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Finance & Accounting
Pages 3 (753 words)
The allocation of overhead cost is one of the core challenges of businesses. If not properly allocated, decisions made by the company may be true or could lead to improper analysis.
Activity costing being one of the methods of cost allocation. There are four major steps in cost allocation using this method. First is the determination of the major activities of the business that result in cost increases. The cost centers of the activities are then determined. The third stage is the determination of the cost drivers i.e. the factors responsible for the increase in cost in the various cost centers (Horngren, 2009). The costs are then charged to the various cost centers considering the driving factors. The main core of a profit making company is to increase its returns and reduce costs. Management and cost accountants have to put up measures that reduce costs and ensure profit maximization. In the above case, the customer who should be preferred is that whose contribution margin less Customer and distribution cost is high. It must be noted that fixed cost is not used in making decisions since the company has no control on the fixed cost. Considering the revenue approach of cost allocation, the company will prefer specialty shop because of the high return of 39000. The department’s stores with the return of 21000 and lastly the gift shop with a return of 11000 would then follow this. In the case of activity based costing allocation method, the department store will be more attractive compared to the other customers. The gift shop will be second while the specialty shop will be the least attractive. ...
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