costs. Activity based costing is just one method of charging IT costs because it focuses on the identification of actual IT costs and can give the true and accurate results. A simple charge back costing technique can be also a good option for allocation of IT cost but it is only feasible only at first stage and the company can face many of big inherent problems at the end of process. Why Activity Based Costing (ABC) is best technique for the allocation of IT costs ABC Vs Flat Rate: In comparison with other costing methodologies the Activity based costing technique always gives accurate results and could be a true measure of profitability. For example, Allocation of overheads on flat rate system hides the inefficiencies of the systems and causes many serious problems in long run. Using a flat rate is can be the best option to get cost transparency but sometimes it can be headache for business leaders because they started to thin k that, they are charged greater than the their use. Using flat rate system, there is a possibility of greater charges in respect with little use of service. Complexity of IT costs: On the other side of coin, other traditional approaches are not able to measure the complexity of the IT costs properly while the Activity based costing recognize the complexity with its multiple cost drivers. Realistic Approach: In modern competitive environment, companies must be able to assess profitability realistically. Activity based costing methodology facilitates a good understanding of what drives IT costs. Purpose of Allocation Simple the cost allocation is the process of charging the indirect costs in to products on the base of services they consume. It is a process of charging the portion of shared services from cost centers in to a product or service. In current technological environment, the overheads are likely to be far more important and in fact direct labour may account for as little 5% of a product cost. In advance environment many non-volume related support activities such as IT costs have captured a great part in company’s profitability that’s why the fair allocation of IT costs is more important to measure the true profitability level. Benefits of Allocation There are many benefits of allocation of IT costs. Some of them are mentioned below: Proper Accountability of resources: In current competitive trends, enterprises demand more accountability of their funds and they try to use their resources in effective manner. For this purpose, Proper allocation of IT
Allocation of Fixed Costs Allocation of Fixed Costs Process of Allocation of IT costs In recent technological environment, the use of information technology has captured a major area in all fields of life. People are adopting up to date IT techniques for maintain their business in efficient manner…
The paper operates mainly based on research questions which can be stated as follows: What methods of cost allocation were used? How were cost centers determined? How would fixed and variable costing differ in this situation? How much profit does each hospital make under each alternative? How much do the combined hospitals make under each alternative?
Principles of Accounting SLP 3: Allocation of Fixed Costs Introduction The allocation and distribution of fixed and variable costs over the various elements of an organization’s balance sheet are what cost accounting is most concerned about, it would seem.
The costs should be allocated keeping in mind the benefits. This will help in identifying, in an organization such resources which needs cost for buying capital, managing cost for buying raw materials and inventory, costs for salaries, operational and various variable costs are needed to get the organization going.
Analyzing the statements prepared under the absorption system, the company seems to have made a significant improvement in the second quarter. The gross profit margin has improved from 28% in the first quarter to 40% in the second quarter; whereas the net profit margin has increased from 14% in the first quarter to 28% in the second quarter as seen in appended figure 5.
For example if the company is producing more aero planes then more amount of raw material will be required to make the planes (Leslie 1993). Examples of variable cost include raw material, labor cost.
There are some costs which include both the fixed and variable element in it and are referred to as semi variable costs.
It has an extensive network of dealers in all the regions of the world. The company as of 2009 has 90 plants scattered in the different locations of the world with 198,000 employees.
Ford is an American Based company, with its head
In year 2011, Herrested Company earned contribution margin of $60 per unit or $480,000 in total with the net income of $180,000.
If the selling price per unit is increased to $280, it will result in the