Cost Allocation in Managerial Accounting

Name: Cost Allocation in Managerial Accounting
Author: William Smith

Learn how the cost allocation process works.

Preview the first lesson free — get full access to all 11 lessons.

Course: On-Demand

Knowing about cost allocation will help you understand the various types of costs and how they're allocated during the production process. In these lessons, we'll discuss several types of costs, how they're checked for variances, and why management needs this information. We'll also explore activity analysis and estimating costs, relevant costs and benefits, costs systems, and make-or-buy decisions. Cost allocation is a relatively simple concept, but it can also be a highly detailed and difficult task. Cost allocation involves assigning cost to cost objects, such as a customer, a product, or even a department or a divisional section of the company in a way that accurately represents a proper share of the costs. There are direct costs and indirect costs. Direct costs can be directly attributed or traced to a cost object. In a manufacturing company, this would include all costs that are directly attributed to the products manufacturer. For example, labor is a direct cost. Laborers clock in and out during their shift. And the company keeps track of the number of units produced during the period. Raw materials are another example of direct costs. When raw materials are purchased, they can be assigned a purchase order number which links the raw materials to the cost object. If the raw materials are purchased to produce a large quantity of products, then as the raw materials are used in the production process, their costs are assigned to each individual product. Indirect costs can be allocated to the production of the product, but not in an accurate or cost effective way. For example, a manufacturing company will have plant managers, shift managers and administrative staff who are involved in the manufacturing process of all of the products. But their level of input per product can't be accurately allocated. These members don't punch a time clock or track the number of hours that they spend thinking, planning or directing plant operations. Indirect costs have to be reasonably allocated per product to accurately reflect the costs associated with production. Many organizations employ cost assignment practices that help trace the indirect costs and allocate them in a cost-effective manner.

Intermediate Provider : William Smith 11 Lessons · 28m in Arabic, German, English, Spanish, French, Portuguese, Chinese

Course Description

This module outlines the various types of cost and how they are allocated during the production process. You will learn how material, labor, and overhead costs are checked for variances and how this vital information helps management. Finally, you will explore the process that managers use to determine the feasibility of producing or purchasing the products they sell.

What You'll Learn

Identify the different types of cost involved in the production process
Differentiate between overhead, materials, opportunity, estimating, and labor costs
Analyze how cost variance and activity analysis work
Apply activity-based costing to allocate costs
Use relevant costs to support decision-making processes
Conduct make-or-buy decisions to determine whether to produce or purchase products

Key Takeaways

The module outlines the various types of cost and how they are allocated during the production process.
Material, labor, and overhead costs are checked for variances, providing vital information that helps management.
Activity-based costing and activity analysis are methods covered for understanding how costs are assigned.
Relevant costs play a role in the decision-making processes managers use.
Managers use a defined process to determine the feasibility of producing or purchasing the products they sell.

Frequently Asked Questions

What does this course cover?

It covers the various types of cost and how they are allocated during production, including overhead, materials, labor, opportunity, and estimating costs, as well as cost variance, activity analysis, activity-based costing, relevant costs, cost systems, and make-or-buy decisions.

Who is this course for?

It is suited to those who want to understand cost allocation in managerial accounting, including how cost information helps management make decisions about producing or purchasing products.

What skills will I gain from this course?

You will learn to differentiate between cost types, understand how cost variance and activity analysis work, apply activity-based costing, use relevant costs in decision-making, review cost systems, and conduct make-or-buy decisions.

How is a make-or-buy decision addressed in this course?

The course explores the process that managers use to determine the feasibility of producing or purchasing the products they sell, and includes a dedicated lesson on make-or-buy decisions.