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03_Cost assignment
methods
Eva Švandová
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Direct v. indirect costs
• can be traced easily and accurately to a cost object
direct costs
• cannot be traced to cost objects
• estimate must be made of the resources consumed by
cost objects using cost allocations
• = the process of assigning costs when a direct
measure does not exist for the quantity of resources
consumed by a particular cost object
indirect costs
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Cost assignment methods
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Example
Furniture Inc.
̶ 3 types of products
̶ wardrobes
̶ tables
̶ drawers
̶ annual costs: $ 2,791,160
̶ How to assign cost to 1 unit of each product?
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Furniture, s.r.o.
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Direct costs
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Indirect costs
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Indirect cost allocation
Plant-wide overhead rate (1/6)
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Indirect cost allocation
Plant-wide overhead rate (2/6)
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Indirect cost allocation (3/6)
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Plant-wide overhead rate (4/6)
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Plant-wide overhead rate (5/6)
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Plant-wide overhead rate (6/6)
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Two-stage Allocation Process
IN general
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Indirect costs
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Two-stage allocation process
Allocation bases (=cost drivers)
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Multistage Allocation Process
(= Reallocation of Service cost centers)
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What if the service department provides
services not only to the production
departments?
̶ Incorporating service
department relations
into the allocation
̶ Repeated distribution
method
̶ Simultaneous
equation method
̶ Step allocation
̶ Direct allocation
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Service Departments (Centres)
An operating department
carries out the central
purpose of the organization
Production Department
Service departments do
not directly engage
in operating activities
Accounting department
Human Resources department
Maintenance
ICT ...
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Reciprocal services
̶ When service departments provide services to each
other - see
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Allocation of service departmental cost
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Multistage Allocation Process
using Direct method for reallocation of service cost centers
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Direct Method
(An example from a manufacturing company)
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Direct Method
(An example from a manufacturing
company)
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Direct Method
(An example from a manufacturing company)
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Direct Method
(An example from a manufacturing company)
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Direct Method
(An example from a manufacturing company)
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Direct method – an example
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Direct method – an example
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Multistage Allocation Process
using Step-down method for reallocation of service cost centers
Step-Down method
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Step-Down Method – An Example
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Step-Down Method – An Example
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Step-Down Method – An Example
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Step-Down Method – An Example
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Step-Down Method – An Example
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$360,000 ×
30
10 + 20 + 30
= $180,000
Allocation base: Number of employees
Step-Down Method – An Example
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Step-Down Method – An Example
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Step-Down Method – An Example
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Multistage Allocation Process
using Reciprocal method for reallocation of service cost centers
Reciprocal method
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Reciprocal method – an example
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Reciprocal method – an example
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Reciprocal method – an example
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Reciprocal method – an example
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CONCLUSIONS
• Pros and Cons
of more accurate methods
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THE END